Summary of Opinion — Outer House, Court of Session

Factual and Procedural Background

This is a dispute concerning a first-class hotel in The City (the "Hotel"). The Plaintiff was tenant under a head lease dated 6 March 2001 (the "Head Lease") and, by assignation, became tenant under that Head Lease in 2011. The Plaintiff was also landlord under a sub-lease of the Hotel (the "Sub-Lease"). The Defendant was tenant under the Sub-Lease; neither the Plaintiff nor the Defendant were parties to the original Sub-Lease.

The Sub-Lease expired on 31 December 2021. The Plaintiff commenced proceedings alleging that the Defendant breached repairing and maintenance obligations under the Sub-Lease and sought damages. The Plaintiff's detailed allegations were set out in a Scott Schedule incorporated into the pleadings.

The court heard a preliminary proof before answer to determine two discrete construction issues arising under the Sub-Lease, the parties having agreed that those issues should be determined before further inquiry into the Scott Schedule. By the time of the diet, the parties had agreed a joint minute of admissions so that no oral evidence was required at the preliminary hearing.

Legal Issues Presented

1. How the reference to "Schedule of Condition" in Clause 3.5.1 of the Sub-Lease ought to be construed.
2. How the provisions relating to "fair wear and tear", particularly Clause 3.5.1(b) and related definitions, fall to be construed (the parties agreed this issue would be taken to proof before answer but it was identified as an issue for resolution).

Arguments of the Parties

Plaintiff's Arguments

• The Overview Report prepared by Company D and the two video cassettes produced by the Defendant did not constitute the "Schedule of Condition" as defined in the Sub-Lease; there was no authenticated Schedule of Condition available.
• In the absence of the Schedule of Condition as defined, the provisos in Clauses 3.5.1(a) and 3.19 (which limit the Defendant's repairing obligations to the condition evidenced by the Schedule) were of no effect and should "fly off".
• The Plaintiff sought declarators that (a) the limitations in Clauses 3.5.1(a) and 3.19 were ineffective absent the defined Schedule and (b) the Overview Report and video footage should not be taken into account when assessing the Defendant's repairing obligations; consistent with that, certain of the Defendant's averments should be excluded from probation.
• On evidential points, the Plaintiff argued that the Defendant had not proved the creation, execution or tenor of the defined Schedule and, if seeking to rely on secondary evidence of its contents, would require to prove causa amissionis (the reason the primary document was lost) and satisfy the best evidence rule.
• The Plaintiff also argued that the decoration obligation (Clause 3.5.2) was not qualified by the Schedule of Condition or by Clause 3.19 and that reliance by the Defendant on that qualification for allegations under Clause 3.5.2 should be excluded from probation.

Defendant's Arguments

• The Overview Report (prepared by Company D) was the "accompanying explanatory statement" referred to in the Sub-Lease definition of "Schedule of Condition" and the two VHS video cassettes the Defendant produced were copies of "the video" referred to in that definition.
• Evidence (including the written answers of the surveyor, Company D's report, the video dates and running times, and the testimony of a long-serving engineer employed at the Hotel) supported that the Overview Report and the produced video cassettes together constituted the Schedule of Condition defined in the Sub-Lease.
• The reference in the Sub-Lease to initialling related only to identifying a copy and did not require further agreement between the parties for the Schedule to exist. The Defendant disavowed any attempt to "prove the tenor" of a missing document.
• On the construction of Clause 3.5.1, the Defendant submitted that the tenant's obligation was to "keep" the Hotel in good and substantial repair (not to replace, renew or rebuild), and that this obligation was qualified by the Schedule of Condition; case law on similarly worded clauses supported that approach.
• As to decoration (Clause 3.5.2), the Defendant contended that Clause 3.5.2 was qualified by reference to the Schedule of Condition (including by the qualification repeated in Clause 3.19) and that its averments on that basis were relevant and should be admitted to probation.

Table of Precedents Cited

Court's Reasoning and Analysis

The opinion proceeds in two steps: first, whether the Overview Report prepared by Company D and the two VHS video cassettes produced by the Defendant fall within the Sub-Lease definition of "Schedule of Condition"; and second, what the absence of a Schedule (if it were absent) would mean for the Defendant's repairing obligations under Clause 3.5.1.

On the definition point, the court examined the Sub-Lease definition, which identified "the video and accompanying explanatory statement prepared by Messrs Company D" and added that "a copy of which has been initialed [sic] by the parties and marked 'Schedule of Condition dated March 2001'." The court held that the natural meaning of the definition was that the parties identified the video and explanatory statement prepared by Company D as constituting the Schedule and that the wording did not require any further agreement between the parties to constitute the Schedule. The reference to initialling, the court held, was directed at identification of a copy rather than a substantive requirement that the Schedule itself be separately executed or agreed.

