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RICHARD DEREK VERNON WILLIAM MALIN AND OTHERS v CROWN AEROSOLS UK LIMITED

OUTER HOUSE, COURT OF SESSION

[2015] CSOH 58

 

CA198/14

OPINION OF LORD TYRE

In the cause

RICHARD DEREK VERNON WILLIAM MALIN and OTHERS

Pursuers;

against

CROWN AEROSOLS UK LIMITED

Defender:

Pursuers:  Martin QC;  Morisons LLP

Defender:  Lord Davidson of Glen Clova QC;  Garrity;  MacRoberts LLP

14 May 2015

Introduction

[1]        The pursuers are the owners of a site extending to 4.04 acres in Houstoun Industrial Estate, Livingston.  The defender is the tenant of the site, pursuant to a lease granted to it in 1977 by Livingston Development Corporation (“LDC”), the pursuers’ predecessor in title.  I shall refer to the pursuers as “the landlord” and to the defender as “the tenant”.  At the time when the lease was granted, an industrial building constructed in 1972 by LDC stood on the site.  That building is still in existence.  It has been lying empty since about 2011 when it was vacated by a sub-tenant. 

[2]        The condition of the building has deteriorated.  The landlord avers that the deterioration has occurred because the tenant has not fulfilled its maintenance obligations.  The tenant avers that the building is past its economic lifespan, and moreover is obsolete in respect of the tenant’s business formerly carried on at the site and of a design and specification which would not readily permit assignation or sub-letting.  The tenant has intimated to the landlord its intention to demolish the building and, thereafter, to produce proposals for re-development of the site for the landlord’s approval.  The principal issue in the case is whether the tenant has a right in terms of the lease to demolish the building.  The tenant contends that it does; the landlord contends that it does not.  The tenant has a fall-back argument that even if it does not have an absolute right to demolish the building, the circumstances which currently subsist render erection of a new building necessary, with the consequence that demolition of the existing building is also necessary.  The landlord seeks interdict against the tenant from demolishing the building in whole or in part.  The matter came before me for debate.

 

The relevant terms of the lease

[3]        In consideration of the price of £260,000 and the rent etc specified, LDC granted a lease of the site in favour of the tenant (then called The Crown Cork Company Limited).  The lease is a ground lease.  The conveyancing description of the subjects let makes no reference to the building which had by then been constructed by LDC.  The duration of the lease is just over 90 years from 10 January 1977 with an option to the landlord to review the rent at 15-year intervals from Whitsunday 1977.  The initial rent payable was £2,500 per annum.  The rent currently being paid is £37,780 per annum plus VAT.  In the event of the fair market rental being fixed following review by an arbiter, no account is to be taken of the tenant’s trade goodwill or of “any building on the subjects leased or of any works effected” by or on behalf of the tenant. 

[4]        Clause sixth of the lease provides as follows:

“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 such erection, completion, maintenance and re-erection to be all to the satisfaction of the Landlords and the said buildings and others shall not be re-erected unless and until full and detailed plans and specifications thereof, showing inter alia, but without prejudice to the generality, the sites, building lines, elevations, floor plans, chimney plans, designs and colour schemes of the said buildings and others, and the materials to be used in the construction of the same, shall have been submitted to and approved by the Landlords in writing in all respects, prior to the commencement of any building operations and the Tenants shall not make any external alterations or additions to any of the said buildings and others after the erection thereof as aforesaid, nor erect any additional buildings and others on any part of the subjects leased, nor make any internal alterations to any of such buildings and others which would affect or be likely to affect the main structure thereof, without the prior submission and approval as aforesaid of plans and specifications of all such altered or additional buildings and others, which shall all be maintained by the Tenants in the manner above provided.  The Landlords shall not unreasonably withhold or delay their approval under this Clause.”

 

[5]        Clause tenth of the lease obliges the tenant, in familiar terms, 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 the payment of any sums due to the landlord and then towards making good loss and damage caused by the insured risk

“…to the said buildings and others, which shall, in any event, be restored, or if necessary re-erected by the Tenants so as to be in all respects consistent with the provisions and obligations contained in this lease…”

 

Clause twelfth requires the tenant inter alia at all times to keep “the whole buildings and others” in good and substantial repair and condition, all to the satisfaction of the landlord.  Clause fourteenth contains provisions for irritancy of the lease in certain events including non-payment of rent by, or liquidation of, the tenant.  Finally, clause sixteenth grants the tenant an option, on giving the landlord not less than two years’ written notice, to extend the lease for a further period of 90 years on the same terms or “on such other terms as the landlords are incorporating into leases of a similar nature at that time”.

