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28 June, 2019

Gatsby Retail Ltd v The Edinburgh Woollen Mill Ltd [2019] CSOH 49

Case comment by Michael Way, advocate

Lady Wolffe allows landlord’s dilapidation claim to proceed to proof-before-answer

Facts

The pursuer (“Gatsby”) was the landlord of a commercial premises on Princes St. The defender (“EWM”) was the former tenant of these premises first under a lease, then under a license. EWM vacated the premises. Gatsby then served a schedule of dilapidations on EWM, detailing work required to restore the premises. The work was estimated at around £170,000.

Meantime, Gatsby had arranged to let the premises to Caffè Nero (“Nero”). A term of the missives was that Gatsby would pay Nero £110,000 as a ‘Landlord’s Contribution’ (referred to as the “Nero Payment”). The missives contained a common ‘entire agreement’ clause.

Gatsby raised a commercial action in the Court of Session seeking recovery of damages for breach of EWM’s repairing obligation in the amount of £110,000. EWM sought a debate seeking: (i) dismissal of the action, (ii) deletion of averments relating to a meeting of agents and (iii) deletion of averments on quantum. Success on pleas (i) or (iii) would be fatal to Gatsby’s claim.

Issues

The debate turned on a narrow pleadings point:

  1. Had Gatsby relevantly averred a causal link between the Landlord’s contribution payment to Nero and its loss as measured by the schedule of dilapidations?

Decision

Lady Wolffe allowed Gatsby to continue to a proof-before-answer. She dismissed plea (iii) on quantum, reserved plea (i) on relevancy but sustained plea (ii) on the meeting of agents (at [38]).The Court was satisfied that Gatsby’s case was not irrelevant; there was a relevant averment of a causal link (at [34]). EWM had founded on the fact that the inclusion of an ‘entire agreement’ clause in the missives meant that the definitions of “Landlord’s Contribution” and “Tenant’s Works” were conclusive. It was not open to Gatsby to argue that the Nero Payment was to cure EWM’s breach and to restore the dilapidations, when the missives stated the Tenant’s Works were for fitting out work, which would have been required regardless of the condition the premises were left.Lady Wolffe did not accept this argument. Entire agreement clauses preluded parties to the contract from seeking to invoke extraneous evidence to contend for additional contractual terms. They do not “preclude consideration of the commercial rationale or underlying purpose for which an agreement was entered into” (at [29]), at least between one party to the contract and a third party. EWM’s remaining criticisms were matters “classically resolved at proof” (at [30]). Accordingly, the case was allowed to proceed to proof-before-answer.

Analysis

In this case Gatsby appears to have taken a commercial decision to mitigate potential losses flowing from a failure to repair and so make an upfront payment to an incoming tenant, with the expectation of that being recoverable against their outgoing tenant. The Court’s decision is in line with existing principles and confirms that the landlord can go to proof in such a claim. An ‘entire agreement’ clause will not bar a landlord from arguing the purpose behind a payment/commercial arrangement of this type.

The lesson for parties negotiating and drafting commercial property agreements is that where such an arrangement is in contemplation, making this clear in the missives may be helpful to avoid such challenges.

Representation

Ampersand’s Timothy Young appeared for Gatsby.

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