The court reviewed the evidence (uncontested at the preliminary diet). It identified:

• Contemporaneous evidence that Company D had been jointly instructed by Company B and Company C to record video schedules of condition in March 2001 and to prepare an accompanying written overview report.
• The Overview Report dated March 2001 which listed the Hotel with reference number 011184/4 and recorded running time consistent with the produced videos.
• Two VHS cassettes produced by the Defendant with matching reference numbers and dates, whose footage and running times were consistent with the Overview Report; differences in footage were minimal and not material.
• Evidence from the Hotel's long-serving engineer that he was present during the filming and that the video appeared to fairly present the Hotel's condition as he recalled it.

On that basis the court concluded, on the balance of probabilities, that (a) the Overview Report was the "accompanying explanatory statement" and (b) the produced VHS cassettes were copies of "the video" referred to in the Sub-Lease definition. The court rejected the Plaintiff's inferences that the absence of initialling meant the Schedule never existed and rejected the argument that the videos could not be the Schedule because portions of footage post-dated the execution date or because the surveyor may typically have edited footage: the Sub-Lease wording permitted the identification of the Schedule by reference to the expert-prepared video and explanatory statement and did not require later agreement between the parties.

On evidential objections, the court held that because the Overview Report and the videos constituted the Schedule of Condition as defined, the best-evidence and "prove the tenor" arguments were inapplicable. The materials were the best evidence of the Schedule's content. The court also observed authority permitting secondary evidence where primary evidence is unavailable, and that there was no suggestion the Defendant had been at fault or had exclusive control such that secondary evidence would be excluded.

On construction of Clause 3.5.1, the court set out principles: read the contract as a whole and construe clauses together. The court observed that the tenant's obligation is expressed as "to keep the Hotel in good and substantial repair and condition and to remedy any inherent defects" and noted three qualifications: fair wear and tear, insured risk exceptions, and the proviso in Clause 3.5.1(a) that nothing required the tenant "to deliver up the Hotel in a better state of repair and condition than that evidenced by the Schedule of Condition."

Four key observations informed the court's construction:

1. No special onus is imposed on the tenant by virtue of the order of wording; the clause must be read as a whole and the proviso operates as a qualification to the principal obligation rather than a burden requiring the tenant to prove the qualification first.
2. The tenant's obligation is to "keep" in good and substantial repair, not to replace, renew or rebuild.
3. The Schedule "evidences" the state of repair and condition (it evidences the baseline) rather than constituting or creating that state.
4. Properly construed, the tenant is not required to deliver up the Hotel in a better state than existed when the video survey (the Schedule) was carried out in March 2001.

Applying those points, the court concluded that Clause 3.5.1 should be read to qualify the tenant's obligation by reference to the Schedule. The court expressed respectful agreement with the approach in McCall's Entertainments and considered the differences in other authorities (including @SIPP and Archyield) but did not find them determinative. The court was critical of the Archyield approach to the extent it treated the Schedule as constitutive rather than evidential and considered that approach to place undue weight on an isolated part of a clause rather than construing the clause as a whole.

On the narrower question concerning Clause 3.5.2 (decoration), after considering the wording of Clause 3.19 and its proviso, the court concluded that Clause 3.5.2 is also qualified by reference to the Schedule of Condition: the proviso in Clause 3.19, even if seen as part of that clause, operates to qualify the state and condition the tenant must achieve on yielding up the Hotel and thereby qualifies the decoration obligation as pleaded.

Holding and Implications

Holding: The court sustained the Defendant's second and third pleas-in-law and dismissed the action quoad the first and second conclusions (the Plaintiff's first and second declarators were refused).

Findings in fact made by the court (anonymized):

1. A Schedule of Condition, as defined in the Sub-Lease, comprising a video survey and accompanying explanatory statement was prepared by Company D on 6 and 7 March 2001.
2. A copy of the video and the accompanying explanatory statement were provided by Company D to both Company B and Company C.
3. The Overview Report produced in the proceedings is a copy of the explanatory statement referred to above.
4. The VHS video cassettes produced by the Defendant are copies of the video survey referred to above.

Consequences and procedure: The court put the case out by order for the parties to address further procedure in light of the decision, in particular how further inquiry into disputed items in the Scott Schedule should proceed. The court reserved all questions of expenses for the time being.

Broader implication: The court's decision turns on contractual construction and the factual conclusion that the Overview Report and produced videos fall within the Sub-Lease definition of Schedule of Condition; the opinion does not purport to establish a new general rule of law beyond those conclusions and the application of established principles of contractual construction and evidence to the facts.

Judge: Judge Richardson

Pleadings and representation noted in the opinion (anonymized): Plaintiff represented by Attorney Ford and Company G; Defendant represented by Attorney Anderson and Company H.