Scottish Law Commission begins commercial leases law review

Commercial leases in Scotland are not currently heavily regulated by law, making them attractive to businesses seeking flexibility. However, parts of the law around termination in particular draw from Roman law concepts and have not been updated, meaning the law here is "not in line with modern business needs" and can be cumbersome and confusing, according to the Scottish Law Commission (SLC).

In a new discussion paper (95-page / 1.1MB PDF), the SLC has set out six of the biggest problem areas in the current law: tacit relocation; notices to quit; apportionment of rent at early termination; calls for repeal of the 1949 Tenancy of Shops (Scotland) Act; irritancy, which is the Scottish equivalent of forfeiture in England and Wales; and the Roman law concept of 'confusio'. It goes on to look at some ways in which these issues could be addressed, including by looking at laws and practice in other parts of the world.

"Commercial leasing practice in Scotland is based on old law which has been interpreted in different ways," said SLC commissioner Caroline Drummond. "We want to ensure that the law is clear, fair and user-friendly."

A consultation on the discussion paper closes on 14 September 2018. Responses will be used to inform an SLC report, in which it will make recommendations for reform of the law.

Leases in Scotland can be categorised, broadly, as one of three types: agricultural, residential and commercial. Unlike the other two categories of lease, commercial leases in Scotland are on the whole unregulated. This is also unlike the position in England and Wales, where there is a substantial body of landlord and tenant legislation.

The general view amongst investors, surveyors and others involved in commercial property in Scotland is that the comparable lack of regulation makes Scotland a more attractive place to invest and increases flexibility. However, this means that it is important for all those operating in the sector to fully understand the customs and practices that govern Scottish commercial leases.

The first issue on which the SLC is seeking views is the Roman law doctrine of 'tacit relocation', which requires notice of termination in order to bring certain contracts, including commercial leases, to an end. Where notice is not given, the commercial lease will automatically continue for a further period on the same terms and conditions.

The SLC has proposed that tacit relocation no longer apply in relation to commercial leases. Parties would be free to 'contract in' if they wished to do so. It is also seeking views on whether statutory provision should be made to cover the situation where parties which have failed to opt in act as though the lease has continued at the end of a fixed-term lease, or whether tacit relocation should continue as a default.

The next two sections of the report provide a review of the laws around notices of termination, or 'notices to quit'; and make recommendations for reform. In Scotland, notice to quit a commercial lease need not necessarily be made in writing, provided that it is explicit. The SLC is seeking views on whether written notice to quit should be made a requirement, as well as whether notices to quit should be in a prescribed form or include specified information.

The SLC is also seeking views on whether to clarify the law around apportionment of rent at early termination, usually following the exercise of a break clause. In an English case decided in 2015, the Supreme Court ruled that Marks and Spencer was not entitled to recover rent paid in advance after exercising a break. It is the SLC's view that the position is the same in Scotland unless an alternative is provided for in the terms of the lease. It is asking respondents whether the law in this area should be clarified.

The paper proposes repeal of the 1949 Tenancy of Shops (Scotland) Act, which is one of the few pieces of legislation governing certain Scottish commercial leases. The SLC has heard evidence that this legislation, which allows tenants to apply to the sheriff court to have a lease extended following notice of termination, "is being used by national retailers for whom the protection of the Act was not originally intended".

The final chapters deal with the law of irritancy, which allows a landlord to unilaterally terminate a lease due to breach of lease conditions by the tenant; and 'confusio', a Roman law concept which acts to extinguish a lease when the landlord and the tenant become the same person. The SLC's broad view is that the law of irritancy should continue and the provisions around confusio be clarified; but it is seeking views from stakeholders on both topics.

Property law expert Alan Cook of Pinsent Masons, the law firm behind Out-Law.com, said that the commercial property industry in Scotland would be keen to contribute to the SLC's consultation, particularly in relation to tacit relocation and notices to quit.

"The Scottish government is keen as a matter of principle to avoid too much legislative change, in the interests of not disturbing Scotland being seen as a good place to do property-related business without the heavy legislative regimes of the likes of England and Wales," he said. "However, it has to be borne in mind that there are thousands of smaller leases for which tenants do not obtain legal advice, and the SLC keeps their interests and perspective very much in mind."

"Reforming the law around apportionment of rents is potentially complex, as the 1870 Apportionment Act applies UK-wide to rents paid in arrears as well as to many other types of commercial payments. Changing this would require interplay with the UK government. It could also be hard to get consensus across the profession on reforming the doctrine of confusio, as commercial and agricultural lawyers tend to take opposite views on whether it should be automatic," he said.