L Batley Pet Products Ltd v North Lanarkshire Council (Scotland) [2014] UKSC 27

A commercial sub-tenant disputed liability to remove alterations and repair premises on lease expiry, arguing written notice was required. The Supreme Court held neither the Minute of Agreement nor the repairing obligation required prior written notification, allowing the mid-landlord's dilapidations claim to proceed to proof.

Facts

The appellant, L Batley Pet Products Ltd (‘Batley’), was the mid-landlord of commercial premises at Wardpark South Industrial Estate, Cumbernauld. The respondent, North Lanarkshire Council (‘the Council’), was the sub-tenant under a sub-lease dated 26 February and 19 March 1998, as varied to expire on 18 February 2009. A Minute of Agreement dated 7 and 17 April 1998 licensed the Council to make alterations to the sub-let premises, subject to conditions including, at clause 2.5, an obligation to dismantle and remove the works and reinstate the premises at expiry of the sub-lease ‘if so required by the Mid-Landlord’.

On expiry of the sub-lease, Batley claimed dilapidations on two alternative bases: (a) approximately £253,766 under the Minute of Agreement for removal of alterations and reinstatement; and (b) approximately £189,692 under clause 5.1 of the sub-lease (which incorporated the repairing obligation in clause 3.12 of the head lease) for repairs excluding removal. Batley’s chartered surveyor had orally informed a Council official on 22 December 2008 that reinstatement would be required; no written notice or schedule of dilapidations was served before expiry.

Issues

The court had to decide two issues of contractual construction:

• Whether, under clause 2.5 of the Minute of Agreement, Batley was obliged to give written notification of its requirement that the Council remove the licensed alterations and reinstate the sub-let premises.
• Whether, under the repairing obligation in clause 3.12 of the head lease (applied via clause 5.1 of the sub-lease), Batley had to give written notification before expiry of the sub-lease requiring the Council to carry out repairs.

Arguments

The Council (Respondent)

Counsel for the Council argued that clause 2.5 must be read in the context of clause 5.8 of the head lease and clause 13 of the sub-lease, which required notices, requests, demands and consents to be in writing. It was submitted that clauses 5 and 7 of the Minute of Agreement incorporated the notice provisions of the head lease. Requiring writing made commercial sense in providing certainty about the scope of reinstatement. In relation to the repairing claim, the Council contended the claim was pursued under clause 2.5, that Batley had not carried out the works to trigger reimbursement under clause 5.3, had not averred that defects arose during the sub-lease, and had given no written notice before expiry.

Batley (Appellant)

Batley contended that clause 2.5 did not require any written notice, that oral intimation by its surveyor sufficed, and that clause 3.12 of the head lease imposed a continuing repairing obligation that did not require any notice to activate it.

Judgment

Lord Hodge, with whom Lady Hale, Lord Kerr, Lord Reed and Lord Carnwath agreed, allowed the appeal.

The repairing obligation (basis (b))

Lord Hodge held that clause 3.12 of the head lease imposed a continuing obligation on the tenant to keep and put the premises into good and tenantable condition. Such an obligation did not require any notice from the landlord, written or otherwise, to activate it. Drawing on the reasoning of Lindsay J in Credit Suisse v Beegas Nominees Ltd [1994] 4 All ER 803, he quoted the following passage:

Whilst I accept the inevitability of the conclusion of the Court of Appeal in Post Office v Aquarius Properties Ltd [1987] 1 All ER 1055 that one cannot have an existing obligation to repair unless and until there is disrepair, that reasoning does not apply to a covenant to keep (and put) into good and tenantable condition. One cannot sensibly proceed from ‘no disrepair, ergo no need to repair’ to ‘no disrepair, ergo no need to put or keep in the required condition’. Leaving aside cases, such as this, where there is special provision for there to have been prior knowledge or notice in the covenantor, all that is needed, in general terms, to trigger a need for activity under an obligation to keep in (and put into) a given condition is that the subject matter is out of that condition.

