In the recent case of Granton Central Developments Ltd v Len Lothian Ltd, a commercial landlord appealed successfully against a Sheriff’s decision that it was obliged to provide, and that its tenant was entitled to receive, a supply of water to leased subjects. 

Background to the utilities dispute

Granton Central Developments Ltd and Len Lothian Ltd were the landlord and tenant respectively in terms of a lease of commercial premises in Granton, Edinburgh. The subjects were let for use as a warehousing and open storage facility, with associated offices. 

The landlord raised an action in Edinburgh Sheriff Court in which it sought declarator that:

• in terms of the lease, there was no express or implied contractual obligation on it to supply water to the leased subjects, nor any corresponding right available to the tenant to receive or demand that supply; and
• no such obligation or right arose at common law. 
  
  

Decision of the Sheriff Court

The Sheriff dismissed both of the landlord’s craves for declarator on the following basis: 

Dismissal based on the terms of the lease 

In terms of the lease, while there was no express obligation on the landlord to supply water services to the tenant, there were specific clauses that imposed on the tenant the obligation to:

• maintain, repair and replace “sanitary and water apparatus” in the subjects let; and
• relieve the landlord of “all charges for water…and other services” in respect of the subjects during the currency of the lease. 
  
  

The tenant argued that, when read together, these provisions were “highly suggestive” that a supply of water was implicit in the grant of the right of occupancy; and that the lease should be construed as imposing on the landlord an obligation to provide that supply via the water pipes serving the subjects.

The Sheriff agreed, noting that it seemed impossible that the parties would expressly agree to insert clauses relating to the maintenance of water apparatus, and payment of water charges, if it had not also been their intention for the tenant to receive a supply or water to use and pay for.

Dismissal based on the common law 

The common law implies a warranty that, at the start of a lease, subjects let by a landlord are reasonably fit for the purpose for which they are let. 

However, the Sheriff in this case refused to reach a concluded view as to whether that warranty also implies that the subjects have a right to a water supply. 

While he considered it highly improbable that, in the 21st century, commercial premises could be let without access to a water supply, bearing in mind the implications such an arrangement would have on basic sanitation, health and comfort, he acknowledged that much would depend on the facts of the individual case. 

However, in the circumstances, based on the Sheriff’s already concluded view on the construction of the lease, and the implications flowing therefrom, the landlord’s second crave for declarator was dismissed without further enquiry into the facts. 

The appeal 

On appeal, the landlord argued that the Sheriff had erred in his approach to the principles of contractual interpretation and implied terms, and the Sheriff Appeal Court agreed. 

The Appeal Court confirmed that, when interpreting contracts, its task was to ascertain the objective meaning of the words the parties had chosen to use in their agreement, while having regard to the background knowledge that would reasonably have been available to them at the time of the contract. On review of the lease, the Appeal Court concluded that there was no language used that was capable of being construed as imposing an obligation on the landlord to supply water to its tenant.

The Appeal Court did not agree with the Sheriff’s view that, because the parties had inserted specific clauses pertaining to the repair and maintenance of water apparatus, and the payment of water charges, they must have intended that the tenant receive a water supply. It concluded that, by taking that view, the Sheriff had conflated the process of interpreting the express provisions of the contract with the separate exercise of implying contractual terms.

In any event, as at the date of the original action, the tenant had made no averments in support of an implied term of any kind, and it was an error of law for the Sheriff to allow the tenant to succeed on an argument it had not pled. 

In the circumstances, the landlord’s appeal was upheld and the action remitted back to the Sheriff to proceed in accordance with the Appeal Court’s conclusions. 

Points to take away 

This case serves as a useful reminder of the distinction between the interpretation of express contractual terms, and the question of whether a contractual right or obligation can be implied into a contract.

The basic approach to the interpretation of contracts is objective and involves a review of the actual words used by the parties, placed in the context of the contract as a whole. The court is concerned principally with the natural and ordinary meaning of what the parties have said, and not with what the parties may have intended to say. 

By contrast, the implication of contract terms involves the much more intrusive exercise of introducing terms to deal with issues for which the parties themselves have made no provision. For that reason, before a court will imply a term into contract, it must be shown to be reasonable and equitable, necessary to give business efficacy to the contract, so obvious that it goes without saying, capable of clear expression, and it must not contradict the express terms of the contract.

As for the argument about whether a tenant’s common law right to occupy subjects that are reasonably fit for purpose includes a right to the supply of water, this remains open to question.

For more information on landlord and tenant disputes, please contact Alyson Shaw, a Solicitor in our commercial disputes and regulation team, at [email protected]