 

Argument for the landlord

[6]         On behalf of the landlord, it was submitted that the tenant’s argument that it had a right to demolish the building was untenable.  The obligation imposed on the tenant by the terms of the lease was to maintain the building to the landlord’s satisfaction, as well as to keep it at all times in good and substantial repair and condition.  There was no ambiguity.  An obligation to maintain was wholly inconsistent with an entitlement to demolish.  Although clause sixth envisaged the re-erection of the building, it did so in the context of an obligation to maintain in good order and when necessary to re-erect.  Use of the words “when necessary” indicated that the tenant was obliged to replace the building at its own cost in the event of that being rendered necessary by a destructive event external to the parties, such as fire or explosion.  Where the dilapidated state of the building had been caused by the tenant’s neglect of its repairing obligation, it could not be said to be “necessary” to re-erect it.  The primary obligation to repair and maintain continued to subsist.  Re-erection could only become “necessary” if destruction had happened, i.e. if there was no longer a building.  The second half of clause sixth prohibited external and internal alterations to the building without the landlord’s consent; it would be absurd to construe the clause as permitting the tenant to demolish the building altogether.

[7]        The fact that the lease was a ground lease did not mean that the landlord had no interest in securing the continued existence of a building of which it was the heritable proprietor and which would revert to its control and occupation at the end of the lease.  Such an end could come in less than 90 years if, for example, the lease was irritated.  On the landlord’s analysis, the landlord would at all times have security in the form of either a building or, if the building was destroyed, the proceeds of insurance.  The case of British Glass Manufacturers Confederation v University of Sheffield [2004] L&TR 251, relied on by the tenant and referred to below, was distinguishable on the ground that the lease in that case was for 1,000 years.  In contrast, it could not be assumed in the present case that the parties contemplated at the time when the lease was entered into that the building would be likely to require demolition and replacement during the initial 90-year period.

 

Argument for the tenant

[8]        On behalf of the tenant, it was submitted that it was entitled, in terms of the lease, to demolish the building without consent, prior to being in a position to re-erect a replacement building (in accordance with proposals approved by the landlord) if there remained sufficient time to do so prior to expiry of the lease.  There was no explicit prohibition of demolition, and it was clear that demolition and re-development during the duration of the lease had been in the parties’ contemplation when the lease was entered into.  Grant of permanent interdict would impose an unqualified prohibition on demolition that did not otherwise exist.  When construing clause sixth in accordance with commercial business sense, it was to be noted that:

  • the lease was a ground lease.  The landlord’s continuing financial interest was restricted to the regular payment of a modest ground rent which was unaffected by the existence or non-existence, or state of repair, of any building on the site;
  • it had been in the reasonable contemplation of the parties to the lease that the tenant would require to replace the building periodically throughout the duration of the lease in order to meet the changing requirements of users;
  • the landlord’s interest in a building was limited to there being a building (not necessarily defect-free) on the site at the expiry of the lease.

 [9]       Against that background, the words “when necessary” related to the tenant’s requirements for use of the site, whether that be its own use or that of an assignee or sub-tenant.  There was no reason to restrict the reference to re-erection to circumstances in which the building was destroyed by an external event.  If the landlord’s interpretation were correct, the tenant would have to spend £2.4 million on an obsolete building.  That would have made no commercial sense at the time when the parties entered into the lease. 

 

The tenant’s alternative argument

[10]      In the alternative, it was contended on behalf of the tenant that clause sixth fell to be construed as permitting development when circumstances rendered re-erection necessary.  The present building was obsolete and could only be repaired by expenditure of unreasonable sums of money.  Demolition as a precursor to re-erection was therefore “necessary”.  If the landlord contended that expenditure of £2.4 million on the existing building was reasonable, there would require to be a proof before answer.

 

The landlord’s reply to the tenant’s alternative argument

[11]      In response to the tenant’s esto argument, the landlord contended that if the lease did permit demolition of the building, it did so only if the tenant followed the procedure prescribed in clause sixth for external and structural alterations.  That would require the tenant to seek and obtain the landlord’s consent not only to the plans for re-development but also to demolition.  Such plans would require to be submitted prior to commencement of demolition.

Decision

[12]      It was common ground that the lease fell to be interpreted according to the established approach to construction of commercial contracts, as enunciated by Lord Clarke of Stone-cum-Ebony in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 at paragraph 21 and applied in many recent decisions of the Scottish courts and by the Supreme Court in L Batley Pet Products Ltd v North Lanarkshire Council 2014 SC (UKSC) 174.  The lease requires to be read as a whole and given the interpretation that a reasonable person with background knowledge reasonably available to the parties at the time of the contract would have understood them to have meant.

