A three-judge appeal court in Edinburgh has issued an important commercial leasing decision on landlords’ options to terminate leases. At issue were two competing rights: the right of a landlord to terminate by irritancy (forfeiture) based on the tenant’s failure to keep the property in good condition; versus the right of a tenant to put matters right and be allowed to stay on. The court decided that once the landlord had terminated the lease, there was no going back for the tenant even if subsequently remedying the breach.

The Facts

Mr and Mrs Maris were in partnership as hoteliers of the Tor-na-Coille Hotel, Banchory. The hotel buildings and grounds were partnership property.

In 1979, the Banchory Squash Racquets Club Ltd had been granted a 99-year lease of part of the hotel grounds, for the purpose of building and operating their club. Hotel guests were to be permitted to use the facilities on the same basis as members. Under the lease, the tenant was responsible for maintaining the facilities in good order.

By 2003, the facilities had deteriorated. Mr and Mrs Maris had a ‘schedule of dilapidations or wants of repair’ prepared. The squash club was given 3 months to do the work specified in the schedule, failing which lease termination (irritancy) would follow.

The work was not done so the landlord terminated the lease.

The Reasonable Landlord Test

The squash club sought to rely on section 5 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985. This provides that a landlord under a commercial lease may not terminate the lease where a reasonable landlord would not do so.

A relevant consideration is whether the tenant has been given a reasonable opportunity to remedy the breach.

The Decision

The squash club were in material breach of the repairing obligation at the expiry of the 3-month period, which had been a reasonable period in which to carry out the works.

A fair and reasonable landlord may well have relied on the breach to terminate the lease. The lease termination was therefore valid.

Sting in the Tail

The repairs were actually completed during the course of the court action, after a third party donated funds to the squash club to cover the cost.

The squash club appealed the case and argued that the ‘fair and reasonable landlord’ test should have been applied to the circumstances at the conclusion of the action (by which time the repairs had been completed) rather than the expiry of the 3-month period. This approach had been suggested by Lord Macfadyen in an earlier case as being potentially appropriate.

The three-judge appeal court rejected this suggestion. They confirmed that the correct approach was to look only at the circumstances prevailing at termination and to leave out of account repairs effected after the action had been raised.

The Implications

The case gives landlords the green light to consider termination of a lease where the tenant is failing to keep the property in good repair. It also removes the previous uncertainty over whether a tenant can remedy the situation after the termination notice has been sent. This may prove to be a useful tool for landlords in their dealings with tenants.

 

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