Development of the Scots Law on dilapidations

In the 2013 Blundell lectures, Jonathan Gaunt QC expressed the opinion that the development of the law on dilapidations in England had taken an unfortunate turn. A dilapidations claim is a claim in damages. In most claims in damages, the claimant has to prove his loss. In the case of breaches of covenant for repair, that isn’t necessary or even permissible. An entirely different approach is used – diminution in the value of the landlord’s reversion. In a simple case this is how much less the landlord’s freehold is worth than it would have been had the tenant complied with his covenants. That is an objective test, not a test of the loss of this particular landlord.

Scots law

Scots law is developing along more rational lines. As early as 1926, in Duke of Portland[1] (before enactment of the Landlord and Tenant Act 1927 in England, therefore), it was said:

It would appear from the case of Joyner v Weeks [2] that in England it is regarded as a rule, absolute in its application, that damages in respect of the breach by a tenant of a contractual obligation to redeliver the subject of the lease in repair are measured by the cost of putting the premises into the condition stipulated for. Nevertheless the case of Joyner v Weeks does not bind us in Scotland. The tendency of our law is probably less favourable than that of England to the formulation of judge-made rules for the assessment of damages; and I am by no means prepared to affirm that the measure of damages laid down in Joyner v Weeks is, according to the law of Scotland, the sole legal measure of damages in such circumstances as were under consideration in that case, or in the present. The measures employed to estimate the money value of anything (including the damage flowing from a breach of contract) are not to be confounded with the value which it is sought to estimate; and the true value may only be found after employing more measures than one — in themselves all legitimate, but none of them necessarily conclusive by itself – and checking one result with another. As Lord Stair puts it … : “It is rather in the arbitrament of the Judge to ponder all circumstances.” If, for example, the [tenants] should succeed in … proving the true loss suffered by the lessor to be materially less than the more readily ascertainable cost of repairing the ravages of their neglect,… they may be entitled to ask the Court to restrict the lessor’s claim.

Two recent cases have reinforced this proposition:

1. Grove v Cape [3]

The relevant Article Twelfth was worded:

 to pay to the landlords the total value of the Schedule of Dilapidations prepared by the landlords in respect of the tenants’ obligations …

The landlord argued:

[3]… [This] is a payment clause which binds the [tenant] on the expiry of the lease to pay to the [landlord] the value of a schedule of dilapidations duly prepared in accordance with the terms of the lease.

The tenant argued:

[4]… [Article Twelfth] does not have effect so as to oblige the [tenant] to make payment to the [landlord] of whatever sum happens to be the total of the various cost estimates contained in the Schedule of Dilapidations produced by or on behalf of the [landlord]. … on a proper construction of the relevant contractual provisions, the landlord … would be entitled to seek payment of the total of the various cost estimates contained in the Schedule of Dilapidations by way of damages but only if the figure in question truly represented the actual loss suffered by the landlord by reference to a breach of the repairing obligations by the tenant.

The Court concluded:

[23]… the tenantsʹ arguments are correct, and … their case as set out in the passage quoted … at paragraph [4] is relevant. … the case for the landlords, as set out in paragraph [3]… , is irrelevant. The sum due by the tenants to the landlords … must be quantified in accordance with that approach;… in some circumstances this might amount to the cost of the repairs set out in the schedule of dilapidations and in others might be a sum calculated in a totally different manner.

So damages apply and the landlord would be free to claim his loss in any form, not only in the form of loss of value in his property.

2. @SIPP[4]

This case turned on the meaning of a slightly differently worded clause:

[7] … if the Landlord shall so desire at the expiry or sooner termination of the foregoing Lease they may call upon the Tenant … to pay to the Landlord … a sum equal to the amount required to put the leased subjects into good and substantial repair and in good decorative condition …

At first instance, the court found that:

[29] … the proviso … does not … preclude the [tenant] from offering to prove that the appropriate measure of the [landlord’s] loss is something other than the cost of repair.

Reversing that decision on appeal, the court expressed itself as follows:

[39] … We see no potential for importing into the words “a sum equal to the amount required”  a meaning to the effect that the landlord must intend to use the money to carry out the works, failing which repair costs become wholly irrelevant and actual capital loss suffered, to which no reference is made at all, becomes the only matter of any relevance at all. 

The Scottish courts take account of some of the decisions of the Supreme Court. The appeal in @SIPP was decided after the Supreme Court gave its judgment in Arnold v Britton,[5] in which the President said of the interpretation of contracts:

The meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provision of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions …

The appeal court in @SIPP therefore concluded that:

[42] The present case can readily be distinguished from the circumstances in Grove. There, the clause under consideration … was, in terms, concerned with parties reaching a “financial settlement” in relation to the “value” of the Schedule of Dilapidations without any reference to the “cost” of repairs.

In Scotland, as seen from these two cases is, the Landlord’s claim will sometimes be his true loss, and sometimes the cost of works. Words connoting “cost” or “value” may be critical to determining which applies. Diminution in value may be the correct measure of the true loss to the landlord, but other kinds of assessment are possible. It will be interesting to see which predominates in loss claims as these begin to move through the courts in Scotland.

s18(1) of the Landlord and Tenant Act 1927 as aberration

The background to the English position is the late 19th century development of case law summarised in Joyner v Weeks. There it was decided that, in a dilapidations claim, the landlord could claim for the cost of repair, even if he hadn’t incurred it and even if he wasn’t going to incur it. To take an extreme example: even if the landlord is going to demolish the building, he still can have the cost of repairs to a building that he is not going to, and could never, repair. This remains the common law measure for the assessment of damages in a dilapidations claim.

