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PDPF GP LIMITED AGAINST SANTANDER UK PLC


Submitted: 14 April 2015

 

OUTER HOUSE, COURT OF SESSION

[2015] CSOH 40

 

CA106/14

OPINION OF LORD WOOLMAN

In the cause

PDPF GP LIMITED

Pursuer;

against

SANTANDER UK PLC

Defender:

Pursuer:  McClelland;  Maclay Murray & Spens LLP

Defender:  Davies;  Harper MacLeod LLP

14 April 2015

Introduction

[1]        The Cornerstone is a substantial office building located at the South Gyle Business Park in Edinburgh (“the premises”).  The pursuer was formerly the landlord of the premises and the defender was the tenant.  The parties’ relationship was governed by a fifteen year commercial lease executed in 1998, together with two licence agreements that had allowed the tenant to make alterations to the premises.

[2]        Two weeks before the lease expired in 2013, the landlord served a lengthy schedule of dilapidations on the tenant.  In particular, it sought the removal of the tenant’s alterations and the replacement of the floor coverings.  The tenant has declined to carry out the works, maintaining that it did not receive sufficient notice.

[3]        In the present action the landlord seeks to recover the estimated cost of the works (£753,471.24) and the cost of preparing the schedule of dilapidations (£3,200).

[4]        There are three issues for decision.  First, does the lease stipulate that the landlord must provide at least three months’ notice prior to its expiry?  Second, should a term of reasonable notice be implied into the two licence agreements?  Third, did the schedule of dilapidations constitute a valid notice?

 

Background

[5]        Britel Fund Trustees Limited (“Britel”) formerly owned the premises.  In 1998 it let the premises to the Scottish Provident Institution (“SPI”).  The lease was dated 30 November and 9 December 1998 and registered in the Books of Council and Session on 31 December 1998 (“the lease”).  Technically the lease is a sub-lease, but nothing turns on that fact.

 

[6]        The lease itself consists of eight clauses.  Clause 1 is a definitions section.  Clause 2 states that the landlord let the premises to the tenant in “consideration of the rents and other prestations hereinafter specified”.  Clause 3 obliges the tenant “to implement, perform and fulfil the obligations and undertakings set out in the Schedule Part V”.  Similarly, Clause 4 imposes various obligations on the landlord.  They are contained in the Schedule Part VI.  The remaining clauses are of a formal nature.

[7]        Most of the incidents of the lease, including the rent review provisions, are therefore to be found in the Schedule.  It is divided into twelve parts.  Part V of the Schedule imposes the following obligations on the tenant:

(a)        to keep the premises in good and substantial repair during the currency of the lease (paragraph 3)

(b)        to permit the landlord to enter and inspect the premises at all reasonable times (paragraph 7)

(c)        to carry out any works contained in a notice served on it by the landlord within three months, failing which the landlord has the right to enter the premises and carry out the repairs itself (paragraph 8)

(d)        not to make any alterations without the prior written consent of the landlord (paragraph 13)

(e)        at the end of the lease (i) to leave the premises in good condition and repair and (ii) to replace the floor coverings at the request of the landlord (paragraph 28)

[8]        During the course of the lease, Britel gave consent to SPI to alter the premises in terms of paragraph 13 as follows.  In 2000 it permitted SPI to alter the layout of the kitchen and servery area.  In 2004 it permitted SPI to carry out various mechanical and engineering works.  On each occasion, the parties executed a formal licence agreement.  Conditions 2.5 and 2.9 of those agreements are in similar terms.  They provide that on the termination of the lease the landlord can require the tenant to remove the alterations and restore the premises to their previous state.  If the landlord does not issue such a requirement, the tenant’s obligation is to leave the premises in good condition and repair.

