Scottish Court of Session Decisions

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2017] CSIH 22

CA60/16

Lord President

Lord Bracadale

Lord Glennie

OPINION OF THE COURT

delivered by LORD CARLOWAY, the LORD PRESIDENT

in the Reclaiming Motion

AWG BUSINESS CENTRES LIMITED

Pursuers and Respondents

against

REGUS CALEDONIA LIMITED

First Defenders and Reclaimers

and

CHESHIRE WEST AND CHESTER COUNCIL

Second Defenders and Respondents

Pursuers and Respondents:  Duncan QC, Turner; Eversheds LLP

First Defenders and Reclaimers:  Lindsay QC, Manson; Shoosmiths LLP

Second Defenders and Respondents: MacColl; Morton Fraser LLP

2 February 2017

Introduction
[1]        This is a reclaiming motion (appeal) against an interlocutor of the commercial judge, dated 23 August 2016, granting decree for payment by the first defenders to the pursuers of £167,000; being the costs of repairing latent defects in a building caused by faults in its original construction or design.  The issue is whether, under the terms of the relevant leases and sub-leases, the obligation to pay for repairs to latent defects falls upon the landlord or the tenant, and through him, the sub-tenant.

 

Background
[2]        The subjects are an office “Building”, namely Riverside House, Aberdeen, owned by the second defenders.  They consist of five floors of office space together with an area of surrounding land, including a car park.  The car park has two decks; the upper at ground level and the lower at basement level.

[3]        The pursuers are the second defenders’ tenants in respect of each of the top three floors in terms of leases dated 8, 21 and 29 April and 21 May 2002 and registered on 18 June 2002.  The first defenders and reclaimers are the sub-tenants of the pursuers in terms of sub-leases, again applying to each of the three floors, dated 8, 9 October and 5 November 2007 and registered on 12 December 2007.  The leases and the sub-leases are, mutatis mutandis, the same in respect of each floor.  The sub-leases include a provision whereby, in effect, the first defenders as sub-tenants, require to indemnify the pursuers, as tenants, in respect of any sums due by the pursuers to the second defenders, as landlords.

[4]        In 2009, defects became apparent on the upper deck of the car park.  Remedial works were carried out in 2012.  It is not disputed that the remedial works arose out of latent defects caused by the design and construction of the car park, which took place in or about 2000.

 

Terms of the leases and sub-leases
[5]        Clause 1.2 of each lease defines “the Premises” as “... those premises at [the particular level] of the Building…”.  They do not include “the Common Parts”.  “The Common Parts” are “those parts and portions of the Building not let or intended or designed to be let ... to any ... tenant…”.  The car park is included in the Common Parts.

[6]        Clause 4 contains the landlord’s obligations.  These include (clause 4.5) a requirement to manage the Building in accordance with the principles of good estate management and to carry out or procure the carrying out of the landlord’s services.  Part V of a schedule lists the landlord’s services, which include:

“To maintain in good and substantial repair and to rebuild, renew and reinstate the Common Parts as necessary, irrespective of the cause of any damage or destruction …”.

 

[7]        Clause 3 contains the tenant’s obligations.  These include obligations to pay (clause 3.1.2) a service charge to the landlord and (clause 3.1.3) the applicable proportion of premiums properly incurred by the landlord in insuring the Premises and the Common Parts.  Critically, they include (clause 3.6) an obligation:

“… to repair, maintain, decorate, cleanse, glaze, point, and where necessary renew, rebuild and reinstate and generally in all respects keep in good and substantial repair and condition the Premises … with all necessary maintenance, cleansing and rebuilding and renewal works and amendments whatsoever (… irrespective of the cause or extent of the damage causing such repair, maintenance, renewal, rebuilding or others and including any which may be rendered necessary by any latent or inherent defects in the Premises); …”.

 

[8]        The service charge payable by the tenant to the landlord is defined (clause 1.2) as the aggregate of the “main” and the “car park” service charges.  The car park service charge is a proportion of the service expenditure incurred by the landlord in respect of the car park.  The main service charge is in similar terms.  The service expenditure is the expenditure in the provision of the landlord’s services pursuant to clause 4.5.  The liability on the tenant to pay the service charge is subject to five exceptions one of which, contained in exception (c) within the definition of the “Service Expenditure”, is central to the current issue.  The exception is:

“any expenditure incurred in respect of or pertaining to the initial construction of the Building or the Service Systems or any part thereof by the Landlord”.

 

[9]        The position of the sub‐leases is more straightforward.  In terms of clause 5.2, the sub‐tenant is obliged to pay to the tenant:

“... all sums of money properly payable by the [tenants] to the ... [landlords] or others in terms of or arising from the ... Lease including, without prejudice, liabilities arising in relation to service charge, common charges and insurance premiums …”.

 

Any sum properly paid by the tenant (the pursuers) to the landlord (the second defenders) by way of the service charge is therefore recoverable from the sub‐tenant (the first defenders).

