A recent decision in a Court of Session case Gatsby Retail Limited v The Edinburgh Woollen Mill emphasises that landlord’s should be careful that subsequent dealings with new tenants do not prejudice their ability to recover dilapidations from the previous outgoing tenant.
Edinburgh Woollen Mill was a former tenant of Gatsby Retail Limited’s commercial premises on Princes Street Edinburgh. When The Edinburgh Woollen Mill Limited (EWM) vacated the premises they were served a schedule of dilapidations identifying that works valued at around £170,000 were required to bring the premises in line with EWM’s repairing obligations.
Matters remained unresolved between EWM and Gatsby when Gatsby entered into a lease of the same premises to Cafe Nero including an arrangement that Gatsby paid Nero £110,000 as a contribution to “the fitting out works to the property.”
Gatsby then raised court action against EWM for recovery of damages of £110,000, their justification being that because of the new lease they were not required to spend £170,000 on repairs but they were out of pocket for the £110,000 paid to Nero as a consequence of EWM’s failures.
EWM argued that the case should be dismissed as the new lease with Nero stated they had accepted the premises “in their present condition and state of repair” and that the payment of £110,000 was spent on “fitting out” not remedying the repairs flowing from EWM’s breach. EWM’s view was that fitting out works were “paradigmatically not works that were the product” of any loss that it may have caused. They argued that Gatsby could not now claim that the £110,000 was to cover dilapidation works.
The court found in favour of Gatsby. The appropriate measure of loss to a landlord in dilapidation claims is fact specific, but the court did comment here that if a Landlord can re-let the subjects with no reduction in rent and without having to offer a commercial incentive to the new tenant there is no loss. In this case, therefore, the true loss to Gatsby was the payment made to the new tenant (Nero) as a consequence of the dilapidated state of the building.
The clear message from this case is that tenants will continue to seek justification for avoiding payment of dilapidations in disputed cases and so landlords and their agents should be equally careful to accurately record the basis upon which incentives/payments to new tenants are made.