Scots commercial leases: time for reform?

The Scottish Law Commission has issued a discussion paper inviting views on the reform of six aspects of the law relating to leases of commercial property in Scotland. Responses have to be submitted by 14 September 2018.

Where we are currently

The paper notes that even though commercial leases play a large part in the Scottish economy, there is very little statutory regulation. The essence of a lease in Scotland is similar to that in England, in that it is not only a contract between the landlord and the tenant, but also a property interest (a "real right", using Scottish terminology), which is good against not just the landlord but the whole world.

The modern commercial lease was imported into Scotland from England in the 1970s. At that time the legal profession in Scotland had no choice but to adapt the English form of lease for the Scottish legal jurisdiction ("kilting" in the jargon), but without the statutory background for leases that existed in England, such as the Landlord and Tenant Acts 1927 and 1954.

Crucially, with one exception, there is no security of tenure legislation for business tenants in Scotland. The exception is the Tenancy of Shops (Scotland) Act 1949 (the Act), which affords a very limited security of tenure to tenants of shops, which means premises where a retail trade or business is carried on. It allows tenants to ask for a renewal of their tenancy for a period of up to a year. While the Act was intended to be a useful tool for small shopkeepers in the post-war era, the discussion paper rightly highlights that it has become "an unnecessary anomaly in Scottish commercial lease law" and asks (in so many words) whether it should be repealed.

Given it is relatively rarely used and, when it is used, it tends to be by large commercial occupiers, it would seem that the spirit of the Act is not what is keeping it alive and it is questionable whether it has any continuing value. Certainly some clarity around when such provisions could and should be relied on would be welcome.

Tacit relocation

The longest section of the discussion paper deals with the Scottish concept of "tacit relocation". This is unknown in England, having its roots in Roman law.

In Scotland a lease does not come to an end at the end of its contractual term. Instead one party has to serve a notice, not less than 40 days before the date of expiry, to end it. If neither party serves a notice, the lease continues from year to year until terminated. This is not dissimilar to an English lease that enjoys the protection of the Landlord and Tenant Act 1954.

Such a lease will also continue after the end of the contractual term - but the tenant in England can terminate it on three months' notice. In Scotland a lease continues for a year at a time, causing hardship to tenants who do not appreciate the need to serve a notice in advance of the end of the term to end their liability for rent and other obligations, and to landlords in circumstances where they expect to obtain vacant possession of their property for redevelopment but find themselves stuck with their tenant for another year.

The discussion paper observes that there appears to be uncertainty as to whether the parties to a lease can legally contract out of tacit relocation, saying: "It does seem surprising that in Scotland a fixed-term tenancy cannot be effectively created." It also notes that it is standard practice to include wording in leases that suggests that a lease will terminate automatically, which is the opposite of the legal position.

The discussion paper suggests two options, which, we understand, will not be retrospective if implemented. The first is that tacit relocation should be disapplied in relation to commercial leases, but that the parties should have the right to opt back in again, on the basis of a statutory scheme. The second is to clarify that the parties have the right to contract out of tacit relocation, to create what is effectively a fixed-term tenancy.

The first option is perhaps the more drastic of the two and would represent a major change. The second option would make drafting that parties sometimes try to incorporate in leases at present (arguably ineffectually) effective to prevent tacit relocation.

The rules of tacit relocation, including, for example, which terms of the original lease are capable of being implied into the one-year rolling lease, are largely reliant on historic texts for guidance and are therefore unclear. We would expect that most would welcome a change, whichever of the two options is adopted.

Other suggestions

The discussion paper goes on to consider the complications of notices to quit, which is the term given to a notice to end a lease to avoid tacit relocation, as well as various other purposes. The position is complex and this would be a good opportunity to tidy up the law.

The other topics discussed in the paper are more technical, asking whether the law should be changed so that a tenant who breaks a lease between rent payment dates should be entitled to have an apportioned part of its rent back (on which Scottish law is thought to follow English law in requiring the lease to include an express term to this effect), and whether there should be changes to the law relating to irritancy and confusio. These are Scottish concepts similar respectively to the English doctrines of forfeiture and (approximately) merger. Both are too technical to explain further in this article but will be of great interest to Scottish landlord and tenant lawyers.

# The discussion paper can be downloaded from www.scotlawcom.gov.uk/law-reform/law-reform-projects/proprietary-aspect-of-leases

Gillian Wood and Sheelagh Cooley are senior associates in the Edinburgh office of Shoosmiths LLP

This article was originally published 4 August 2018 in Estates Gazette.