 

The commercial judge’s reasoning
[10]      The commercial judge applied his mind to whether exception (c), prevented the second defenders, as landlords, from recovering the costs of the remedial work to the car park from the pursuers, as tenants.  If it did not preclude recovery, the pursuers would be entitled to recover the sums, which had been paid by them in respect of the remedial works, from their sub-tenants, the first defenders.  If it did preclude recovery, then neither the pursuers nor the first defenders would have been obliged to pay.  The pursuers would then be entitled to recover the sums already paid by them in error to the second defenders.   The issue therefore turned on whether exception (c) was broad enough to exclude, from the definition of Service Expenditure, the costs of remedial work arising from latent defects caused by the design and construction of the car park.

[11]      The commercial judge accepted the pursuer’s argument that the natural and ordinary meaning of the phrase “in respect of or pertaining to the initial construction of the Building” in exception (c) extended only to works carried out during the construction phase and any related snagging.  In doing so, he rejected the first defenders’ argument that the exception ought to be interpreted broadly, so as to exclude the cost of remedying any latent defect which “pertained to” the construction of the Building.  The lease was a full repairing and insuring one and the court ought to place emphasis on that (@SIPP Pension Trustees v Insight Travel Services 2016 SLT 131). The imposition (clause 3.6) of a liability on the tenant to repair or rebuild the Premises, even where the work was required as a result of a latent defect, was indicative of the parties’ common intention that the landlord ought to be relieved of such a liability generally.  It would have been surprising if the parties had not had the same common intention in respect of the Common Parts, including the car park.

[12]      The first defenders’ construction placed too much weight on the words “pertaining to”.  Those words simply excluded recovery of costs, such as professional fees, which were not strictly costs of construction.  The first defenders’ construction would place an uncertain and continuing liability on the landlord, whereby any works which required to be carried out at any point in the future could be said to be “pertaining to” the initial construction of the Building.  This was inconsistent with the idea of a full repairing and insuring lease.  It was not appropriate to construe a lease on the basis of what the reasonably prudent tenant might wish to achieve or by considering what might represent a good or bad bargain for each party.  The correct approach was to ascertain the parties’ intentions by reference to what a reasonable person, with all of the background knowledge available to the parties, would have understood exception (c) to mean (Arnold v Britton 2015 AC 1619, Lord Neuberger at paras 14-23, approved in @SIPP Pension Trustees v Insight Travel Services (supra) at para [17]).  The natural and ordinary meaning of the words, taking into account the definition of Service Expenditure and the rest of the provisions of the lease, and applying commercial common sense, all supported the interpretation proposed by the pursuers and the second defenders.

 

Submissions
First Defenders
[13]      The first defenders submitted that, although the commercial judge had correctly directed himself on the law, he had misapplied the principles.  It was accepted that the landlord was responsible for repairing latent defects in the car park, by virtue of the words “irrespective of the cause of any damage or destruction” in part V of the Schedule.  It was also accepted that that liability was effectively passed on to the tenants, who were obliged (clause 1.2), other than in five exceptional situations, to make payment of service expenditure, including any sums incurred by the landlord in the provision of landlord’s services.  Despite that, the ordinary and natural meaning of exception (c) was to exclude liability for latent defects in the Common Parts of the Building, including the car park.  The commercial judge had erred in giving a narrow meaning to the words “pertaining to”.  They meant “connected with” the initial construction.  Latent defects were so connected.

[14]      The parties had agreed to treat different parts of the building differently.  The tenant was liable to make repairs to the Premises, but only to pay a share of the cost of any repairs to the Common Parts.  There was a rational difference between the Premises and the Common Parts.  The purpose of exception (c) was to exclude this liability from the tenant’s repairing obligation.  The lease did not provide for an assignation of the landlord’s right to recover the costs of any defective building works from the original builders.  The commercial judge’s interpretation of exception (c) rendered it devoid of content in two respects.  First, the expenditure, which the commercial judge envisaged falling within the exception, would not be recoverable as service expenditure in any event.  Secondly, the car park had been completed by 2000.  The lease had been entered into in 2002.  The costs of initial construction would predate the existence of the lease.  Commercial common sense could be used to support either parties’ interpretation.  It was a secondary consideration, given the clear terms of the lease.

 

Pursuers
[15]      The pursuers submitted that the commercial judge had correctly taken into account the commercial importance of the lease as a fully repairing and insuring one.  The term “initial construction” referred to the costs related to the initial building and snagging.  The commercial judge had given the words their natural meaning.  The provisions of the lease, and in particular clause 4.5 and the service charge under clause 3.1.2, naturally followed to achieve the purpose of a full repairing and insuring lease.  The first defenders’ interpretation of exception (c) would result in a removal of that liability from the tenant.  The judge had been correct to conclude that it would be anomalous if the parties had intended to impose liability differently in respect of latent defects in the Premises as distinct from the Common Parts.  The lease (clause 1.2, part V of the Schedule) provided that the landlord was responsible for the repair of latent defects in the Common Parts “irrespective of the cause”.  That included latent defects (Thorn EMI v Taylor Woodrow Industrial Estates, unreported, Lord Murray, 29 October 1982).  The first defenders had conceded that the effect of clauses 4.5 and 3.1.2 was to make the tenant generally liable for the cost of repairs to the Common Parts, irrespective of the cause, including latent defects.

