27 Jun 2018

In May 2018, the Scottish Law Commission (SLC) issued a Discussion Paper on commercial leases in Scotland. The Discussion Paper addresses six aspects of commercial leasing in relation to which there is considered to be problems in practice.

In Scotland, there is little statutory regulation of commercial leases. The modern commercial lease was imported from England in the 1970s. At that time, the Scottish legal profession adapted the English style of commercial lease for use in Scotland without importing the legislative framework for leases which existed in England and Wales, namely the Law of Property Act 1925 and the Landlord & Tenant Act 1954. The rules governing commercial leasing in Scotland instead have evolved through custom and practice.

The SLC is not proposing to introduce a similar legislative framework as in England & Wales, but rather is seeking the views from consultees in relation to six areas for potential reform, namely:

  • Tacit relocation 
  • Apportionment of rent
  • Notices to quit
  • Tenancy of Shops (Scotland) Act 1949
  • Irritancy
  • Confusio

Tacit relocation

Tacit relocation is the continuation of a lease after the expiry of its fixed term automatically because neither party has taken positive steps to terminate the lease. The presumption is that if nothing is done, the parties have, by implication, consented to the lease continuing. If parties wish to avoid tacit relocation and terminate the lease at the end of the fixed term, then they must serve on the other party a notice to quit. SLC advises that it has received representations that tacit relocation is not fit for purpose in a sophisticated commercial leasing market, is not properly understood by non-lawyers and that it simply leads to unfairness and unwanted outcomes. 

While similar legal systems across the world appear to operate the doctrine of tacit relocation or a similar concept, none appear to operate it in the way it is operated in Scotland. All other legal systems require positive actions to evidence consent for a continuation of the lease beyond the fixed term, while Scotland operates on the basis of doing nothing, or silence.

In England and Wales, the termination of commercial leases is governed by Part II of the Landlord & Tenant Act 1954 (1954 Act). This confers security of tenure on a tenant so that the lease does not come to an end at the end of the fixed term. However the parties can contract out of Part II of the 1954 Act providing certain procedural steps are carried out before the commencement of the lease. 

SLC considers that one of the options for a reform is to allow the parties to a commercial lease to have the right to contract out of tacit relocation.This will allow the parties to enter into a lease for a fixed term which will expire at the end of the fixed term, without any requirement for a notice to quit. If there is a contracting out clause, then the lease can deal with what happens if both parties wish to continue with the lease, for example, there may be a provision to continue to occupy on a month to month basis. 

Notices to quit

The Scottish legal system has developed rules which apply to the giving of notice to terminate leases in order to stop the operation of tacit relocation. A notice to terminate is more commonly known as a notice to quit. Common law principles have evolved but these have been supplemented but not superseded by legislation, in particular Sheriff Courts (Scotland) Act 1907 (1907 Act). Although the 1907 Act set out procedures for removing tenants in certain circumstances, the terms of the 1907 Act relating to the form and period of notice are complied with by lawyers and the parties as if they were compulsory in all situations. The result is that, in practice, the party seeking to terminate the lease serves a notice to quit on the other party giving at least 40 clear days' written notice and, in cases where the premises are larger than 2 acres and the lease is more than 3 years, 1 year's written notice is given.  

The SLC is inviting responses from consultees on a number of issues in relation to a notice to quit, for example:

  1. The essential details to be included in a notice to quit.
  2. The period of notice required.  In comparison with England and Wales, the period of notice to be given by a landlord for a lease protected under the 1954 Act must be no more than 12 months and no less than 6 months before the termination date, and, if the lease is not protected, no more than 6 months and no less than 3 months before the termination date. If a tenant does not wish a tenancy protected by the 1954 Act to continue after the end of the fixed term then, the tenant may give written notice no later than 3 months' before the end of the fixed term. The SLC also considers that the length of the lease may have a bearing on the length of notice required. In a lease for over 3 years, a period of 3 months may be considered appropriate. 
  3. The method of service of the notice to quit – the parties could agree that section 26 of the Interpretation & Legislative Reform (Scotland) Act 2010 applies with the effect that the notice could be served electronically.

Apportionment of rent 

The Discussion Paper also considers the topic of apportionment of rent at early termination of a lease in light of the 2015 Supreme Court case of Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Limited and Another. In this case, a tenant exercised its right under a break clause to terminate the lease early but was not able to recover rent paid in advance of the break referable to the period after the break. The court had to consider, amongst other things, whether it was an implied term in the lease that the tenant was entitled to a repayment of rent which it had paid in advance in respect of the period after the early termination of the lease.  The court held that the tenant was not entitled to such a repayment of rent. 

Therefore the current law in England & Wales is that for an apportionment of rent payable in advance to be recoverable in the event of early termination, express provision to this effect must be included in the lease. The SLC specifies in the Discussion Paper that it considers the position is the same in Scotland. 

