Two recent Scottish property cases have forced a change in the property industry’s understanding of a landlord’s right to claim the full “cost of repair” if a tenant fails to undertake their dilapidation obligations. We examine these judgements and explore what impact they may have for construction defects claims.
Grove Investments Limited v Cape Building Products Limited [2014] CSIH 43
The first case was decided before an Inner House bench of three judges in May 2014. The tenancy provided that at the termination of the lease the tenant would: (1) vacate the premises; and (2) either return the property to its original condition or pay the costs estimate in the dilapidation schedule. A dilapidation schedule lists the parts of the building which have fallen into a state of disrepair during the lease along with the work and cost required to rectify the disrepair. In this case, the tenant vacated but did not do the repair works themselves. The landlord then sued for the cost of repair.
The relevant tenancy clause stated that (if the tenant did not undertake the works themselves) the tenant would:
“pay to the landlords the total value of the Schedule of Dilapidations”
The landlord thought it clear that the “total value” was simply the cost estimate found in the dilapidations schedule and that this clause was a payment provision. The tenant argued that the “total value” should only amount to the actual loss suffered by the landlord, as compensation for the breach of the repairing obligation by the tenant.
The judges noted that there could be circumstances where the landlord chooses not to complete the repair works. For example if a new tenant required substantial alterations in any case, or if the landlord demolished the building and disposed of the land. In that case the “cost of repair” value would be significantly higher than the “actual loss” value preferred the tenants’ interpretation. The judges were concerned about a landlord gaining financially in such circumstances and therefore preferred the tenant’s interpretation.
This case suggests that in order for a landlord to claim the full cost of repair from a tenant, they may have to demonstrate that they actually plan to carry out, or already have carried out, the works noted in the dilapidations schedule.
@Sipp (Pension Trustees) Limited v Insight Travel Services Limited [2014] CSOH 137
The second case was decided by Lord Tyre in September 2014, and draws heavily from the Grove Investments case above. It provides some opportunity to review how the Grove Investments case will be analysed and used in a wider context.
The factual situation was similar to the Grove Investments case above, but the relevant contractual provision obliged the tenant, who had not undertaken the repairs stated in the dilapidation schedule, to pay:
“a sum equal to the amount required to put the leased subjects into good and substantial repair… in lieu of requiring the Tenant himself to carry out the work.”
The judge was comfortable with the Grove Investments precedent, particularly as to the potential enrichment there could be if the landlord decided not to repair. The judge noted that the words at the end of the clause: “in lieu of requiring the Tenant himself to carry to the work”, indicated that any payment obligations should only be activated if the landlord intends to carry out the work. The judge therefore found in favour of the tenant.
The judge stated that for the full “cost of repair” to be claimed by a landlord without further inquiry would:
“require very clear wording in order to conclude that a tenant had entered into an agreement which might have the consequence of it having to pay a sum which bore no relation to what was required to compensate the landlord for loss (if any) actually sustained as a result of the tenant’s breach of its repairing obligation.”
Construction defects
The above cases should be of interest to construction practitioners and professionals because of the contractual similarities between dealing with dilapidations at the end of a tenancy and dealing with defects during a defects liability or maintenance period.
At the end of a construction project, it is usual for a schedule of defects to be produced. The contractor is then obliged to rectify those defects during the defects liability or maintenance period. Any failure to rectify defects is a breach of contract and the employer’s remedy is usually damages. These damages are usually calculated by reference to the “cost of repair” of the defects, that is, the cost of the employer having the defects rectified by a third party.
Sometimes the cost of repairing minor construction defects is out of all proportion to the benefit gained. In such cases the courts may use the alternative “diminution in value” assessment for damages. This is often irrespective of whether the employer wants to repair the defects or not.
But even where the cost of repair is considered to be the reasonable approach, it is not unusual for employers to leave defects where they are minor, cosmetic or perhaps where additional works are subsequently to be done in any case. In those circumstances the Scottish courts may well take a similar view for construction defects as they have in the above property dilapidations claims. There is clearly the potential for the intention of the claimant to actually carry out repair works, to become a more central issue in cost of repair damages recovery than it was before.
Conclusion
In property cases the position in Scotland is now that before a cost of repair claim will be justified a landlord must normally demonstrate that it has carried out or intends to carry out the dilapidation repairs. That requirement may be dependent upon the specific tenancy clause wording.
This new position is likely to have implications for construction defects claims. Where the cost of repair value would otherwise be considered reasonable, but the employer has no plans to repair the defects, then the courts may well disallow that value as the measure of damages, if the repairs are not to be carried out. An employer’s actual loss would then be calculated on a diminution in value basis. Depending on the nature of the defects this may well be less than the cost of repair.