Lord Hodge endorsed the same approach in Scots law, referring to Lord Penrose’s decisions in Taylor Woodrow Property Co v Strathclyde Regional Council and Lowe v Quayle Munro Ltd 1997 SC 346. He rejected the Council’s other objections: clause 2.5 of the Minute did not prevail over the sub-lease as no hierarchy of contracts existed; damages were available under clause 5.1 alongside reimbursement under clause 5.3, with estimated repair costs being a legitimate measure of loss (citing Duke of Portland v Wood’s Trustees 1926 SC 640); and it was implicit in the pleadings that the schedule of dilapidations related to the clause 5.1 obligations.

The Minute of Agreement claim (basis (a))

Applying the principles of construction in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 and Multi-Link Leisure Developments Ltd v North Lanarkshire Council 2011 SC (UKSC) 53, Lord Hodge quoted Lord Clarke:

[T]he exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.

Starting with the words of the Minute, Lord Hodge observed that the phrase ‘if so required by the Mid-Landlord’ in clause 2.5 contrasted with clauses that expressly required writing (clause 2.1.2’s ‘written acknowledgement’; clause 3’s requirement for a notice specifying breach) and clauses permitting informal communication (clauses 2.1.3 and 2.2.2). The drafters had distinguished expressly between formal and informal communications.

Clause 5 of the Minute did not incorporate the head lease’s notice regime; its purpose was solely to enable the mid-landlord to invoke irritancy for breach of the Minute’s obligations. Clause 7 was a neutral saving provision. The Minute was a separate contract, not a variation of the sub-lease, and existed as the mid-landlord’s consent under clause 5.7 of the sub-lease.

Lord Hodge considered his construction consistent with business common sense: reinstatement would only arise at the end of the sub-lease when repairing obligations were also being addressed, and a conscientious sub-tenant receiving oral intimation could readily incorporate the removal works into its planned works, or enquire if in doubt. The desirability of certainty did not render the Council’s construction the only commercially sensible one.

Batley’s averments regarding the surveyor’s oral communication to the Council on 22 December 2008 met the test of relevancy in Jamieson v Jamieson 1952 SC (HL) 44. The appeal was allowed and the matter remitted for proof before answer.

Implications

The decision confirms two significant principles applicable to commercial leases and licences for alterations.

First, in relation to repairing covenants framed as obligations to keep (and put) premises in good and tenantable condition at all times, no notice from the landlord is required to activate the tenant’s obligation. Such obligations are continuous and self-executing, contrasting with covenants requiring prior notice or knowledge of disrepair. This confirms in Scots law the approach taken in Credit Suisse v Beegas Nominees.

Second, in construing licence documents authorising tenants’ alterations, whether a requirement to reinstate must be communicated in writing depends on the words of the licence read in context. Where the licence itself distinguishes between formal (written) and informal communications, general notice provisions in a related lease will not necessarily be imported. The unitary approach to construction in Rainy Sky applies, with the wording of the specific document as the starting point.

The decision matters to landlords, tenants and their advisers dealing with dilapidations claims at lease-end, particularly in Scotland, and provides guidance on the interplay between licence agreements, leases and repairing obligations. It cautions against reading in formality requirements not supported by the language and structure of the specific contract. The judgment does not resolve on the merits whether Batley’s specific claims will succeed; these were remitted for proof before answer, including questions of fact about whether repairs were needed and whether the estimated cost measure applies.

Verdict: The Supreme Court allowed the appeal. It held that no written notice was required either under clause 2.5 of the Minute of Agreement to trigger the obligation to remove alterations, or under the repairing obligation in clause 3.12 of the head lease (as applied by clause 5.1 of the sub-lease). Batley’s pleadings were relevant on both bases and the matter was remitted for proof before answer, with the Council’s plea to relevancy reinstated.

Source: L Batley Pet Products Ltd v North Lanarkshire Council (Scotland) [2014] UKSC 27