Nevertheless, the SLC has invited responses as to whether consultees agree that, unless provided for in terms of the lease, Scots law does not provide for the recovery of rent paid in advance in circumstances where the lease is terminated early, and, if so, whether it is considered that a change in the law is desirable to permit recovery of overpaid rent and therefore put Scotland into a different position from England & Wales.  

Tenancy of Shops (Scotland) Act 1949

The Tenancy of Shops (Scotland) Act 1949 (1949 Act) is the only statutory form of security of tenure under Scots law for business tenancies. The 1949 Act affords a very limited security of tenure to shop tenants. 

In England & Wales, under the 1954 Act, all commercial tenants are afforded security of tenure. Essentially this means that the tenant can remain in possession of the premises after the fixed term of the lease has come to an end, unless the landlord successfully opposes a renewal or if the parties have contracted out of Part II of the 1954 Act. There is no equivalent legislation in Scotland.

The 1949 Act was originally passed in order to give protection to small shopkeepers in the post war era. At this time there was a general concern that due to the lack of available premises, shop tenants were being forced to pay inflated rents or face eviction without the option of buying the premises. The 1949 Act allows for tenants of shops to apply to the sheriff for a renewal of their tenancy for a period of up to 1 year. 

The 1949 Act is now generally considered to have fulfilled its purpose and is an unnecessary anomaly in Scottish commercial lease law. Furthermore, recent case law illustrates that larger tenants have attempted to use the protections under the 1949 Act when the purpose of the 1949 Act was to protect small shopkeepers. 

The SLC is looking for responses on whether the 1949 Act should be repealed. 

Irritancy

Irritancy is the right available for the landlord to terminate the lease where the tenant has breached certain conditions of a lease. The effect of this right being exercised is not only that the lease is brought to an end but that lease becomes void as if it had never existed. 

A 2003 SLC Report recommended that irritancy should be modified to have the effect that the lease was terminated but should not affect liabilities that had already accrued before the termination of the lease. However, in this Discussion Paper, the SLC consider that this recommendation in the 2003 SLC Report may have gone too far because there is already a legal remedy of rescission available to the landlord against a tenant who has committed a material breach of the lease which allows the landlord to claim damages.  

Other recommendations in the 2003 SLC Report included (i) the requirement on the landlord to provide a moratorium notice to the tenant's insolvency practitioner allowing the insolvency practitioner 6 months to assign the lease before the lease was terminated by the landlord on the grounds of the tenant's insolvency and (ii) the requirement on the landlord to notify creditors holding a standard security over the tenant's interest under the lease of warnings, moratorium notices and notices of termination.

With regard to irritancy, the SLC is seeking views from consultees on whether the law of irritancy requires reform.

Confusio and leases

Scots law recognises that, in certain circumstances, an obligation can extinguished automatically by virtue of the doctrine of confusio, where the creditor and the debtor in that obligation becomes the same person.

The Discussion Paper states that there is disagreement in the legal profession on whether a lease is extinguished automatically by confusio when the rights of a landlord and a tenant under a lease come to be vested in the same person. The lack of clarity is causing problems in practice, particularly where there are sub-leases granted under the lease or a standard security is granted over the lease and, in each case, there is a desire for the lease to remain in place to maintain the structure of lease and sub-lease interests and standard security interests.

The Discussion Paper considers that commentary from certain authors suggest that confusio is a principle which traditionally applies to personal obligations under the law of contract and over time had been extended by analogy to real rights under the law of property. The extension of the principle has created a difference of opinion as to how and when confusio operates in Scots law. Leases contain (i) personal obligations - an obligation to pay rent and (ii) real rights - the right to occupy a property. SLC comments that there is authority both in Scots law and in other jurisdictions to support the view that the amalgamation of real rights – as may exist in a lease – occurs not by confusio but another legal principle called consolidatio – in which real rights are not merged automatically but require a positive act such as registration of a minute of consolidation for the landlord's and tenant's respective real rights under a lease to be merged.

The SLC is asking for responses from consultees as to whether a clear statement on the law of confusio and leases is required and whether consultees consider that positive action is required e.g. the registration of a minute of consolidation, before the interests of the landlord and tenant are consolidated. 

The SLC has invited consultees to submit comments on the Discussion Paper by 14 September 2018. Reforms in relation to tacit relocation and notice to quit may have widespread implications for all commercial leases but should result in a clearer process and provide less scope for unintended and unfair consequences. Further consideration on the application of confusio to leases should provide welcome clarification particularly where there are different levels of leasehold and security interests. Confirmation that the law in relation to the repayment of apportioned rent follows the decision in the Marks & Spencer case and also the current drafting of leases in the PSG website should reinforce current practice requiring express drafting to secure the repayment of such apportioned rent to the tenant. The abolition of the Tenancy of Shops (Scotland) Act 1949 will ensure that the security of tenure issue in relation to shop units no longer needs to be specifically set out in lease reports to investors and lenders. With regard to irritancy, lenders may also be keen to see protections built into statute to ensure that they are notified of any potential termination of the lease in circumstances where they have a standard security over that lease.

Should you have any queries on the Discussion Paper, please do not hesitate to get in contact.