This was felt to be unfair, as it patently is. Most lawyers familiar with dilapidations now think that Joyner v Weeks would be differently decided today even in the absence of a statutory cap. Nonetheless, a statutory cap was applied by s18(1) of the Landlord and Tenant Act 1927. It provided essentially for the landlord’s claim to be to the cost of works, or diminution in the value of the reversion, whichever was the less. This is the source of the objective, rather than subjective, test of which Jonathan Gaunt disapproves. It is the law, in relation to breaches of covenant to repair. As regards breaches of covenant other than repair, the principles appear to be the same as those for damages generally. Two examples of the general principle are: Ruxley v Forsyth [6] and The Baltic Surveyor [7]. In principle, the landlord can only claim for his actual loss, not the loss that would be triggered by sale of the property, which is what a valuation addresses: value is price payable in a hypothesised sale. (Note, however, that he can only claim for the cost of works if reasonable; otherwise, loss of value may well apply:  that was the principle in Ruxley.

Examples of conflict between normal damages and s18

To explain why the present system is unfortunate, it helps to think about two cases in which we were involved. The facts have been anonymised to protect confidentiality.

Case 1 – the dentists

This was a case concerning a big house in a provincial town. The house had been the family home of the landlord for many years, until it was converted into a dentists’ surgery and let as such. As it happened, the landlord lived in a newer house immediately behind the old house. The lease came to an end; the dentists vacated; and left the house in a poor state. The landlord sued for dilapidations. The market for dentists’ premises in the town was poor; indeed all values were poor, other than residential values. To exploit residential values to the full, it would have been necessary for the landlord to sell the house, which he was not prepared to do. First, he lived very near it; second, he relied on it for income; and third, he would be faced by a Capital Gains Tax bill if he sold it. He made it clear he was not willing to sell it: he wanted to relet it for the same sort of use as previously.

You can imagine that, if the house was sold, it would be radically reorganised within. As it had been arranged for office/dental purposes, it didn’t lend itself at all well to a residential property as configured. Reconfiguration would nullify (or, as dilapidations surveyors say, “supersede”) much of the dilapidations. Nonetheless, that was the best sale value.

It could be argued – ignoring s18 – that the landlord’s loss was attributable to his inability to let the building, albeit at a relatively low rent, to an office or medical user. As far as he was concerned, that was the future for the building. However, that approach was excluded by s18(1). For the purpose of assessing a value, one had to contemplate sale, and there was no doubt (in fact, I don’t think there was any dispute) that the best value for sale was residential. It followed that s18 failed to compensate the landlord for his true loss – his true loss, that is, not the loss that would be occasioned in the merely hypothetical event that he sold the property.

Case 2 – the food manufacturers

This was an industrial unit carved out of a large industrial estate, owned and largely occupied by food manufacturers, but they had let out this particular unit to tenants. When the tenants vacated, the landlord had the intention of storing large quantities of perishable food there immediately. The roof was leaking. They couldn’t store food there, and had to rent other premises. This was expensive. One can understand why they would expect to claim for it: there had been a breach of contract; the tenant was responsible for repairing the roof; they hadn’t repaired the roof; and, as a consequence, the roof leaked – everything followed from that. They therefore claimed for the substantial costs to which they were put.

However, again, the landlord was unable to sustain that claim. In order to establish the value of the property, one had to envisage sale. In doing so, only the cost of repair figured: the consequences of not being able to store perishable food did not.

It’s indicative to consider what the situation would have been had the landlord in that case been claiming for reinstatement of something that prevented the storage of perishable food. In that case, it would have been possible (subject always to adequate evidence, of course) for the landlord to recover the outlay of rent occasioned by the tenant’s failure to reinstate.

Above and beyond these admittedly rare examples of the inadequacy of the law in England, there is a two-part approach to the landlord’s loss in dilapidations. The correct approach is different depending on the breach of covenant. Repairs are subject to s18 while other breaches of covenant are not [8], even though in practice most dilapidations claims are dealt with either as cost of works claims, or as claims where diminution in the landlord’s reversion is the correct measure. In an extreme case, one can even imagine a dispute about whether a particular breach is a repair or not, which in turn would lead to an assessment of whether the landlord’s loss should be assessed by one means or another.

Diminution in value is expensive and technical as a measure of loss. The disputes tend to be long, costly and arduous, often involving a dialogue of the deaf. It will be interesting to see whether Scots law – developing along more rational lines – tends to militate against those unfortunate effects.

PB.


[1] Duke of Portland v Wood’s Trustees, 1926 SC 640

[2] Joyner v Weeks [1891] 2QB 31 CA

[3] Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43 XA73/13

[4] @SIPP (Pension Trustees) Ltd v Insight Travel Services Ltd [2014] CSOH 137

[5] Arnold v Britton and others [2015] UKSC 36

[6] Ruxley Electronics and Construction Ltd v Forsyth [1996] 1 AC 344

[7] Voaden v Champion (The “Baltic Surveyor” and “Timbuktu”) [2002] EWCA Civ 89

[8] See, for example, Consortium Commerical Developments Ltd v ABB Ltd [2015] EWHC 2128 (TCC)