[16]      The terms of the lease had to be looked at in context.  They contained a hierarchy of obligations which were passed from the landlord to the tenant.  The parties had displaced the common law position, whereby the landlord would be liable for the repair of latent defects.  The consequence of the first defenders’ construction would be to restore the common law position, despite the clarity of the provisions.  The language of exception (c) was a “carve out” from the starting point that liability would be transferred to the tenant.  “Pertaining to” should not be interpreted as relating to the cause of the defect.  It was not “causative language”.  Any wider interpretation of “pertaining to the initial construction” would not accord with commercial common sense or the approach of parties under a full insuring and repairing lease.  It would leave the landlord with significant ongoing potential repairing liabilities, which would have been clearly expressed if that had been the parties’ intention (@SIPP Pension Trustees v Insight Travel Services (supra) at para [24]).

 

Second Defenders
[17]      The second defenders adopted the pursuers’ submissions.  The commercial judge had correctly interpreted the terms of exception (c).  It did not preclude the landlord from recovering the costs of the remedial works to the car park from the tenant.  The judge had correctly applied Arnold v Britton (supra) and @SIPP Pension Trustees v Insight Travel Services (supra).  He had considered the whole context, being that of a full repairing and insuring lease.  He had not erred in taking into account that the tenant would have liability for repairs to the Premises “irrespective of the cause of any damage”.  Exception (c) had a plain and ordinary meaning, which the judge had given effect to.  The first defenders had focussed too narrowly on the words “pertaining to”, whilst disregarding the first part of the sentence, viz.: “incurred in respect of or pertaining to”.  There was no doubt that “in respect of” could only mean initial building costs.  It was not inconceivable that works could have been ongoing in the car park at the time when the lease was executed.  Work had been undertaken in the car park in 2003.  It could not be said that the date of completion of the car park meant that exception (c) had no content.

 

Decision
[18]      The language of exception (c) must be given its natural and ordinary meaning (Arnold v Britton [2015] AC 1619, Lord Neuberger at paras 14-23; @SIPP Pension Trustees v Insight Travel Services 2016 SLT 131, Lady Smith, delivering the Opinion of the Court, at para [17]).  Exception (c) provides that any expenditure which is incurred “in respect of or pertaining to the initial construction of the Building … or any part thereof by the Landlord” shall not be recoverable from the tenant.  It is important not to place too much emphasis on the words “pertaining to” as distinct from the whole sub-clause, including “in respect of”.  The natural and ordinary meaning of the exception “in respect of or pertaining to the initial construction” is that it relates to the costs of, or associated with, initial construction and related snagging works. 

[19]      Other relevant provisions of the lease must be taken into account.  It is not disputed that the tenant is liable to repair damage to the Premises caused by a latent defect, whether in respect of the initial construction or otherwise (clause 3.6).  In respect of the Common Parts, clause 4.5 and part V of the Schedule provide that the landlord must repair the Common Parts, again irrespective of the cause of the damage.  The liability to pay for such repairs is then passed on to the tenant by virtue of clause 3.1.2.  That clause obliges the tenant to pay the Service Expenditure, ie the expenditure incurred by the landlord, subject to the five exceptions.  

[20]      The interpretation of exception (c), as relating only to initial construction and snagging works, is consistent with the terms of a lease providing for liability on the tenant to repair, or to pay for repairs to, defects in respect of both the Premises and the Common Parts, irrespective of the cause of damage.  The exception should not be read in isolation from those provisions which transfer the general liability to repair, or to pay for the cost of repairs, from the landlord to the tenant.  It is consistent with the full repairing nature of the lease.

[21]      The fact that the construction of the car park had been completed by 2000, around two years before the lease was executed, does not render the exception devoid of content.  It is quite conceivable that works to the car park or other Common Parts, including snagging, would be ongoing in 2002.  It is expenditure incurred in carrying out those works which would not be recoverable from the tenant by virtue of exception (c).

[22]      Parties were agreed that commercial common sense was a factor which could be invoked to support either construction and was thus a secondary consideration.  The language of exception (c) is significantly clear that, applying commercial common sense, the parties had agreed that, in relation to the Common Parts, only the costs of initial construction should be excluded from the service expenditure recoverable from the tenant by the landlord.

[23]      The court therefore, in essence, agrees with the reasoning of the commercial judge.  It will therefore refuse the reclaiming motion and adhere to the interlocutor of 23 August 2016.