Sub-leases: interpreting repair and reinstatement provisions

What is the extent of a local authority’s obligations to remove alterations and reinstate premises under the terms of a sub-lease of commercial property? Ross Thomson of Harper Macleod comments on a Supreme Court ruling which provides useful guidance and clarification in relation to what is a key issue for landlords and tenants in commercial leases.

Original news

L Batley Pet Products Ltd v North Lanarkshire Council [2014] UKSC 27[2014] All ER (D) 57 (May)

The parties disagreed on whether the respondent council was obliged to remove its alterations and reinstate the sub-let premises on the expiry of the sub-lease when the request to do so was made orally and not put in writing before the sub-lease expired. The Extra Division of the Inner House of the Court of Session held that writing was required and the appellant appealed. The Supreme Court, in allowing the appeal, held that neither the sub-lease nor a minute of agreement authorising alterations to the sub-let premises had required such request to be in writing.

What issues did this case raise?

The decision relates to the extent of North Lanarkshire Council’s (NLC) obligations to remove alterations and reinstate premises under the terms of a sub-lease of commercial property where Batley was the landlord and NLC the tenant.

The Supreme Court considered the correct interpretation of what is quite standard wording in commercial leases and minutes of agreements (licences for works) dealing with consent to alterations. In this case, the minute of agreement between the parties consenting to alteration works by NLC (the agreement) did not expressly require Batley to give notice in writing to NLC of its requirement for NLC to remove the alterations at the expiry of the lease between the parties to which the agreement related (the lease), whereas the lease required all notices, requests or demands to be given in writing. The question was whether the agreement, by incorporation into the lease, created a requirement for Batley to serve written notice upon to NLC to remove the alterations.

In addition the court considered whether the terms of the repairing obligation in the lease required Batley to have given notice to NLC prior to the expiry of the lease that work was required under the repairing obligation.

Batley was pursuing either:

  • the costs of both removing the alterations of NLC and repairing the premises, or
  • the costs of repairing the premises were the court to find against them on the question of NLC’s obligation to remove their alterations

The case accordingly considered two distinct, but in some respects related, issues which the court acknowledged were of general importance given the common nature of the terms of the repairing obligation in the lease and the reinstatement provision in the agreement.

In relation to the repairing obligation, this was held to be an ongoing and continuing obligation on the tenant to keep the premises in good and tenantable condition. In relation to the alterations, it was held that the agreement was a standalone contract, equal and not subsidiary to the lease, and capable of interpretation in isolation.

The court found that written notice did not require to be given to keep the premises in good and tenantable condition where the obligation to do so was a continuing obligation. The court also found that the terms of agreement were such that written notice did not require to be given for the removal of the alterations and the incorporation of the agreement into the lease was to give the landlord a power of irritancy in the event of a breach agreement—it did not have the effect of imposing the general written notice requirements of the lease upon agreement.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment provides useful guidance and to some extent clarification in relation to what is a key issue for landlords and tenants in commercial leases. Firstly, it applies established law in relation to the effect of a continuing repairing obligation to keep a property in good and tenantable condition, and affirms that no notice is required for such a continuing obligation to be binding on the tenant and enforceable by the landlord following the expiry of the lease.

Secondly, it confirms that, in the facts and circumstances if this case, the terms of a minute of agreement consenting to alteration works can and should be interpreted in isolation. It helpfully concludes that minutes of agreement of the nature in the case are not, by virtue of their making under and subsequent incorporation into a lease, subsidiary to the lease. They are on a par with the lease. They are separate and distinct contracts, the terms of which fall to be interpreted distinctly from, and not with reliance upon the terms of the lease, unless the wording of the agreement is such that the parties must refer to the lease when seeking to interpret it which was not the case here.

The court also made clear that in considering whether a written notice had been required to seek the reinstatement of the alterations by the tenant in terms of agreement it was applying established principles of contractual interpretation as has developed in recent case law, including Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47[2011] 1 All ER 175. The court construed the words in the context of the terms of the agreement as a whole, whereby in certain clauses written notice or acknowledgements were stated to be required, but not in the relevant clause being relied upon by Batley—Lord Hodge also made clear that the lease was a document which could be considered as part of the ‘factual matrix’ (as discussed in the Multi-Link case) but the wording of the relevant clause here was sufficiently clear and, moreover, that the interpretation being given to this clause by the court was a commercially sensible one.

The Supreme Court in this case was to some extent limited by the facts in this case and the judgment relies on the averments as plead.

What are the implications for lawyers?

The implications for lawyers are reasonably simple—they must ensure each and every contract that is prepared properly reflects the intentions of the parties (or certainly, the intentions of their client).

A minute of agreement consenting to alterations under the lease will be interpreted in its own terms and should therefore have clear and unambiguous notice provisions in its own right. Moreover, in both a lease and any minute of agreement entered into in terms of the lease the circumstances when notice is required and whether this notice requires to be in writing should be clearly stated.

Are there still any grey areas or unresolved issues lawyers will need to watch out for?

Matters of contractual interpretation will always create the opportunity for argument to arise. However, I do not see any particular unresolved issues arising from this judgment.

The basic principles affirmed in relation to continuing repairing obligations and the interpretation of notice provisions are consistent with existing authority, albeit arguably the court here adopted a stricter approach to the interpretation of the agreement than certain commentators may have anticipated. As always when advising in relation to matters of contract drafting, the lawyers advising their clients must be diligent in their review and critique of the precise wording of the contractual terms, particularly in relation to notice provisions, which are a common area of dispute at the expiry of lease terms, particularly where they seek to impose expensive obligations to undertake works upon a tenant. Failure to apply appropriate levels of attention can result in protracted litigation and, ultimately, unnecessary costs for the client.

Are there any patterns or trends emerging in the law in this area?

In relation to the obligation created by a continuing repairing obligation, the case is consistent with existing authorities.

In relation to the matter of contractual interpretation, recent case law (including the Multi-Link case and Stewart Milne Homes Limited v Aberdeenshire Council) have provided examples of the court applying a less strict and more purposeful/commercial approach to contractual interpretation, both arguably in circumstances where the wording used in the contract did not support the conclusion. In this case, while affirming the principles established in Multi-Link the Supreme Court was of the view that the wording of the relevant clause was sufficiently clear and, therefore, a reflection of the parties’ intentions while still providing a business common sense construction. The case highlights that cases of this nature will still to some extent rest on their own facts and circumstances and affirms the importance of clear drafting of the contractual terms to mitigate against disputes arising.

Interviewed by Nicola Laver. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

This article was first published in LexisPSL Property on 21 May 2014.  Click here for a free one week trial of Lexis®PSL Property. 

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