Dilapidations- a drafting minefield

The case of Gatsby Retail Limited v The Edinburgh Woollen MillLimited from earlier this year reminds landlords that even the small detail of wording in a lease can have significant consequences, particularly in relation to dilapidations claims.

This case concerned a landlord, Gatsby, whose lease of their commercial premises on Princes Street to its previous tenant, Edinburgh Woollen Mill (EWM), had come to an end. Gatsby served a schedule of dilapidations on EWM identifying works valued at around £170,000 which were required to bring the premises up to the standard required under Gatsby’s lease to EWM.

Meanwhile, a new lease had been negotiated with Café Nero for the premises, with Gatsby offering them a ‘sweetener’ of £110,000 to help them fit-out the premises before starting business. Gatsby then raised a commercial action against EWM in the Court of Session to try and recover damages for a breach of EWM’s repairing obligation under the lease in the amount of £110,000. Gatsby claimed that, as a consequence of the terms of the new lease with Nero, it would now not be required to spend £170,000 on dilapidation repairs, but was instead seeking to recover the sum of £110,000 from EWM, being the amount Gatsby had actually had to spend as a result of EWM’s failures. Could the £110,000 “sweetener” be used as a measure of Gatsby’s actual dilapidations loss?

EWM scrutinised the wording of the new lease between Gatsby and Café Nero which stated that Café Nero had accepted the premises “in their present condition and state of repair”. EWM claimed that the Gatsby’s “sweetener” was therefore simply to fund “fitting out” by Café Nero and could therefore not be used to repair the damage caused to the premises during EWM’s lease. EWM argued that the case should be dismissed and Gatsby could not now claim that that £110,000 was to cover dilapidation works.

Luckily for Gatsby, the courts took the view that the wording did not have the effect that EWM had claimed. The court held that Gatsby’s true loss was the amount of the payment that it had to make to its new tenant, Café Nero, as a consequence of the dilapidated state of the premises.

This case serves as a warning to landlords in Gatsby’s position who are in negotiations with new tenants. Care must be taken to accurately record the basis upon which incentives to new tenant are made so that the new lease terms do not prejudice the landlords’ ability to recover dilapidations from the outgoing tenant.

MBM’s Commercial Property team can help guide you through the various stages of your commercial property transaction. If you would like to find out more then please contact Jane Ramsay at jane.ramsay@mbmcommercial.co.uk or on 0131 226 8222. Jane is a partner at MBM Commercial LLP and specialises in Commercial Property and Renewables.

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