Dilapidations

Landlords and tenants have always argued about who is responsible for repairing dilapidations and the recession has brought such arguments to the fore once more.

Dilapidations - what you need to ask

Every negotiation over dilapidations will turn on the facts and circumstances of the parties and, more importantly, the wording of the lease. When involved in such negotiations, or indeed when negotiating the terms of a new lease, the following questions should be considered:

1. What is included in the demise leased to the tenant - how are the premises defined?
2. Does the lease provide that the tenant has accepted the premises as being in good and substantial condition and fit for purpose?
3. Was there a schedule of condition which was intended to qualify the extent of the tenant's repairing obligations; and is the wording sufficient to achieve such qualification?
4. Is the tenant responsible for repairing, maintaining and renewing any damage to or destruction of the premises (insured damage excepted), no matter what has caused the damage or destruction?
5. Did the tenant carry out any works to the premises and are they obliged to remove those works? If the landlord wants the works removed, must he specifically ask for the works to be removed and is there a time limit for removal of fit out?
6. In what condition must the tenant give back the premises?
7. Does the lease allow the landlord to enter the premises to prepare a schedule of dilapidations and is there a time limit on when that schedule can be served?
8. Does the lease provide for the tenant to be given the opportunity to carry out the repairs required by a schedule of dilapidations?
9. Can the landlord carry out the repairs and charge them back to the tenant?

Dilapidations - the cases

The two most recent cases involving dilapidations were considered from different perspectives, one from the perspective of a terminal schedule of dilapidations, the other from the perspective of an interim schedule of dilapidations. In the first case the landlords were looking for £1.3 million in damages whilst in the second case the landlords were looking to bring the lease to an end so that they could recover the property and put it to a more lucrative use.

CO-OPERATIVE INSURANCE SOCIETY LIMITED V FIFE COUNCIL [2011] SCOH76

Facts

The Co-op leased Unicorn House, The Kingdom Centre, Glenrothes to Fife Council until the lease ended in November 2006. The Co-op claimed that the Council had failed to comply with its lease obligations and produced a dilapidations report, identifying the repairs which were required to bring the premises up to the standard and condition required by the lease. The Co-op sought damages of over £1.3 million in compensation for the Council's failure to carry out the necessary repairs. This stage of the dispute looked at the types of repairs for which the Council was responsible in terms of the lease.

Arguments

In terms of the common law, tenants in Scotland are not obliged to carry out 'extraordinary repairs' to leased property unless their lease specifies that they must do so. Extraordinary repairs are those which are required due to inevitable decay caused by lapse of time / wear and tear and latent and inherent defects in newer buildings.

The Council's lease stated that the tenants were required:

At their own cost and expense to repair and keep in good and substantial repair and maintained, renewed and cleansed in every respect all to the satisfaction of the Landlords the leased subjects and all additions thereto and all sanitary, water and mechanical and electrical apparatus, and equipment therein and thereon, and further at the joint and cost and expense of the Landlords and the Tenants to repair, maintain, and renew all vertical or horizontal structures separating the leased subjects from the Landlord's adjoining premises on any side or below..........

The Council argued that some of the repairs listed in the Co-op's schedule were extraordinary repairs for which the Council were not responsible. The Co-op argued that since the repairing obligation in the Council's lease mentioned that the tenants were required to renew the subjects for the purposes of repair, the tenants were responsible for extraordinary repairs.

Court discussion

In deciding whether the Council was responsible for extraordinary repairs, the Court looked at the question of what actually constitutes extraordinary repairs and declared that there is no universally acceptable principle or formula for distinguishing between ordinary and extraordinary repairs. The Court explained that the question is answered on the facts by considering three matters:-

1. The cause of the damage - something caused by a fortuitous event, something unanticipated, or something outwith the control of either party would be a pointer to the repair being an extraordinary one for which the tenant was not liable.
2. The extent and seriousness of the damage - damage which would result in excessive costs to repair is likely to qualify as an extraordinary repair; and
3. The nature of the damage and the repairs necessary to be effected - if the repairs amounted to reconstruction it is likely that they were extraordinary repairs.

The Court pointed out that all of the above was subject to the damage not having been caused by the tenant's failure to repair and maintain. Damage due to tenant neglect would remain the tenant's responsibility.

Decision

The Court decided that the use of the word 'renewed' within the tenants' repairing obligation was not sufficient to make the tenants responsible for extraordinary repairs and that such repairs remained within the landlords' obligations. The Court said that if it had been intended that the tenants should be responsible for extraordinary repairs, the lease should have gone on to address the need to rectify the actual cause of the damage needing repair and not leave it just to the extent of the repair necessary (ie not just mention renew).

CRIEFF HIGHLAND GATHERING LIMITED V PERTH AND KINROSS COUNCIL [2011] SCOH78

Facts

Crieff Highland Gathering Limited (CGH) had leased land to Perth and Kinross Council for use as a public park and recreation ground since 1983. CGH was seeking to have the Council removed from the premises, claiming that the Council was in material breach of its lease due to the Council's failure to comply with an interim schedule of dilapidations calling for the repair and maintenance of, among other things, boundary walls. The Court also heard how CGH had entered into option agreements with developers which would facilitate the sale of the property for development as a Sainsbury's supermarket and development of an improved sports ground at another site. The Council argued that CGH was not entitled to terminate the lease and that the site which it occupied should be retained for use as a public open space. The Council acknowledged the need for a new supermarket but favoured an alternative site.

There was no irritancy provision in the lease setting out the circumstances in which CGH could bring the lease to an end. The Court therefore had to decide whether or not the Council's failure to maintain the boundary walls constituted a material breach of the lease that justified CGH terminating the lease.

Court discussion

There was another brief discussion of what constitutes extraordinary repairs in this case. The surveyor who prepared the schedule of dilapidations had categorised the repairs needed to the boundary walls to be extraordinary repairs. The lease provided that the "Tenants shall, during the currency of this Lease, relieve the Landlords of their whole responsibility for the maintenance of the boundary fences, walls and others enclosing the ground leased." The Court said that this clause was sufficient to transfer the liability for extraordinary repairs to the tenants. The Court agreed that the Council was in breach of its obligation to carry out the necessary extraordinary repairs to the various defects in the boundary walls at the premises. The question which then had to be addressed was whether or not this breach was a material breach.

Decision

The Court said that what constitutes a material breach is primarily a question of fact and degree. Looking at all the facts and circumstances the Court decided that the breach in this particular instance was not material. The Court was not persuaded that the state of the boundary walls or any other of the problems had ever been so fundamentally bad as to justify termination of the lease. It pointed to the carrying out of repairs and the continuing operation of the property for the purposes of the lease to lend support to the view that the essence of the contract had not been undermined.