Retail reform

Retail, food and drink, and hair and beauty shop leases: a special regime?

In today’s world, do tenants of retail premises, pubs, cafes, restaurants and hairdressers need a statutory right to seek a one-year renewal of their lease? And if such tenants do require special protection for their business at the end of the lease, what should it be? The Scottish Law Commission is asking whether the Tenancy of Shops (Scotland) Act 1949 has outlived its usefulness and, if so, what rights a tenant should have as a retail, food and drink, or hair and beauty lease nears its end. 

The Scottish Law Commission has published its Discussion Paper on Aspects of Leases: Tenancy of Shops (Scotland) Act 1949. The paper considers the provisions of the 1949 Act, issues relating to its operation, arguments for and against special legal provision being made for leases of “shop” premises, and explores three options for changing the law. This article outlines the key issues. Consultation on the paper is currently open until 31st July 2024.

The 1949 Act and the background to the Discussion Paper

Despite its title, the 1949 Act is not limited to premises where retail businesses sell goods. It also extends to leases of cafes, pubs, hairdressers and barbers, and maybe even restaurants and nightclubs. Warehouses and wholesale premises are included. Premises used principally for the provision of services, without any element of selling, hiring or treating goods, are excluded, as are premises devoted predominantly to manufacturing.

The Act allows a tenant, who has been unable to obtain renewal of their lease on satisfactory terms from their landlord, to apply to the sheriff for a renewal of their tenancy for up to one year after the lease’s termination date (the ish date). The sheriff is given a discretion to decide the application based on what they think is “reasonable” but the Act contains no guidelines as to how reasonableness is to be assessed.

The Act dates from the late 1940s and was originally intended to be a temporary measure to provide relief for small shopkeepers who faced “buy or quit” ultimatums from property speculators taking advantage of the shortage of premises following the end of the Second World War. The aim of renewal was to enable a tenant to save their business – and livelihood – by giving them additional time to find suitable alternative premises. The Act was made permanent in 1964 against the background of urban development and modernisation, and a concern that rents might be unaffordable for shopkeepers. There was also a concern that a 40-day notice-to-quit period gave insufficient time for a tenant to find other premises.

Much has changed since 1964. Then, most retail, pub and other commercial leases covered by the Act were on a year-to-year basis, and the general market in commercial lets was still seen as favouring landlords. Neither remains the case. The 40-day notice to quit exists, but in its 2022 Report on Aspects of Leases: Termination (Scot Law Com No. 260), the Commission has proposed a three-month notice period, though with the possibility of contracting out of notice to quit altogether. In the light of all this, it has been questioned whether the Act continues to be necessary.

Additionally, criticism has been levelled at the operation of the Act. This includes: 

• The “reasonableness” test that the sheriff has to apply is vague, and thus it is difficult to predict the likely outcome of renewal applications.
• The court proceedings can be costly and cause delay in clarifying whether renewal will be available, therefore parties are unable to plan effectively.
• The cost, delay and unpredictability of an application can distort negotiations towards the end of the lease: a financially powerful sitting tenant (such as a national retailer whose business is not threatened by the end of the lease) can, by threatening an application, push a landlord into granting renewal, and prevent them from seeking out alternative potential tenants.

Just another commercial lease?

In its 2022 report, the Commission recommended that for commercial leases of six months or more, a landlord should have to give three months’ notice to quit but that the lease could exclude notice altogether. One option for the 1949 Act is its repeal whereby the leases of retail, cafe, pub and other premises that it covers at present would be treated under the Commission’s 2022 recommendation in the same way as the let of an office, leisure facility or industrial unit. This has the advantage of simplicity. On the other hand, depending on the outcome of negotiations, the lease could exclude notice altogether, leaving the tenant with no notice at all of the landlord’s intentions at the end of the lease. That might prejudice their ability to find suitable alternative premises.

Mandatory notice-to-quit scheme

One way of ensuring that a “shop” tenant would not so be caught out would be to make it mandatory that notice to quit be given by a suitable time before the end of the lease.

For leases of one year or more, the minimum mandatory period of notice to quit could be six months prior to the ish date, reduced to three months for leases of a duration between six months and one year. Failure to give notice would give rise to tacit relocation (or “automatic continuation”, as it is likely to be relabelled).

The tenant could still end the lease themselves, either by giving the landlord notice of intention to quit no later than three months before the ish, or by exercising a statutory break option to take effect at any time during the automatic continuation and exercisable on three months’ notice. Exercise of the statutory break would end the lease either on the date falling three months after the option’s exercise, or on any date falling later than those three months as specified in the break notice.

A reformed 1949 Act

Another option would be to reform the 1949 Act by amending it to remove the problems arising in its operation. Three modifications could assist in particular.

Firstly, the aims and limitations of the sheriff’s discretion in granting renewal could be clarified. A “statutory statement of objects” could express the purposes of renewal such as:

• To provide the tenant breathing space sufficient to allow them to relocate to other premises.
• To allow time to exhaust and/or conclude any ongoing negotiations for renewal or extension of the lease.
• To avoid the tenant going out of business altogether as a result of having to remove themselves suddenly from the premises.

A list of “disregards” could limit the scope of the court’s inquiry by stating factors that should not be taken into account. Those disregards could include:

• The importance of the shop to the public (those being planning matters).
• Any consequent effects on employees of the tenant’s business, such as redundancies.
• Any consequent effects on prospective third-party users of the premises, such as prospective buyers.

A second major change would be the inclusion of a “gateway test”. The aim of this would be to restrict applications for renewal to “small tenants”. The idea would be to reduce situations where a landlord would feel unfairly pressurized in negotiations by a powerful tenant. A “small tenant” could be defined as falling below certain thresholds with respect to annual turnover, net assets and number of employees. For ease of use, those thresholds could mirror those provided for determining whether a company is a “micro-entity” in its reporting duties under the Companies Act 2006.

Finally, an application could be made conditional on the tenant proposing mediation to the landlord before going to court. This should encourage the opening of a business-like conversation between the tenant and the landlord with the hope that it might resolve any dispute over lease renewal, without the cost and delay of court.

Responses welcome

The Commission is keen to hear from everyone with an interest in the options raised in the Discussion Paper. The consultation period runs until 31st July 2024. Responses can be submitted using the response form available on the Commission’s website, accessible on the Current consultations page. Whether or not covering every question, all responses will be welcome and will help shape the recommendations to be made in the Commission’s subsequent report, anticipated to be published in 2025.   

Written by Craig Dalziel (Legal Assistant) and David Bartos (Commissioner), Scottish Law Commission