 

[9]        The defender (under its then name of Abbey National plc) acquired the tenant’s interest from SPI in 2006.  The pursuer purchased the premises from Britel in 2007.  The lease itself did not specify a period of notice for termination.  At common law, either party had to give the other 40 days’ notice.  Otherwise the lease would continue by operation of the principle of tacit relocation.  The tenant served a notice to quit on 6 August 2013.  It stated that it would vacate the premises on the final day of the lease (25 November 2013).

[10]      The landlord then instructed surveyors to inspect the premises and identify any works that were necessary to put them into the condition required by the lease.  The surveyors produced a schedule of dilapidations, which the landlord’s solicitors served on the tenant on 11 November 2013. The accompanying letter was signed and witnessed.  It stated that “we enclose a terminal schedule of dilapidations … served on you in terms of Schedule Part V (8)”.

[11]      Following correspondence between the respective solicitors, the landlord raised the present action after the tenant indicated that it did not intend to carry out the works contained in the schedule of dilapidations.

 

Was three months’ notice required under the lease?

[12]      Mr Davies submitted that all of the provisions of the lease are directed toward the premises being left in a certain condition at its expiry.  Accordingly, the tenant required a significant degree of notice to carry out the necessary works.  He relied on paragraph (8) of the Schedule Part V.  It stipulates that the landlord had to provide three months’ notice to the tenant.

[13]      I consider that approach to be mistaken. It conflates the obligation in paragraph (8) with those in paragraphs (3) and (28).  On a proper construction, they impose independent obligations on the tenant.

[14]      Paragraph (3) imposes a general obligation upon the tenant to keep the premises in “good and substantial repair” throughout the whole period of the lease.  Such an obligation is common in repairing leases.  It “does not require any notice from the landlord to activate it”:  L Batley Pet Products Ltd v North Lanarkshire Council [2014] SC (UKSC) 174, per Lord Hodge at paragraph 14.  It follows that if the condition of the premises falls below the standard specified in the lease, the tenant is in breach of its obligations.

 

[15]      Taken together, paragraphs (7) and (8) provide a protective regime for the landlord during the currency of the lease.  Paragraph 7 relates to inspection and paragraph 8 to enforcement.  The landlord is permitted to enter the premises at all reasonable times to check that they are being properly maintained. If it finds that the tenant is not performing its repair obligations, it can issue a notice requiring the tenant to carry out the specified works within three months.  If the tenant fails to do so, the landlord can carry out the works itself at the tenant’s expense.

[16]      Paragraph (28) addresses the tenant’s obligations at the expiry of the lease:

“(a)      Immediately prior to the expiration … of this lease at the cost of the Tenant:

 

(i)         … if required by the landlord but without limitation, to provide new floor coverings suitable to the use of the Premises then permitted and of a quality commensurate with the quality of the Premises and;

(ii)        … ;

(iii)       if so requested by the Landlord … to remove and make good all alterations or additions made to the Premises at any time during the Period of this lease and well and substantially to reinstate the Premises in such reasonable manner as the Landlord shall direct and to the Landlord’s reasonable satisfaction; Declaring that the Tenant shall have no liability to the Landlord for loss of rent as a result of such removal and making good being carried out by the Tenant subsequent to the expiry or sooner determination of the period of These Presents, where the Tenant could not reasonably have been expected to effect such removal within the period of notice given by the Landlord and the Tenant has proceeded with all speed to do so.

 

(b)        At the expiration or sooner determination of the Period of this lease … to remove from and leave void and redd the Premises in such condition as shall be in accordance with the obligations on the Tenant contained in these Presents.”

 

[17]      Mr Davies submitted that the passage that begins with the words “Declaring that the Tenant …” only governs sub-paragraph 28 (a) (iii).  I disagree as a matter of syntax.  The phrase follows three semi‑colons, so a natural reading suggests that it governs all that has gone before.

[18]      I prefer, however, to approach the question on a broader basis, by considering the view of a reasonable person who had all the relevant background knowledge: Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, 2907 B-C per Lord Clarke of Stone‑cum‑Ebony.  Such a person would take into account a number of factors.  First, the repair and reinstatement burdens formed a valuable part of the consideration.  If the landlord had shouldered those burdens, the passing rent would have been much higher.  Accordingly, one would reasonably expect that the landlord would wish to insist on performance of these obligations.  The cost of the new floor coverings alone could be considerable.

