Some personal views on the proposals in the Scottish Law Commission's discussion paper on aspects of the law on termination of commercial leases

Property law in Scotland has arguably seen more change in the last two decades than in the preceding 50 year period beforehand. For example, we kissed goodbye to the feudal system under the Abolition of Feudal Tenure (Scotland) Act 2000. We also codified the common law of title conditions and streamlined how they could be created going forward, under the Title Conditions (Scotland) Act 2003 and the Tenements (Scotland) Act 2004. The discussions, of course, on s 52 reforms continue – rightly so – and may yet create even better levels of certainty in the context of enforcing real burdens. 

And we all had a rude awakening on the introduction of the new Land Registration (Scotland) Act 2012, which should be welcomed for the concept of advance notices but, in my view, has also created larger problems with the Keeper’s “Midas touch” no longer being exercised and support with applications being minimised to an all-time low and non-existent extent. Both of these points, combined with a disproportionate level of strict adherence to the terms of the legislation, have made it even harder to achieve an applicant’s ultimate goal. This, however, is an article – maybe even a book – for another day. 

Indeed, the volume of change surging through the realms of property law is the subject of much camaraderie in my firm. I am often found emphasising to my three corporate law colleagues that they have such easy working lives in having to occasionally consult/glance at a single piece of legislation, the Companies Act 2006 (and, before then, its 1985 predecessor). If and when this article is published I will probably need to lock my door to avoid the three of them committing a serious assault at my expense! 

In May last year the Scottish Law Commission launched its discussion paper on the reform of six aspects of commercial leasing, and invited responses for consideration by September of that year. Whilst the outcome is still awaited, the purpose of this article is to identify the broad aspects and to set out my own views on the extent of such reforms. 

The first aspect of termination – tacit relocation

The principle of tacit relocation in leases is inherited in Scotland from Roman law. In the absence of a notice to quit being served at least 40 days prior to natural expiry, Scots law assumes that both landlord and tenant wish the lease to continue by default to the shorter of (a) one year, and (b) the original term of the lease. Whilst this is a well-entrenched and recognised principle of Scots law, it is fair to say it is not appreciated by clients. 

The discussion paper explores whether tacit relocation should be dis-applied completely, leaving contracting parties free to bring it in by express terms, and with the possibility of a statutory default regime if the tenant remains in possession after natural expiry. The second option is that the law is clarified to state that tacit relocation can be contracted out of, possibly with it reviving if the parties find themselves continuing beyond lease expiry. 

My own view is that there is nothing to stop a landlord and tenant setting out a fixed term at the outset and specifying the contract will continue on a monthly or yearly rolling basis thereafter if no notice to quit is served. Accordingly, it would be my view that Scots law should set out the possibility of contracting out of tacit relocation (which I personally have always considered is possible to date). This can then be taken into account in the preparation of the lease. 

The question of continuing possession beyond lease expiry is far trickier, and should depend on the circumstances of the four essential elements of a lease – parties, rent, duration and property – so if the same payment is continuing and accepted by the landlord then I would favour an assumed 12 month rolling continuation until terminated by either party prior to the anniversary of the original expiry date. 

The second aspect of termination – notices to quit

The discussion paper considers whether there is any benefit in forming a statutory format for a notice to quit and irrespective of whether it is served by a tenant on the landlord or vice versa. If not, the next consideration is whether there should be a set of essential elements that must be covered in any purported notice to quit. There is also a suggestion that 40 days in the modern era, given the complexities of dilapidations and the extent of tenant fit-out removal works required, may no longer represent sufficient time and a comparison is made to break options, which typically require six months' notice. A break option, however, may be distinguished in that it is generally served by a tenant to a landlord to warn of a surrender in advance of lease expiry, and the bulk of the notice duration is to enable the landlord to consider dilapidations and remarketing rather than return of vacant possession alone. 

My personal view is that the content of notices should prescribe essential elements to eradicate ambiguity. I would leave the parties to contract out of the default period of notice required for termination at natural expiry, and this would fit well with the concept of contracting out of tacit relocation (meaning no notice would be required at all in such circumstances). I remain open to the default 40 days being extended to, say, two months prior to natural expiry; however I would wish the notice required for a break option to be as much or indeed as little as the parties have agreed in the lease. For simplicity and transparency I would not distinguish the period of notice to take account of the length of term of the lease, as is the case with the private residential tenancies introduced by the Scottish Government in place of assured tenancies. 

