Scotland mulls reform of outdated commercial lease laws…

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Commercial Lease:

In Scotland (unlike
in England), the law of commercial property leases, when it comes to
ending a lease, is based largely on ancient common law and some
obscure statute law, and is deemed to be out-dated for modern
commercial practice.

Although there has
been a general reluctance to legislate – and in contemplating it
there is disagreement among stakeholders as to what should replace
the existing rules – there is nevertheless concern that the current
system is likely to discourage investors and occupiers, giving
England a competitive advantage when attracting inward investment.

In England and Wales
The Landlord and Tenant Act 1954 (Part II) was an important piece of
legislation which has governed the letting of commercial premises
relatively effectively for many years. English & Welsh Business
Tenancies are primarily contractual in nature, i.e., based on English
contract law, a contractual agreement between the parties and usually
result from a protracted pre-contract negotiation of the terms
between landlord and tenant.

However, in England
& Wales Part II of the Act recognises that business tenants need
protection since they stand to lose their business and any goodwill
they may have built up over years, and perhaps much of the value of
their stock and equipment, if they have to leave the premises
abruptly at the end of their lease term. Therefore, the statutory
rules kick in when the lease terms ends.

So, the L&T 1954
Act is primarily intended to provide business tenants with some
certainty, the right, if they wish, to renew their lease on the
expiry of the contractual term on essentially the same terms, subject
to a review of the rent to open market rent.

The landlord is
entitled to oppose lease renewal on limited and specified grounds
(such as redevelopment), but may have to compensate the tenant. The
downside is that if the tenant contests the issue, the matter is
referred to arbitration or court potentially resulting in significant
uncertainty, cost and delays.

The 1954 Act does
give a degree of certainty for both sides if they follow the
statutory rules, which are quite clear. It is well tried and tested
and many precedents have been set through court cases over the years,
meaning the process, though not perfect, works well for both
landlords and tenants, large and small.

In Scotland,
commercial lease law is a “grey area of lease law” and needs to
be in black and white argues Stephen Webster, a Partner, Commercial
Property, at Urquharts writing for The Scotsman newspaper.

Following an
extensive consultation exercise, the Scottish Law Commission (SLC) is
soon expected to make recommendations for the reform of Scots law
relating to the termination of commercial leases.

Landlords and
tenants will often assume that a Scottish commercial lease will end
on the date the lease says it will, but that is not necessarily so.
Under the Scottish common law doctrine of ‘tacit relocation’, if
neither party has given the required notice to quit in time, the
lease is extended automatically at the same rent and otherwise
essentially on the same terms, for at least a year.

For the unwary
landlord or tenant this can cause much disruption and possibly
financial distress if a new tenant has been lined up, or the tenant
has made commitments elsewhere. On the other hand it can sometimes
work to the advantage of one or other party if they are ignorant of
the rules.

According to Mr
Webster, there is no obvious reform solution in Scotland.

“If tacit
relocation is abolished, should parties have the right to opt back
in? But if they don’t opt back in and then, after its expiry date,
act as if the lease is continuing, does there need to be a new
statutory scheme to regulate what happens (like there is in
England)?” he says.

“…would such a
statutory scheme provide more certainty, or would it just introduce a
raft of new areas for dispute? If tacit relocation is retained, could
its main dangers be addressed by allowing the parties to agree at the
outset that any automatic extension will be only for short rolling
periods, rather than potentially a whole year?”

“Consultation
responses indicate that there is no clear consensus on what should
happen. Tacit relocation operates where neither party has given the
requisite notice to quit. It is therefore vital that landlords and
tenants know exactly what is required (i.e. when notice needs to be
given, what it needs to say, and how it needs to be given).”

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