Where is the Schedule of Condition?

Where is the Schedule of Condition?

In Dem-Master Demolition Ltd v Healthcare environmental services Ltd [2017] CSOH 14 the Outer House of the Court of Session considered the interpretation of the repairing clause in a commercial lease which referred to a photographic schedule of condition. The schedule of condition had never been prepared.

In its absence, what repairing standard would apply at the termination of the lease?

THE FACTS

Dem-Master Demolition Ltd held the landlord’s interest in the lease of an industrial property in Shotts which commenced in 2010, having acquired the property at auction in 2012. They sought declarator that the lease had been terminated by irritancy notices that they served following the failure of Healthcare Environmental Services Ltd to comply with notices requiring them to carry out certain repairs. The case came before the court as a preliminary proof, to consider the circumstances of the execution of the lease and the construction of the repairing obligation. Clause 6 (REPAIR) provided that:

“The Tenants accept the Premises as being in such condition as shown on the attached Photographic Schedule and in all respects fit for the Tenants’ purposes and shall at their sole expense and, to the reasonable satisfaction of the Landlords, repair and maintain and maintain and renew, (and, if necessary for the purposes of maintenance and repair, to replace and rebuild) and decorate and keep the Premises and all permitted additions and new buildings, if any, in like condition as is evidenced on the said Photographic Schedule and in a clean and tidy condition … .”

THE PURSUER’S PLEADINGS

As the pursuer only purchased the property after the commencement of the lease, they faced an obvious disadvantage when required to present evidence to establish the condition of the property at the date of commencement of the lease. The defender led evidence with the aim of establishing that the property was in a material state of disrepair on the date of entry. In particular, the subjects of the lease comprised part of a factory building which was formerly occupied by manufacturers of diesel engines.

The defender maintained that it had been used as an engine testing area and thereafter as a machine shop, and that both of those operations resulted in harmful emissions and structural damage, which they claimed was not remedied prior to the commencement of the lease. Although the pursuer had no direct knowledge of the position, they did present some photographs that had been taken in 2007, 2014 and 2015.

Dem-Master claimed that the photographs from 2014 and 2015 evidenced damage that was not shown in those dated 2007. Furthermore, they argued that if the damage had existed at the date of entry and the defender was seeking to limit their repairing obligation by reference to a schedule of condition, no reasonably competent surveyor would have failed to record the defects in repair. The pursuer claimed that it could therefore be inferred that the damage was caused by the defender. However, that evidence was only a secondary argument by the pursuer.

Their principal contention was that the schedule of condition was solely for the benefit of the tenant, who had chosen not to prepare one. In its absence, the reference to the schedule of condition in the repairing clause should be read as pro non scripto. The tenant’s repairing obligation became unqualified, and the defender was obliged to restore the property in accordance with the “absolute” full repairing and insuring standard. Interestingly, the counsel for the pursuer accepted that the position would be different if the schedule of condition had been lost, in which circumstance it would be necessary to prove the tenor of the missing document.

THE DEFENDER’S PLEADINGS

Healthcare Environmental Services Ltd maintained that the property was in a dilapidated condition when the lease commenced. The lease was of short duration, of five years with a mutual break option at the expiry of three years. No prudent tenant, they argued, would have accepted a full repairing obligation and the clause should be interpreted in that context. They claimed that in cl.6, the word “keep” imposed an obligation to put the property into a like situation.

The words “in like condition” were words of comparison and referred back to the schedule of condition, which served an evidential function. The absence of the photographic schedule of condition did not alter the meaning of cl.6. Accordingly there was no obligation on the tenant to improve the condition of the property beyond that at the commencement of the lease. The absence of the schedule of condition created an evidential problem, as it would do if it had prepared and subsequently lost.

THE DECISION

The court preferred the submissions of the defender. Lady Wolffe determined that, as the defender alleged, the property had been in a dilapidated condition at the date of entry, and it was therefore unlikely that the tenant would have accepted an onerous repairing obligation. The ordinary and natural meaning of cl.6 is that the defender was obliged to maintain the property in the actual state that it was in at the outset of the lease, as evidenced by the photographic schedule of condition. The words “in like condition” protected the tenant from any requirement to restore the property to a higher objective standard, providing certainty as to the actual repair standard to be achieved. The absence of the schedule of condition did not change the meaning of cl.6.

COMMENT

It is noteworthy that the lease contained no acceptance by the tenant that the property was in “good and tenantable” condition. If it had, it would have been interesting to see if that would have supported the landlord’s argument that the property was not in such a dilapidated condition as the tenant alleged. The repairing clause in question did not impose an objective repairing standard. The requirement was to maintain the property “in like condition”.

Many leases impose an obligation on the tenant to maintain the property in “good and substantial repair and condition”, but subject to the qualification that the tenant is not obliged to repair any defects that are specifically noted in the schedule of condition. Such wording should not pose the same question of interpretation. Every repairing clause should be subject to review and negotiation in context of the condition of the property and the circumstances of the parties, and this distinction should be borne in mind when drafting.

If there are specific areas of the property that are in a very poor state, the tenant should consider carving out any liability to repair those in the repairing clause, to remove any scope for doubt. Particularly for a tenant, it is vital to engage the services of a surveyor, who can not only advise on the terms of the repairing obligation, but also recommend any works that ought to be carried out as a preventative measure to prevent further deterioration in condition.

The court noted that a schedule of condition can benefit both the landlord and tenant, providing certainty as to the repairing standard to be applied. Often, missives of lease require the tenant to prepare the schedule of condition after the date of entry. Having achieved a concluded contract, with the tenant in occupation there is a risk that the parties to the lease and their professional advisors may forget to ensure that it is prepared and agreed. The case serves as a reminder that both the landlord and the tenant must diarise to pursue the matter.

Even if the parties cannot agree the terms of a schedule of condition, it will benefit both the landlord and the tenant to keep their own photographic record of the condition of the property at the date of entry, should such evidence be required for a dilapidations dispute.