Is there (economic) life beyond the end of a lease?

The repairing obligation is one of the most essential components of a full repairing and insuring commercial lease for both landlord and tenant.  For the landlord, it is the means by which the condition and value of his property may be preserved, and for the tenant, it is likely to involve one of its most significant liabilities under the lease, after payment of the rent. The precise terms of the wording of the obligation is therefore one of the most carefully negotiated elements of the lease, and also one which is a regular subject of litigation.

19th December 2006

The repairing obligation is one of the most essential components of a full repairing and insuring commercial lease for both landlord and tenant.  For the landlord, it is the means by which the condition and value of his property may be preserved, and for the tenant, it is likely to involve one of its most significant liabilities under the lease, after payment of the rent. The precise terms of the wording of the obligation is therefore one of the most carefully negotiated elements of the lease, and also one which is a regular subject of litigation.

The recent Outer House case of Westbury Estates Limited v The Royal Bank of Scotland plc highlights this aspect, not least in relation to the large number of authorities cited to the court by both sides in support of their arguments.
But the issue in this case was not just whether the tenant had complied with its obligation to "uphold, maintain, repair and renew the Let Subjects both externally and internally so as to keep the Let Subjects in good and substantial repair and condition..."; the Landlords sought to impute a requirement on the tenant to replace certain mechanical or electrical items because they had reached, or were approaching the end of, their economic life at the end of the lease.

Maintenance, repair, renewal and if necessary replacement of all services

The Royal Bank of Scotland vacated the premises at 26 St Andrews Square, Edinburgh, in 2004, at the end of a 25-year lease. Before the lease ended, the landlords, Westbury Estates Limited issued a schedule of dilapidations, which included the requirement to replace a number of electrical and mechanical items including the lifts, fire alarm, electrical wiring, boiler and convector heaters. 

RBS did not replace these items and so Westbury carried out the works themselves, at a cost in excess of half a million pounds and then sought to recover these costs, along with a sum in respect of lost rental income for the six-month period during which the works were carried out.

The repairing obligation in the lease did extend to all services in the premises including lifts, heating installations, ventilation or air conditioning systems, drainage system and gas, electricity and water supplies and other services, and included the requirement to replace such services and others "if necessary" to keep them in good and substantial repair.

CIBSE Guidelines

However, Westbury did not maintain that any of the items had been defective or malfunctioning, instead they insisted that RBS had to replace the items in question because, in accordance with guidelines published by the Chartered Institution of Building Services Engineers (CIBSE) these items had reached or were about to reach the end of their estimated "economic life".

These guidelines, which Westbury indicated are accepted as appropriate standards in the building services industry, recommend the replacement of an electrical or mechanical item at the end of a period of time when it no longer represents the "least expensive method of performing its function". This takes into account such factors as the frequency with which an item is likely to break down towards the end of its life, the seriousness and unpredictability of potential breakdowns, difficulties in replacing parts, and the extent of business disruption.

Good and substantial repair?

The property had been let for 25 years, and a number of the items in question, such as the lifts and electric wiring were of a similar age, which the guidelines indicate is the extent of their economic life. The age of the boiler and heaters fell within the age range for those appliances in which the guidelines indicated their economic life could be expected to end.

Westbury's argument was therefore that, the items in question having surpassed or being within the appropriate age range for surpassing their economic lives, they were no longer in good and substantial repair nor fit for their purposes, despite the fact that at the end of the lease each of these items was still capable of being operated.

The language of the lease and the intention of the parties

In the course of his judgement, Lord Reed looked at the approaches taken by the courts towards the interpretation of repairing obligations in a number of the cases that were cited to him, although pointing out the important fact that most of these cases were decided in the English courts, and that as the common law relating to repairing obligations is different in Scotland, it is by no means certain that some of those decisions would have been determined in the same way if they had been presented before a Scottish court.

The proper place to start in determining the scope of the repairing obligation placed on RBS is the language of the lease and, as the obligation to repair applied throughout the currency of the lease, it should be given the same meaning on the last day of the lease as it would have had on the first day. Given that the CIBSE Guidelines were not only not a generally accepted standard when the lease was originally entered into, they may not even have existed at that time, the lease terms could not be interpreted by reference to a change in practice or approach that took place long after the lease had been entered into.  The standard of repair required should be determined by the expectations of the parties at the time of the grant of the lease.

The obligation to replace these items arose "if necessary" which must mean replacement would be appropriate, only where it was necessary to keep the items in good and substantial repair. In other words, the requirement to replace would arise only when the items were in a state of disrepair, which in the present case they clearly were not. RBS was not therefore obliged under this repairing obligation to replace any item merely because it had reached the end of its economic life.

Look to the lease

The decision in this case reinforces that the Courts will invariably look to the intention of the parties, when interpreting lease terms. In this case in particular it cannot have been in the intention of the parties to comply with guidelines that may not have been in existence at the time of the grant of the lease.

The court will give full effect to all of the actual words used in the obligation in considering the provision as a whole.  The use of the words "if necessary" – often a popular tenant's revisal during lease negotiations - was key in this instance in identifying the extent of the tenant's requirement to replace, and it is an interesting proposition to wonder to what extent the outcome of the case might have differed if those words had been absent from the terms of the lease.

The full text of the decision in the case of Westbury Estates Ltd v Royal Bank of Scotland plc is available from the Scottish Courts website at: https://www.scotcourts.gov.uk/