Inner House dismisses landlord’s appeal in Glasgow Grosvenor hotel repairs dispute

After the 2021 expiry of a sub-lease of the Glasgow Grosvenor hotel, the reclaimer brought proceedings in the commercial court regarding the hotel’s condition. That action having been dismissed, it reclaimed to the Inner House of the Court of Session.

The reclaiming motion was heard by Lady Wise, Lord Ericht and Lord Pentland, the Lord President, with Ross McClelland KC and David Ford, solicitor advocate, appearing for the reclaimer and Gavin Walker KC and Ross Anderson for the respondent.

Good and substantial repair

As part of a 2001 sale and lease back of the Grosvenor hotel in Glasgow, a structure was created under which the building’s owner granted a 175-year head lease to a tenant, who in turn granted a sub-lease to the owner. Subsequent assignations saw the respondent become sub-tenant of the hotel in 2007, and the reclaimer landlord in 2011, until the sub-lease’s expiry in December 2021.

The sub-lease obliged the sub-tenant to “keep the Hotel in good and substantial repair”, subject to the proviso that the sub-tenant was not obliged to “deliver up the Hotel in a better state of repair and condition than that evidenced by” a schedule of condition. That schedule, as defined by the sub-lease, took the form of a video and accompanying explanatory statement prepared by a firm of surveyors. Sourced on a VHS tape only after commencement of the proceedings, the video contained around two hours of footage giving a “reasonable” – but incomplete – “overview” of the “general condition” of the hotel.

A decorating clause likewise obliged the tenant to “decorate or otherwise treat the Hotel … in accordance with the Operating Standards”, such standards being defined to mean the standards of a Hilton (or otherwise first-class) hotel. A yielding up clause required the tenant to return possession of the hotel “in a state and condition consistent with due compliance” with its sub-lease obligations but excepted any requirement for the tenant to return the hotel in a better condition than that evidenced by the schedule.

On appeal to the Inner House of the Court of Session, the parties remained in dispute as to the proper construction of the terms of the sub-lease. The reclaimer submitted that the lease obliged the respondent to return the hotel in a state of good and substantial repair, objectively measured and limited only by the contents of the schedule of condition; it was improper to compare that standard with the condition of the hotel at the time of the sub-lease’s commencement. In response, the respondent argued that it would be commercially absurd for the sub-lease to apply two different standards of repair depending on whether the subject was captured by the schedule of condition. Rather, the sub-lease imposed a general obligation to return the hotel in the state of its condition at commencement.

Nothing to suggest ‘two radically different standards’ were intended

After examining the authorities, Lord Pentland, the Lord President, observed: “We consider that the commercial judge correctly construed the sub-lease. Reading it as a whole, it is clear that the parties’ intention was to record the condition of the hotel as it stood at the commencement of the sub-lease. That is the obvious reason for their agreement to make provision for a Schedule of Condition. In terms of clause 3.5.1(a) nothing in the sub-lease was to require the tenant to deliver up the hotel in a better state of repair and condition than that evidenced in the Schedule of Condition. The specific provisions dealing with yielding up were essentially to the same effect (clause 3.19 and its proviso). The clear and obvious purpose of these provisions read together (as they must be) was to ensure that the tenant was not placed under any greater liability than to return the hotel in a state of repair no better than its condition at the time of commencement of the sub-lease.”

Tackling the evidential issue at stake, the Lord President added: “There is, however, nothing in the provisions to suggest that the Schedule of Condition was intended to be a comprehensive and exclusive source of evidence of the hotel’s condition at the outset of the sub-lease. While an express intention to agree a method of establishing twenty years later what the hotel’s condition was at commencement made commercial sense, the provision did not impose the standard in which the tenant would be required to yield up the hotel; it was merely an evidential tool to facilitate proof of that standard at expiry of the sub-lease. The fact that the contents of the Schedule of Condition turned out to be limited in scope cannot detract from the clear import of the contractual provisions … There is nothing to suggest that the parties intended there to be two radically different standards of repair at the expiry of the sub-lease: one for the items covered in the Schedule of Condition and a markedly different standard for items not so covered.”

In that regard, he continued: “We do not consider that the points advanced by the reclaimer about the practicalities of obtaining evidence as to the hotel’s state of repair at the outset of the sub-lease are relevant when it comes to ascertaining the meaning of the contractual provisions. It is conceivable, as the reclaimer submitted, that this might prove to be a significant task, but that is nothing to the point. Such possible difficulties can have no bearing on the intentions of the parties to the sub-lease at the time it was entered into. It should be noted too that at the preliminary proof the reclaimer’s evidence was that it had not seen the Schedule of Condition at the time it acquired the landlord’s interest in the sub-lease. The Schedule of Condition was apparently of no importance to the reclaimer when it became party to the sub-lease.”

Concluding by considering the reclaimer’s arguments on the decorating clause, the Lord President reasoned: “There is no basis for the proposition advanced by the reclaimer that clause 3.19 somehow implies in the case of decoration that at yielding up the Operating Standards required to be complied with. At yielding up the respondent did not require to deliver up the hotel in a state or condition relative to decoration better than that evidenced by the Schedule of Condition. It would make no practical sense for there to be an obligation on the tenant to yield up the hotel as a Hilton hotel when the sub-lease had come to an end. It is accordingly the yielding up obligation in clause 3.19 which governs the dilapidations claims. The decorating obligation set out in clause 3.5.2 was linked to ‘Operating Standards’. By their nature such standards regulated the operation of the hotel during the currency of the sub-lease.”

The reclaiming motion was accordingly refused.