Liability for Extraordinary Repairs – a Problem for the Landlord or Tenant?


Commercial real estate has been a recognized asset class for nearly 50 years. Despite this, disputes between landlords and tenants continue to generate a constant flow of litigation before the Court of Session. The latest decision – Kilmac Properties Limited v Tesco Stores Limited [2021] CSOH70 – provides useful advice on who is responsible for what repairs during a commercial lease and at the end of it?

The common law position

At common law, the tenant is responsible for ordinary repairs, the landlord for extraordinary repairs. However, the court never provided a detailed explanation of what extraordinary reparations are. While this in itself has been a source of dispute, generally ordinary remedies cover what the word implies; but extraordinary repairs include more catastrophic failures, latent and inherent defects, and repairs associated with long-term deterioration.

However, a tenant can become responsible for extraordinary repairs when they do not properly take care of ordinary repairs. For example, if a tenant ignores minor leaks for many years, they may become responsible for the complete roof replacement.

In a well-written commercial lease, these uncertainties should never arise. The draftsman will spell out responsibilities, often using express language to make all repairs the tenant’s responsibility. However, if no explicit language is used, is it still possible to say that the responsibility for all repairs lies with the tenant? This was the issue addressed in the Kilmac Properties decision.

The Kilmac case involved a property lease in Monifieth entered into in November 1977 which lasted until 2019. The tenants’ obligations included the following:

“THE HERBY TENANTS ACCEPT AND DECLARE THAT with regard to the maintenance and use of the Premises, they implement and meet the following conditions, namely:

(I) at all times during the term of this Lease, they must at their own expense maintain and conserve the structure and fabric of the Premises, both inside and outside, including all additions to them. and their installations and fittings and water and sanitary appliances, sewers, drains, pipes and their relevant parts in good condition and in good condition and decoration, damage caused by fire and other risks against which the owners have ensured, with the exception of… ”

At the expiration of the Lease, a final dilapidation schedule was served on the Tenants requiring repairs amounting to several hundred thousand pounds. The tenants argued that the bulk of these costs were extraordinary repairs and should be borne by the landlords.

The owners’ argument

The landlord made three main arguments that the lease required tenants to face extraordinary repairs:

  1. the scope of the restoration obligation is extremely wide: it includes an obligation on “the structure and structure of the premises both inside and outside”. An obligation of reparation of such magnitude was not compatible with an obligation limited to ordinary reparations.
  2. the clause contained a specific exclusion of the obligation to make reparation of “damage by fire and other risks against which the owners are insured”. This exception meant that the tenant was responsible for all other extraordinary repairs.
  3. the Lease did not contain any express right of access for the Lessors to carry out extraordinary repairs, implying that these were the responsibility of the lessees.

These arguments were rejected by the Court. The following points were emphasized:

  • Although relatively broad, the repair clause makes no reference to the tenant agreeing to deal with the more onerous obligation to rebuild (or renew) or to undertake what would normally be the owner’s obligation for repairs.
  • It does not identify any of the relevant characteristics of the damage giving rise to extraordinary compensation, such as the origin of the damage, its nature or its extent. For example, there is no reference to repairs with respect to rotting or deterioration over time, or latent defects.
  • There was not a sufficiently clear indication that the tenant was only responsible for ordinary repairs. The wording of the clause in this Lease was not sufficient to displace the common law position.
  • The Court also took into account that extraordinary repairs can be very significant in terms of works and costs and that this is a lease covering a period of more than 40 years when the potential liability of the tenant for repairs extraordinary would have been a serious matter for the parties. Clear language replacing the common law position would be expected in these circumstances.
  • The owners’ insurance and access arguments were dismissed as insufficient to shift responsibility for the repair costs.

The Court determined that by interpreting the entire wording of the clause and of the lease in its entirety, the absence of sufficiently clear language imposing liability for extraordinary repairs meant that the liability of the tenants was limited to ordinary repairs.

Conclusion

  • Drafters will take great care to ensure that responsibility for repairs passes to tenants, but especially in older agreements it is worth checking that the wording
  • Where there is no clear wording to the contrary, the Court appears to apply the common law position – where the tenant is only responsible for ordinary repairs.


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