Prudent tenants of commercial property should make provision in their accounts for their anticipated dilapidations liability at the end of their lease. Typically in a commercial lease liability for nearly all repairs and maintenance is passed on to the Tenant. During the lease the Landlord can demand that their Tenant carries out repairs (and in some cases Tenants will in any event carry out repairs and maintenance regularly throughout the lease term) but in many cases the issue of dilapidations is held over until lease end. Under the lease terms, typically the obligation on the Tenant is to carry out the work but very often the Tenant will prefer to make a cash payment to the Landlord – being an amount that is an agreed equivalent of the cost of the repairs required.

For some time, in Scotland, it has been unsettled whether a Landlord’s claim for dilapidations should be based on the cost of the repairs that have not been carried out or the loss in value to the property due to its disrepair. These two separate ways of quantifying damages can produce very different results.

Recently Landlords have been attempting to put the matter beyond doubt by expressly stating in repair clauses that the measure of loss is the cost of repairs (and not loss in capital value) and this very point has been the subject of recent judicial scrutiny.

Two recent court decisions in Scotland (Inner House of the Court of Session) could have repercussions – it now appears to be the case that Tenants will only have to pay the cost of repairs (“dilapidations”) if the Landlord can satisfy the court that it actually intends to carry out those repairs. For a long time some Landlords would routinely collect dilapidations damages payments from their Tenants whether or not the work is actually done, which in most cases generated substantial cash windfalls for Landlords.

In the case of Grove Investments Limited v Cape Building Products Limited, the Landlord sought £10M from their Tenant for dilapidations at the end of a 25 year lease of an industrial building. The Landlord argued that the lease terms allowed them to recover this amount whether or not the work was actually done. The court disagreed and stated that the Tenant was only obliged to meet the Landlord’s actual loss. The court was keen to avoid the Landlord receiving a windfall payment.

However, in the case of @SIPP (Pension Trustees) Limited v Insight Travel Services the court had to consider a repair clause which specifically stated that the measure of loss to the Landlord was the cost of repairs. The Inner House of the Court of Session rejected the Tenant’s argument that such a provision could not be enforced as it was ambiguous and rejected the Tenant’s claim that the measure of loss should be loss in capital value.

This case will be welcomed by Landlords of commercial property as it will bring some comfort that the courts will uphold repair clauses that make it expressly clear that the Landlord is entitled to have its dilapidations claim quantified by reference to the cost of repairs.

As always the devil can be in the detail and these developments demonstrate the need for quality advice and guidance on the terms of the repairing clauses in your commercial lease.

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