Dizzy With Confusion Over Reinstatement Obligations

There won't be many people whose lasting memory of Dizzy's Bar & Diner in Aberdeen is the Sheriff Appeal Court's commentary and interpretation of a reinstatement provision in a commercial lease, but a recent case, Reliance (AB) Ltd v Quantum Claims Compensation Specialist Ltd [2024] SAC (Civ) 9 could change all that.

Reliance leased the premises that once traded as Dizzy's Bar & Diner, from the landlord Quantum Claims Compensation Specialist Ltd. Sadly, the premises were destroyed in a fire in December 2019.

Three years later, the building was never reinstated, and the landlord sought to terminate the lease, invoking the termination clause that said:

"If by the expiry of three years after such damage or destruction the Landlords shall have failed to complete the necessary works of reinstatement... either party may at any time after the expiry of such three years...terminate this Lease."

Reliance raised the initial action on the basis that the landlord was in breach by deliberately failing to reinstate the building and so could not invoke the termination clause. The sheriff decided there was no obligation on the landlord to reinstate in a particular way or even to reinstate at all; the language was clear and unambiguous. It was obvious that the building had not been reinstated. Therefore, the termination clause could be invoked.

Reliance appealed the sheriff's decision, and the appeal was allowed on a number of grounds, including the interpretation of the termination clause, disagreeing with the sheriff's approach.

Interpretation of the termination clause

The appeal court considered three elements in interpreting the termination clause.

The terms of the clause in question

The language in the clause was open to different interpretations, in particular, the use of the word 'failed'. To fail can mean to fall short in performance, but it can also carry a degree of fault. 'Failed' in this clause is also linked to completion, so something that 'failed to complete' is something that is started but not finished, and to start something involves an attempt and a degree of effort. Had the parties intended 'failed' to include neglect or lack of effort on behalf of the landlord, then 'failed' would be linked to commencement instead of completion. The court decided that it was possible to interpret 'failed to complete' from the perspective of both the landlord and the tenant as requiring either some effort to reinstate or none at all before termination could be invoked.

The contract as a whole

The clause must be interpreted within the wider context of the lease and, in particular, earlier obligations in the lease providing for reinstatement if damage occurs. The purpose of the reinstatement provisions is to protect the tenant and provide continuity of business by obliging the landlord to use reasonable endeavours to obtain planning permission, labour and materials while also using the proceeds of the insurance in pursuit of reinstatement.

Testing any competing interpretations with reference to common sense

It would be unlikely that the parties, having carefully set out the landlord's obligations in the reinstatement provisions to protect the tenant, would have intended that 'failed to complete' would allow the landlord to deliberately delay reinstatement so that the lease could be terminated three years later. Doing so would relieve the landlord of its reinstatement obligations, rendering that clause practically redundant and in direct contradiction of the termination clause. The intention was for the landlord to comply with its obligations under the reinstatement clause before it would be able to invoke the termination clause.

To allow otherwise would breach what is known as the 'prevention principle'.

The Prevention Principle

The tenant sought to rely on the prevention principle: that no person can take advantage of their own wrong against the other party. Applied to this case, the landlord could not rely on its own failure to reinstate to be entitled to end the lease.

To establish that the prevention principle applied, the landlord would need to be found to have breached its reinstatement obligations. The tenant maintained there were two breaches;

• one express: that the landlord had failed to meet its 'reasonable endeavours' obligation to obtain planning permission within a reasonable time; and
• one implied: that the reinstatement works should be completed within a reasonable time.

The court did not think the tenant had sufficiently established that the express term had been breached, but the implied term posed more of a question.

Implied terms

Implied terms may arise in the context of the parties' intentions at the time of contracting. The conditions in which a term might be implied into a contract are that the term must:

• be reasonable and equitable;
• be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
• be so obvious that it 'goes without saying';
• be capable of clear expression; and
• not contradict any express term of the contract."

There was no express requirement in either of the clauses to reinstate the premises within a reasonable time due to either oversight or intention. However, it was found that the parties could not have reasonably intended this to be the case, given that it may lead to frustration of the contract.

It was noted that there was an implied obligation in the reinstatement clause. The landlord was required to use 'reasonable endeavours' to obtain planning permission, 'as soon as is practicable', and the use of the word 'shall' in making up any shortfall from insurance funds highlighted that the intention was not to allow the landlord to delay reinstatement. If reinstatement was not achieved within a reasonable time, the landlord would be capable of delay, thus frustrating the contract and making the reinstatement clause ineffective. The implied term was consistent with the protection provided to the tenant.

The almost entire agreement clause

It is common in commercial contracts to have what is known as an 'entire agreement' clause which excludes any terms not expressly included. In this case, the landlord maintained such a clause was included that stated:

"Nothing in this Lease shall render the Landlords liable (by implication of law or otherwise) for the doing of anything which the Landlords have not expressly obliged themselves in this Lease to carry out, provide or do."

However, the court decided this fell just short of a typical 'entire agreement' clause; the relevant question was, in fact, what the clause aimed to achieve. The desired outcome was to exclude additional obligations, but the implied term did not impose any. Instead, it fixed a time for performance of reinstatement, which the lease obliged the landlord to do.

The landlord also asserted that this clause would exclude the prevention principle. However, the principle does not impose obligations, it prevents a party from taking advantage of its own breach and is not therefore an additional obligation.

If Dizzy's has given us anything, it is the approach to determining the meaning of a clause that may be interpreted from the perspective of either the landlord or the tenant and a reminder of the true purpose of the prevention principle and 'entire agreement' clauses.

This article was authored by Trainee Solicitor  Carrie Robertson

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.