[13]      In my opinion the primary positions adopted by the parties are both misconceived.  On the one hand, I reject the landlord’s argument that the parties to the lease envisaged that the building erected on the site at the time when the lease was entered into would remain in existence and maintained in good order for at least 90 years, unless destroyed by an external event such as fire.  There is no justification in the terms of the lease for attaching such importance to that particular building.  It is of note that it is not mentioned in the description of the subjects leased, and although clause sixth refers to “such erection, completion…”, there is in fact no obligation of erection or completion in the lease to which these words could relate.  Nor is there any commercial justification for restricting references to “re-erection” to circumstances in which the building is destroyed by an external cause.    Although the duration of the current lease is nowhere near the 1,000 year period of the lease with which the court in British Glass Manufacturers Confederation v University of Sheffield was concerned, it seems to me to accord with commercial sense to construe the reference to re-erection “when necessary” as extending to necessity caused by obsolescence or even disrepair that may have occurred as a consequence of a breach of the tenant’s repairing obligation.  It does not, on the other hand, accord with commercial sense to require repair at inordinate expense of an obsolete building that has fallen into disrepair, simply in order to restore it to its 1977 condition.

[14]      On the other hand, I reject also the tenant’s contention that an absolute right to demolish can be read into the lease.  Clearly such a right is nowhere expressly stated, and I accept the submission on behalf of the landlord that having imposed an obligation to maintain, the lease did not also require to contain an express prohibition on demolition, which is clearly inconsistent with maintenance.  If the tenant was at liberty to demolish before beginning to discuss with the landlord the question of consent to re-erection, there could be considerable practical difficulties in the event that the tenant failed, for whatever reason, to present a reasonable proposal for the landlord’s approval.  In the meantime, the site would lie undeveloped and its value to the landlord in the event of termination of the lease, for example as a consequence of irritancy, would be diminished.  Again, this somewhat absolute assertion on the part of the tenant does not, in my opinion, accord with commercial business sense, and is not what the parties ought to be understood to have intended at the time when the lease was entered into.

[15]      In my opinion, the proper interpretation of the lease accords more closely with the parties’ respective fall-back positions which, it will be noted, are not very far apart from one another.  The key issue, in my view, is the scope to be attributed to the words “when necessary” in clause sixth.  I accept the tenant’s alternative submission that there may be circumstances where re-erection of a building is “necessary” even though an existing building is still standing on the site.  These might include (i) where the existing building is obsolete and unsuitable for any reasonable use, regardless of cost of repair; or (ii) where the cost of repair is excessive in relation to what it would cost to demolish and rebuild premises similar to the existing building.  In each of these cases (and I note that the tenant offers to prove in the present case that both of those descriptions apply), I consider that it is in accordance with commercial common sense to describe re-erection as “necessary”.  It must follow, as a matter of practicality, that demolition of the existing obsolete and/or uneconomic building is also “necessary” in order to allow re-erection to proceed. 

[16]      Although I do not accept the landlord’s analysis that demolition falls within the procedure in the latter part of clause sixth applicable to external alterations, I do accept that the landlord’s approval is required not only of the detailed plans for re-development but also of the demolition that precedes re-erection.  It must be open to the landlord reasonably to withhold approval of a proposed re-development plan on the ground that the landlord is not satisfied that it is necessary – in the sense that I have construed that word – for the existing building to be demolished and replaced at all.  That would not, however, entitle the landlord to withhold approval merely on the ground that the need for replacement has arisen as a consequence of breach of the tenant’s obligation to maintain.  It would not accord with commercial sense to attempt to distinguish between, on the one hand, a state of severe disrepair caused by neglect in which the landlord may insist upon uneconomic repair, and a state of dangerous disrepair caused by neglect where demolition is the only practical option.  The meaning that I have attributed to the words “when necessary” avoids the need for such a distinction which, in my view, could be very narrow and impracticable.

 

Disposal

[17]      In the light of my conclusion, it is not appropriate at this stage either to grant decree for interdict as concluded for or to dismiss the action.  If parties are not agreed on whether demolition of the existing building and erection of a new building is “necessary”, then proof may be required.  I would, however, express the hope that the foregoing opinion affords sufficient guidance to enable the dispute to be resolved without further substantive court procedure.   I shall put the case out by order in order that parties may address me on this, and on any question arising in relation to expenses.