The third aspect of termination – apportionment of rent

The well-known English case of Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72 set a bit of a hare running for those of us in Scotland. It held that a tenant that validly exercised its break option in a commercial lease did not have the right to seek reimbursement of rent paid in advance attributable beyond the break date. In particular it was determined that the Apportionment Act 1870 only applied to rent paid in arrears. The earlier case of QuirkCo Investments Ltd v Aspray Transport Ltd [2011] EWHC 3060 (Ch) held that unjustified enrichment should not “operate to circumvent the scheme of obligations and entitlements contained in a valid contract”. As such, in England, the entitlement to recover rent in advance paid beyond the break date requires express wording in the lease itself. 

The early indications are that the position is the same in Scotland and, personally, I have always held the view that a tenant electing to terminate a lease at a break date must have express wording necessitating a reimbursement of rent, and otherwise is deemed to have offset advance rent already paid against the opportunity to escape for the exit earlier than expected. Invariably, in practice, the question will only arise in break options conditional on all payments being up to date, as otherwise tenants will simply pay up to the break date and leave landlords to determine whether to pursue for other payments as well as any other antecedent breaches. The discussion paper considers whether the 1870 Act should be amended to clarify the position, and my view remains that the position is sufficiently clear enough to avoid further legislation. 

The fourth aspect of termination – the Tenancy of Shops (Scotland) Act 1949

The purpose of this Act was to offer some comfort and protection to small shops facing inflated rents and other terms during the post-war era. It enabled tenants to apply to a sheriff for a renewal of their lease for up to a year once they were in receipt of a notice to quit from the landlord. The Act provides the tenant with a period of 21 days to make the application. 

It would be fair to say, against this background, that I remain astonished to this day that it was cited in both 2013 (Edinburgh Woollen Mill Ltd v Singh 2013 SLT 141) and 2015 (Select Service Partner Ltd v Network Rail 2015 SLT 116). In the first case the sheriff commented, in rejecting the tenant’s application, that “the mischief which the 1949 Act was designed to address is no longer self-evident today”, and the tenant’s £161 million turnover was a far cry from the predicament of the struggling shopkeepers after the war. The second case in 2005 was also unsuccessful, albeit the court was at pains to emphasise that it was determined on the merits of the case. 

Repeal of the 1949 Act is, for me, the most obvious reform considered by the discussion paper. Indeed it is the easiest of all the points considered. 

The fifth aspect of termination – irritancy

The Scottish Law Commission is no stranger to proposing reform of irritancy, having done so originally in its discussion paper in 2001. The question being posed is whether there should be scope for a landlord to raise an action for damages arising from breach of contract for obligations preceding the date of irritancy. In my opinion there is no great pressing need for this as, in practical terms, landlords will either raise proceedings for breach of contract if the prospects of success are reasonable or, if not, proceed with irritancy in order to wipe the slate clean and start from scratch again. Most landlords will also now consider rent deposit agreements and personal guarantees to comfort the blow of a defaulting tenant during the term, where the covenant strength is not considered to be particularly strong at the outset. 

The sixth aspect of termination – confusion and consolidation

Confusion is where an obligation to do something comes to an end because debtor and creditor are one and the same. Similarly, consolidation is where a subordinate real right – a right in the land of a third party – is ended by virtue of the “benefited” party subsequently acquiring ownership. Some academics have summarised that consolidation generally applies to real rights, whereas confusion applies to personal rights (but of course a registered long lease does create a real right in the property, so the original distinction appears to be a bit of a hybrid across both terms in the context of leases). 

It appears to be settled law that confusion takes place automatically whereas consolidation does not but, historically, there is support in both camps on the question of whether, for example, confusion will terminate a servitude right where the benefited proprietor subsequently becomes the heritable proprietor. The Keeper’s present position in land registration applications is to accept confusion as applying unless it prejudices the position of a heritable creditor in a long leasehold title sheet. 

In my view, Scots law needs simplicity in this area and distinguishing tiers of interest in the same property by the same proprietor does not, in my view, rest well with that. If there was an instance where a tenant wanted to keep an existing long leasehold interest alive in advance of its purchase then it is perfectly feasible for the lease to be assigned to another party – maybe a subsidiary, parent company or any other related party – so that the interest is clearly unaffected by the application of confusion. 

If there is a heritable creditor involved in the long leasehold interest, its interest could be protected by a requirement to obtain consent before the leasehold interest is terminated once and for all. This would probably not be an issue if all sums were repaid under its facility, and I would imagine any new lender funding the purchase would want this confirmed anyway. The interest of a subtenant in such circumstances would not be prejudiced where head landlord and mid-landlord become one and the same. 

In the circumstances I would welcome the law specifying that confusion would apply where landlord and tenant are the same entity, but that the effective date would be the date of purchase where there is no security and the date of consent where there is a lender involved. 

The Author

Amir M Ismail is an associate in the Glasgow office of Holmes Mackillop solicitors and a tutor in both residential and commercial conveyancing at the University of Glasgow Diploma in Legal Practice

e: aismail@homack.co.uk

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