[19]      Second, new floor coverings would normally only be laid after any tenant’s alterations have been removed.  It would be odd to construe clause 28 (a) as potentially limiting the tenant’s liability for the removal works, but not affording it the same benefit for the floor coverings works.  Such a construction would run counter to commercial sense.

 

[20]      Third, it was almost inevitable that the works could not be accomplished prior to the expiry of the lease.  A minimum period of forty days’ notice is not long for all that required to be done:  (a) the preparation of a schedule of dilapidations;  (b) the selection of a contractor following a tender process;  (c) the reaching of agreement on the sequencing of the works; and (d) the actual carrying out of the works.  Mr McClelland informed me that in this case the removal works were estimated to take seventy days.

[21]      There is no basis for construing paragraphs (3) and (28) as being subject to paragraph (8).  They are independent clauses.  The fact that only one contains a time limit strongly suggests that the parties did not intend the other two to be so qualified.

[22]      In their letter of 11 November 2013, the landlord’s agents did refer to paragraph 8.  That was plainly a mistake.  As the letter also stated that the schedule of dilapidations was a “terminal” one, the tenant could have been in no doubt that it was being asked to undertake its paragraph (28) obligation.  I conclude that the notice was valid because the error was a patent one:  Mannai Ltd v Eagle Star Ass. Co. Ltd [1997] AC 749, 768F-G.

[23]      I agree with Mr McClelland that the tenant’s construction would subvert the scheme of the repairing obligations if it was only bound to carry out works following an inspection and notice by the landlord.  The interpretation I adopt strikes an equitable balance between the interests of the landlord and the tenant:  Grove Investments Ltd v Cape Building Products Ltd 2014 CSIH 43 at paragraph 12.

 

Should a term of reasonable notice be implied into the licence agreements?

[24]      Mr Davies advanced a fall-back position based on an implied term in the licence agreements. He framed the proposition in his note of argument as follows:

“… it was an implied term that any such notice must be served within a reasonable period of time before the expiry of the lease. Such a term is required by business efficacy. Removing alterations and restoring the premises to their original condition would require the defender to carry out potentially substantial works. In the absence of any such requirement the defenders had to assume that the alterations were not to be removed and had to comply with their obligation to leave the alterations in place and in good and substantial repair and condition. In these circumstances if the defender was to be able to comply with its obligations under the lease, it was essential that it had a reasonable period of notice ahead of the expiry of the lease in which to carry out the required works.”

 

[25]      He suggested that ten weeks would have been a reasonable period of notice, particularly to lay the new floor coverings, although he accepted that the exact period would have to be determined at proof.

[26]      Implication is part of the exercise of construction:  Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988.  It is warranted where the implied term is required to spell out what a reasonable person would understand the licence agreements to mean.  That is not the case here.  The implied term proposed by the tenant would be inconsistent with the parties’ express stipulation that the landlord could issue its requirement “on the termination of the lease”.  Accordingly, I reject this argument.

 

Did the schedule of dilapidations provide valid notice?

[27]      Mr Davies submitted that the schedule of dilapidations was simply an assertion of the tenant’s existing repairing obligations under the lease.  It did not provide adequate notice in terms of the two licences.  I see no force in that point.  The removal of licensed works requires no formality:  see L Batley Pet Products Ltd, (above) at paragraph 24.  In the same passage, Lord Hodge stated that a tenant can dispel any doubts about this matter quite simply.  At the time of serving the notice to quit it can ask the landlord whether it insists on the removal of the tenant’s alterations.

 

Conclusion
[28]      I shall fix a by order hearing to discuss further procedure in the light of this opinion.  There remain a number of factual matters in dispute. Meantime I reserve all questions of expenses.