When insolvent tenants hand back their keys, they may also be passing on a number of difficult questions of liability.
The current recession has led to many commercial tenants becoming insolvent, leaving landlords with a decision on what to do. Faced with little prospect of finding an alternative tenant in the foreseeable future, many Scottish landlords have advised of their intention to treat leases as continuing even after the removal of the insolvent tenant. The principal benefit for landlords is the avoidance of rates liability but it also enables landlords to maximise their claims in the insolvency pending a new tenant being found.
While it is commonplace for Scottish IPs to purport to disclaim leases, this does not of itself operate to bring the lease to an end. The purported disclaimer of a lease under Scots law is at best a 'repudiatory breach', which will only terminate the lease if it is 'accepted' by the landlord. If he declines to accept the breach and the lease continues with no-one in occupation, a question then arises over various occupation related liabilities.
Rates liability turns on who is entitled to possession of the premises. Even where the tenant has removed, provided the landlord continues to act in a manner consistent with the continuation of the lease, the tenant remains entitled to occupy the subjects and the rates liability stays with him.
The position on occupier's liability is less clear. Under the Occupier's Liability (Scotland) Act 1960 ("OLSA"), an occupier owes a duty of care to anyone entering the premises in respect of dangers there. The duty is owed to anyone who enters, with or without consent.
It is generally the person occupying or having control of the premises who owes the duty of care, but who is that person where the insolvent tenant has removed and the landlord refuses to accept that the lease has come to an end?
Liabilities under the Health & Safety at Work etc Act 1974 ("HSWA")
It is not impossible that liability could arise under HSWA in respect of empty premises since it is not only employers who have liabilities. 'Occupiers' of premises also have a liability in respect of 'non-employees' who come on to the premises to do work or use plant or substances. If a person entered the premises to remove items or secure the property in some way, a liability could arise if he is injured whilst doing so. Again the question is who is the 'occupier' where the insolvent tenant has removed and the landlord takes the view the lease is continuing?
The custody of keys has not historically had the same significance in Scotland as in England. There is a Scottish rates case that held that where a landlord accepted the keys back from the insolvent tenant without prejudice to his position that the lease was continuing, he had not, by his actions, assumed the 'entitlement to possession' which is at the root of rates liability.
However, it cannot be assumed that a similar approach would be taken to liability under OLSA and HSWA. The test for liability under those statutes relates to 'control' of premises rather than 'entitlement to possession'. It may therefore be that the mere holding of keys could influence that question. Careful thought should therefore be given to how to deal with keys in an insolvency/removal situation.
Security of premises
The question of custody of keys must also be balanced against the practical need to ensure that premises are properly secured and safe to prevent claims arising in the first place. There may need to be a detailed risk assessment undertaken by the landlord before deciding what his tactic in relation to the lease is going to be.
In the absence of new case law, many issues remain unclear. It is vital that landlords and IPs are aware of these issues and take advice on their potential for exposure to these liabilities.
Joanna Clark is an Associate specialising in insolvency litigation at leading UK law firm Shepherd and Wedderburn LLP.