When a commercial tenant in Scotland leaves premises in a state of disrepair at the end of a lease, can the landlord make a claim for rent it loses out on while it undertakes the necessary repair works?
The short and unhelpful answer is 'it depends'.
Terminal schedules of dilapidations routinely include (considerable) sums for lost rent. However, such claims are tricky and rarely succeed in practice. Here are our top five tips for commercial landlords in Scotland.
1. In principle, landlords are entitled to recover lost rent where the loss occurs as a result of the tenant's failure to repair.
This is an application of the general principle that, where one party (here, the tenant) breaches its contract with another party (the landlord), the injured party is entitled to be put in the same position as if the contract had been performed. If the landlord would have received rent but for the tenant's breach of the lease then the tenant is - in theory at least - on the hook.
2. The landlord must prove the link between the tenant's breach of contract and the lost rent.
In other words, the landlord must show that, if the premises had been left in the condition required by the lease, a new tenant would have moved in almost straight away. Proving this link is typically the biggest hurdle for landlords.
Unless the landlord has a new tenant lined up and ready to enter into occupation immediately, the former tenant is bound to argue that its failure to repair has not actually caused the landlord to lose rent because it couldn't have relet the premises anyway.
Whether the landlord can defeat that argument will depend on the precise circumstances. In general terms, though, the lower the demand for the type of property in question, the harder it will be to succeed in a claim for lost rent.
3. Refurbishment can make claims harder to prove.
If the landlord was always intending to refurbish the premises before re-letting then it will be more difficult to show that any void period was the tenant's fault. The tenant (and the court) will be alive to possibility that some or all of the dilapidations were superseded by the refurbishment. The landlord will have to demonstrate that the tenant's failure to repair resulted in the refurbishment taking longer than it otherwise would have.
4. Lost rent can usually only be claimed for the time it would take to complete the necessary works.
Landlords frequently elect not carry out repairs immediately after lease expiry, particularly if a new tenant has not yet been secured. However, the landlord is not allowed to profit from its own delay by seeking to recover rent from the former tenant while it waited to start the works.
For example, if a landlord waits 6 months after lease expiry before commencing repair works lasting 2 months, lost rent can normally be claimed only for the 2 months that the works actually take.
A possible exception to this is where the landlord is forced to delay the works because it doesn't have sufficient funds to carry out the repairs immediately. In such a situation the landlord may be able to claim lost rent for the whole period from lease expiry until the works are finished.
5. The level of rent which can be recovered may not be the same as under the previous lease.
If the landlord can get over the other hurdles, the level of rent that can be recovered from the former tenant is the rent that the landlord would have been able to obtain had the premises been left in the condition required by the lease.
This will not necessarily be the same as the passing rent under the previous lease, as the market may well have changed (for better or worse) since that rent was fixed. If the premises have been re-let following completion of the repairs then the rent under the new lease may be the best evidence of what could have been achieved at the date the previous lease expired. Otherwise, the appropriate level of rent is (yet another) fertile ground for dispute between the landlord and the tenant.
As lease expiry approaches (and provided a notice to quit has been served), landlords should already be thinking about a potential loss of rent claim.
Ultimately, loss of rent claims are extremely fact specific, so the best course is to take advice on the merits of each particular claim as it arises.
Finally, landlords and managing agents should ensure they are aware of the dilapidations provisions in the lease, and particularly whether there are any payment obligations (including for lost rent).
For more information on loss of rent claims, you can read our previous article on the subject.
If you are a commercial landlord and need advice on pursuing a dilapidations claim including loss of rent then get in touch with our Real Estate Disputes team or your usual Brodies' contact.