Landlords expecting to recover substantial damage payments from past tenants could be in for a nasty shock, a north-east commercial property expert has warned.
Two cases decided by the inner house of the Court of Session in Edinburgh – Scotland’s most senior appeal court – suggest tenants will be obliged to pay for dilapidations only if the landlord intends to actually carry out repairs.
Until now it has been widely accepted that provisions in lease agreements allow landlords to recover costs for repairs whether or not the work is done, which in some cases generates big cash windfalls for property owners.
In one of the cases recently decided on at the Court of Session, Grove Investments sought £10million in dilapidation costs from Cape Building Products after Cape had leased an industrial unit over a 25-year period.
It has always been the case that a party claiming damages needs to have incurred loss, but in the Grove action the landlord thought the lease contained a provision allowing it to recover the total costs of repairs whether or not the work was done.
Mark McCall, legal director with law firm Pinsent Masons’ property team in Aberdeen, said: “The court disagreed and took the view that the tenant was obliged to pay only the landlord’s actual loss.
“The court was keen to avoid the landlord receiving a windfall – payment for works which were not in fact to be done.”
In the other case, @Sipp (Pension Trustees) v Insight Travel Services, the court considered whether the landlord was entitled to payment of a sum equal to the cost of putting the premises into the relevant state of repair, regardless of whether it intended to carry out any work.
Again, the court took the view that the landlord was entitled to recover only its actual loss.
Mr McCall said: “The court’s approach demonstrates that the landlord’s intentions are relevant.
“If it intended to demolish the property, for example, it would have no loss which it could recover from the tenant.
“In light of these decisions, tenants are likely to strongly resist dilapidation claims and to insist on proof that the work has been done or is to be done.
“Claims by landlords for lost rent for any period, in which the landlord says that the property couldn’t be let because of the state of repair, will also need detailed evidence.”
“Landlords looking to negotiate or enforce a provision that the tenant will be liable for the repairing costs, irrespective of their intentions, are likely to face an uphill battle enforcing such a provision.
“These cases demonstrate the attention which both landlords and tenants need to give to repairing clauses in leases.”
Mr McCall said the rulings could have a heavy financial impact for landlords if they fail to show repairs and dilapidations will be actioned, adding: “This has the potential to make life difficult.”
