Property: New lease of life for commercial lets

Leases are fundamental to the Scottish economy and society. The basic rules governing them continue to be in the common law, though modified by statute. Statutory intervention has been most noticeable for agricultural holdings, residential leases and crofts. In other leases, typically of commercial premises, there has been little inroad by statute, except in relation to irritancy.

Unfortunately, in one area statutory rules have caused more doubt than clarity: notices to quit on the expiry of the lease. The notice to quit provisions of the Sheriff Courts (Scotland) Act 1907 have been criticised almost from their outset (Campbell’s Trustees v O’Neill 1911 SC 188 at 191-192). As long ago as 1989 the Scottish Law Commission recommended their repeal and reform (Report on Recovery of Possession of Heritable Property (Scot Law Com Report No 118)), but no legislative time could be found. Practitioners have had to resort to “belt and braces” practices in giving notice, failure to comply with which has led to unnecessary challenges with consequent uncertainty for clients.

Notices to quit form part of the common law of tacit relocation. However that law is itself scarcely clearer. While the concepts of a 40 day notice to quit period and the periods of continuation of a lease in the absence of a valid notice are largely understood, important areas of doubt remain. A glance at the textbooks reveals telling doubt over whether parties can contract out of giving notice to avoid the lease being continued. Nor is it clear whether the presence of a subtenant excludes the need for notice to the tenant. Which leases are covered? That too is unclear.

It was therefore no surprise that the Commission was approached for a project to review the law and recommend change. The outcome is the Report on Aspects of Leases: Termination (Scot Law Com Report No 260), published on 5 October. It follows extensive consultation including a discussion paper in 2018 and a consultation on a draft bill in 2021. So what does the report recommend?

Leases covered by proposals

The report covers “commercial leases”. However that expression must be understood broadly. No new category of lease is recommended. Rather, the reforms are to cover all leases that are not covered by agricultural holdings, residential, crofting or council allotment legislation which provides statutory rules on termination. Thus leases of subjects ranging from offices, retail and industrial units to holiday lets and lets of fishing rights are affected.

Tacit relocation: modernisation

The Commission considered whether tacit relocation should be retained at all. The doctrine applies in two situations: (1) on the expiry of the lease in the absence of a valid notice where the tenant remains in place; or (2) if the tenant remains in place after expiry without the landlord’s agreement and the landlord does not take reasonable steps within a reasonable period of time to remove them.

For the first situation, some consultees expressed support for the abolition of tacit relocation altogether and that there should be no entitlement to notice unless the lease so provided. However the Commission was persuaded by the majority of consultees that a default rule requiring the giving of notice provided a useful safety net for tenants, and a useful warning to landlords, of the need to obtain a fresh tenant or negotiate a fresh lease. In the second situation it was persuaded that the doctrine remained sound, in order to protect a tenant from liability for violent profits incurred through unreasonable inaction of the landlord in pursuing removal.

Further, if notice is required, the Commission concludes that the rules on its form, content, and the means of communication should also be reformed. Accordingly the report recommends that the common law rules of tacit relocation, together with the relevant provisions of the 1907 Act and the Removal Terms (Scotland) Act 1886, be replaced by rules of “automatic continuation” in a modern statutory code.

Automatic continuation: duration and exclusion

As at present, automatic continuation, if it applies, will be for one year for leases of one year or more, or for the duration of the lease if for less than one year. However if the lease contains a written term, however expressed, the purpose of which is to provide that the lease cannot continue beyond its termination date, that term will exclude any automatic continuation even in the absence of a valid notice. There should therefore be no doubt that a “traditional” provision that the tenant leave without any warning should be effective to prevent the lease from continuing beyond its agreed termination date, entitle the tenant to leave without notice, and entitle the landlord to commence proceedings to recover possession should the tenant not leave.

The benefits underlying the giving of notice are inapplicable to leases of under three months, or certain leases where no party would contemplate automatic continuation (such as a holiday or student let or short-term fishing or shooting let). Such leases will require no notice.

Notice to quit: duration, form and communication

Should parties not exclude the need for notice, the Commission proposes reforms for the period, form, and communication of notices. A 40 day period does not give sufficient time either for tenants to obtain premises or for landlords to obtain new tenants. Instead, a three month period for leases of six months or more, and a one month period for leases of three months to under six months, are recommended. These are alterable by parties in the lease.

Turning to the form of notice, landlords’ notices also form the basis for potential court proceedings for removal. Accordingly they should always be in writing and require removal on a specified termination date. Tenants’ notice of their intention to leave at the end of the lease can remain oral (as at present) if the lease is for one year or less (unless the lease requires writing), but must be written for longer leases. With the aim of reducing what some consultees described as the “mini-industry” of challenges to notices based on minor defects, the mandatory content of notices will be kept to a minimum, with provisions for relief from types of error that cause no prejudice to a reasonable recipient.

The code allows written notice to be communicated by any method, but electronic communication is conditional on the express or implied consent of the recipient. Statutory presumptions for timing of receipt apply if certain methods are used. For example, if notice is emailed, it will be presumed to have been received on the date of sending unless it is a bank holiday or weekend.

Notice to quit: multiple parties, subtenants, and withdrawal

Notice will be valid even if from one of a number of landlords, reflecting the current position for tenants’ notices. Contracting out is permitted. Subletting will not prevent automatic continuation, while a tenant will require to notify head lease notices to the subtenant, with failure giving rise to a potential damages claim. Withdrawal of notice will require the consent of all parties.

Termination notices: miscellaneous

Aside from automatic continuation, the report recommends a statutory obligation on parties with foreign addresses in a lease to provide a UK postal address for the service of all documents necessary to terminate a lease, including irritancy-related notices and break notices. Breach will enable service on the tenant at the let property or on the Extractor of the Court of Session, or the retention of rent. In order to protect creditors holding long leases as security, it is recommended that notification to them be a condition of irritancy. Finally, the report recommends a statutory presumption that a lease operates for one year from a date of entry of 28 May.

Transitional provisions

Leases can continue for many years. A dual system of law for pre- and post-enactment leases would be unsatisfactory. Accordingly, following a transitional period of one year, the new law should apply to all leases, subject to express terms in pre-enactment leases remaining governed by the old law.

Apportionment of rent

At present, if a lease ends either on its break or termination date and rent has been paid in respect of a subsequent period, absent an express obligation to reimburse such rent is irrecoverable. The Commission recommends a statutory implied term into post-enactment leases obliging a landlord to repay overpaid rent covering such a period.

Tenancy of shops, and confusio

The report also discusses reform of the Tenancy of Shops (Scotland) Act 1949, as well as termination of leases where a tenant acquires the landlord’s interest. Reform in both areas is desirable, but further consultation is necessary before detailed recommendations can be made.

Conclusion

The report contains a detailed draft bill which gives concrete form to these recommendations. It repays close study. If enacted the proposed reforms will bring about valuable improvements in the operation of commercial leases in Scotland. The necessity for reform goes back many decades. It is important that the Scottish Government considers the recommendations at the earliest opportunity and takes steps to bring them into effect.