Reinforcing lease interpretation principles

Discussion of the case of Malin and others v Crown Aerosols UK Limited

9th June 2015

Introduction

The case Malin and others v Crown Aerosols UK Limited considers when the repairing obligation in a lease can include demolition and redevelopment of the leased premises at the instance of the tenant, during the currency of the lease.

Facts
The parties entered into a 90 year ground lease of an industrial building in 1977.  The building itself had been constructed in 1972 and by 2011, its condition had deteriorated and it was lying empty.   The landlord’s position was that the deterioration had occurred because the tenant had failed to comply with its repair and maintenance obligations.  The tenant wished to demolish the existing building.   They argued that the building was past its economic lifespan and was obsolete in respect of the tenant’s business.  The tenant also argued that the condition of the building would not readily permit assignation or sub-letting.

The case came before the Court of Session when the landlord raised proceedings seeking to interdict the tenant from demolishing the building.  The key issue for the court to consider was  whether the tenant had a right in terms of the lease to demolish the building. 

Clause sixth of the lease provided that “The Tenants shall be bound at their own expense to maintain in good order and when necessary to re-erect on the subjects leased substantial factory buildings and relative offices…

Clause tenth of the lease obliged the tenant to keep all buildings erected on the site insured for full rebuilding value, and to apply the proceeds of any insurance in the first instance towards, first, the payment of any sums due to the landlord and, second, towards making good loss and damage caused by the insured risk.   Clause twelfth required the tenant, at all times, to keep the “whole buildings and others” in good and substantial repair and condition.

 

Decision
It was common ground that the lease had to be interpreted according to the established approach to construction of commercial contracts.  The lease required to be read as a whole and given the interpretation that a reasonable person with the background knowledge reasonably available to the parties at the time of the contract would have understood them to have meant.

Lord Tyre considered that the primary position of both parties was “misconceived”.  He rejected the landlord’s argument that the parties envisaged that the building erected on the site in 1977 would remain in existence and be maintained in good order for at least 90 years.  There was no justification for attaching such importance to the building, nor was there any commercial justification for the landlord’s assertion that references to “re-erection” should be restricted to circumstances in which the building was destroyed by an external event.  However, the suggestion by the tenant that, on a proper construction of the lease, they had an absolute right to demolish, was also rejected.

The court concluded that it accorded more with commercial sense to construe the reference to re-erection “where necessary” as extending to circumstances where the building had become obsolete or in a state of disrepair, even when that may have occurred as a result of the tenant’s breach of its repair and maintenance obligations.  Lord Tyre also offered support for the tenant’s alternative argument that there may be circumstances where re-erection is necessary even though an existing building is still sitting on the site, for example where the existing building is obsolete and unsuitable for any reasonable use, or where the cost of repair is excessive in relation to what it would cost to demolish and rebuild similar premises.    In each of these cases, Lord Tyre stated that it was in accordance with commercial common sense to describe re-erection as “necessary”.   It followed as a matter of practicality, therefore, that the demolition of the existing obsolete and/or uneconomic building was also “necessary” in order to allow re-erection to proceed.

Lord Tyre accepted that the landlord’s approval was required not only of the detailed plans for re-development but also of the demolition that precedes re-erection.   It may be open to the landlord to refuse to approve a proposed re-development on the grounds that it is not necessary for the existing building to be demolished at all.

The landlord’s application for permanent interdict was refused.  On the basis that a proof on the evidence may be required to decide whether demolition or erection of a new building was “necessary”, the case was not dismissed and it remains to be seen whether Lord Tyre’s guidance will enable the dispute to be resolved without further substantive court procedure.

Comment
This decision reinforces a number of well-established principles of lease interpretation, rather than telling us anything new.  However, it does make clear that, on the one hand, clear wording will be needed to establish a right for a tenant to demolish a building, whilst on the other hand, Lord Tyre also made clear that the words “where necessary” should be interpreted in such a way that avoids the telling result that a building that is beyond economic repair must remain standing.