How we deal with leases at termination

On 23 May the Scottish Law Commission (“SLC”) published its Discussion Paper on Aspects of Leases: Termination (DP No 165). The paper deals predominantly with commercial leases, although one of the chapters will apply to all leases. As a result of submissions from practising solicitors to the consultations on topics to be included in the SLC’s Eighth and Ninth Programmes of Law Reform, the SLC agreed that it would review commercial leases as part of its Ninth Programme.

The feedback from solicitors is that by far and away the most challenges relating to commercial leases are those which deal with termination. This discussion paper looks at six aspects of termination of leases and asks for views on these. The purpose of the paper is to engage with all parties involved in commercial leasing to try to find solutions which make the operation of the law on termination of commercial leases simpler, fairer and more clearly understood by all parties.

Tacit relocation

Although a lease may look on the face of it as though it is a fixed-term lease, with a date of entry and a date of termination, this is not always the case. If the parties do nothing prior to the end of the lease then it is likely, unless it falls within the narrow category of exceptions to which tacit relocation does not apply, that it will not terminate, but rather continue on the basis of tacit relocation. This doctrine, having its roots in Roman law, requires the serving of a notice of termination before a lease is terminated. As a doctrine, tacit relocation operates in many countries across the globe, but Scots law applies it in a unique way. The doctrine of tacit relocation also applies to contracts of service or employment and contracts of partnership. This discussion paper is restricted to dealing with how the doctrine applies to leases.

The paper considers the historic development of the doctrine and whether tacit relocation was ever really intended to apply to commercial leases (as opposed to agricultural ones, where the policy justifications seem more obvious). It considers whether or not it is clear that parties can contract out of tacit relocation for commercial leases. The paper looks at the operation of the doctrine in other countries before examining the challenges with the current law and how the law might be reformed. 

For reasons which are unclear, solicitors tend not to address what happens at the end of a lease when undertaking the initial drafting. One view is that Scottish solicitors adopted the English style of commercial lease under pressure from clients to do so. The standard English lease does not address termination as, in England & Wales, they have a legislative superstructure which covers termination.

The chapter discusses two possible options for reform. The first option is whether one might simply disapply the concept of tacit relocation from commercial leases. The second option considers a clear statement that parties may contract out of tacit relocation.

Notices to quit

Chapters 3 and 4 of the discussion paper address notices to quit. Chapter 3 narrates the historical development of such notices. It sets out the legislation and case law, and considers the terms of the Sheriff Courts (Scotland) Act 1907 and its requirements for notices in some detail. The paper looks at current drafting practice for commercial leases and asks whether it should be made clear that the 1907 Act does not apply to the giving of notices to quit in relation to commercial leases.

Chapter 4 is a much more practical chapter which discusses what type of notice would be most appropriate for commercial leases in a modern, sophisticated leasing market. It considers the form and content of a notice, and what the essential requirements of such a notice should be. The paper looks at the period of notice and considers notice periods in other modern leasing markets. It addresses the calculation of the period of notice and how notice should be served. Consideration is given to whether one form of notice should cover all commercial leases or whether there should be differentiation between leases of less than and more than (say) one year’s duration. The paper takes account of break clauses and other special circumstances.

Apportionment of rent

Chapter 5 deals with apportionment of rent on early termination of a lease. It reminds practitioners of the terms of the Apportionment Act 1870 and its application to Scotland, before considering the effect of recent English cases. The paper asks whether it might be appropriate to consider amending the 1870 Act to make it applicable to rent paid in advance as well as rent paid in arrears, but notes that this would not be an easy task given that it is UK legislation and that its application extends beyond rental payments. Views are invited on whether it would be appropriate for Scotland to diverge from England & Wales on this issue. The chapter suggests that this aspect really requires to be dealt with in the lease itself, and commends the Property Standardisation Group commercial leases for this.

Tenancy of Shops (Scotland) Act 1949

The Tenancy of Shops (Scotland) Act 1949 is addressed in chapter 6. Here the paper considers the reasons for the Act being put into place in 1949 and the debate around the Act being made permanent in 1964. Representations to the SLC suggest that the Act, originally put in place to protect small shopkeepers after the Second World War, is no longer used exclusively (if indeed at all) for that purpose, and indeed now appears to be used as a bargaining chip by national retailers to whom the Act was not intended to give protection. The chapter argues that this piece of legislation sits uneasily in a system with little other statutory regulation and that consultees may wish to consider repeal of the Act.

Irritancy

In 2003 the SLC published its Report on Irritancy in Leases of Land, which proposed reform of the law on irritancy, including abolition of legal irritancy and repeal of ss 4-7 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985. This report has never been implemented. Chapter 7 of this discussion paper summarises the main terms of the 2003 report and asks stakeholders whether they wish further reform of the law of irritancy or whether they are in fact content that the current law operates satisfactorily. Representations to the SLC thus far suggest that solicitors do not wish further reform at this stage, but the paper asks the question to ensure that all solicitors have an opportunity for input on this very important issue.

Confusio

Finally, chapter 8 of the discussion paper considers the application of the doctrine of confusio to leases. This chapter applies to all leases and not just commercial leases. This situation arises as an issue when the interest of the landlord and the interest of the tenant come together in the same entity. Consideration of this issue by practitioners appears to happen regularly, particularly in situations with complicated leasehold structures for commercial developments, most notably shopping centres. 

The chapter notes the particular problems experienced by commercial leasing practitioners, and narrates examples given to the SLC. It looks at the history of the doctrine and whether confusio was ever intended to apply to leases, or whether it was in reality applicable only to the debtor/creditor relationship for payment of rent. The chapter considers the application of the doctrine to servitudes and real burdens, and also considers the views of practitioners in the agricultural sector before asking whether consultees wish a clear statement of the law in this regard. 

Submissions are requested in response to the discussion paper by 14 September 2018. The SLC is currently undertaking a series of seminars for members of the profession in Edinburgh, Glasgow and Aberdeen and is also engaging with other property professionals via the RICS and Scottish Property Federation. The paper can be found via the Commission’s publications page www.scotlawcom.gov.uk/publications/, along with associated documents. One of these is a Word response form. This is the SLC’s preferred format for consultation responses, but comments in other formats on some or all of the issues raised are also welcome. Please contact Charles Garland at the SLC on Charles.garland@scotlawcom.gsi.gov.uk