Termination of leases – it's not over till it's over
Modern commercial leases invariably contain a date when the lease will terminate – often still referred to by the less modern expression “ish”, an old Scots word for leaving a property. Most tenants, and landlords too for that matter, are probably under the impression that it is therefore quite clear that the lease will end on the date stated.
But, as is often the case with the law, the reality is not so straightforward. In fact, when a lease terminates – or even whether it has terminated – is an area fraught with confusion and uncertainty; so much so that the Scottish Law Commission (SLC) stepped in to consider some of the problematic aspects of termination of commercial leases, and has today (23 May) published a Discussion Paper on the subject.
The Discussion Paper looks at six separate problem areas, provides an explanation of the issues, and seeks views on options for reform.
If you have ever been caught out by tacit relocation1, struggled to decipher the complex statutory provisions relating to notices to quit, or been confused by the doctrine of confusio2, then this is the ideal opportunity to have your say in how the law can be simplified and clarified. Responses should be submitted by 14 September 2018.
The fact a lease states a date on which it is to end often leads the parties to suppose all that is required is to lock up on the day, hand back the keys and that is an end to the matter. Not so.
The law requires that one or other of the parties must give clear advance notice that they intend the lease to come to an end on the termination date (covered in more detail below), and if they fail to do so it will automatically continue for a further period. For leases of more than a year, it will continue for a further year on the same terms and conditions; leases of less than a year will continue for a further period of the same length; and this process can continue indefinitely if the parties remain silent.
This automatic process, known as tacit relocation, can catch out the unwary, particularly as leases seldom, if ever, directly address the issue. For many, this is a Rumsfeldian “unknown unknown”.
In some situations, this automatic continuation of the lease can be a handy, simple and cost-free way of continuing a tenancy that both parties are happy should persist. Unfortunately, however, there are many examples of the adverse effect, particularly to tenants, of the operation of this doctrine, such as where a tenant has already contracted to take a lease of other premises, imagining that the current lease will be ended on the due date.
If you do know about this effect, is it possible to provide in the lease that it will not apply? Other jurisdictions permit this, but as a universal solution it is far from satisfactory for Scotland, given lack of awareness – and despite the fact many leases do contain wording that may be considered to contract out of the doctrine, although the true effect is unclear.
One option proposed in the Discussion Paper is for the doctrine to be dis-applied to commercial leases, leaving it open to the parties to “contract in” if they wish. A difficulty may arise, however, if the rule is dis-applied, no opt-in is agreed, the tenant continues to occupy after the end date, and the landlord takes no action. What then would be the position? Would it be necessary to replicate tacit relocation in statutory form to accommodate such circumstances? Whichever option is preferred – and respondents are welcome to put forward other suggestions – there is merit in having a visible statutory arrangement in place for parties to consider at the outset of the lease.
How tacit relocation can catch you out
1. ACME Investments Ltd leased premises to Globex Ltd for five years with a termination date of 27 August 2017. In anticipation of the lease ending on that date, ACME agreed a new tenancy with another party, at a significantly higher rent, and was looking forward to a far better return under the new lease. Neither ACME nor Globex served any notice to quit, and Globex, enjoying an attractive deal, continues in occupation. Both parties' silence means that tacit relocation applies: Globex can stay on for another year at the existing rent and ACME loses its chance to benefit from a more lucrative tenancy arrangement.
2. Mr Sweet is a tenant of a high street shop, and has been struggling to pay the rent for the past couple of years as his business has suffered due to the drop in high street shopper footfall. He is relieved the lease is coming to an end at the end of the month. Mr Sweet is surprised to then receive a rent demand for the next three months, and when he queries it with the landlord’s managing agents, is dismayed to discover that, as he failed to give 40 days' notice to quit the premises, he is tied into the lease for a further year and obliged to pay another year's rent. As a result, Mr Sweet may go out of business.
Quit while you’re ahead
Clear advance notice that the parties intend the lease to come to an end on the termination date is required for the lease to end on that date. Yet, again, most commercial leases are silent on that fact. There are statutory rules, almost impenetrably complex in nature, that are generally applied in these circumstances, although it is another little known fact that notice of termination of an urban lease need not be given in writing, and verbal or informal notice will suffice, provided it is explicit. That is clearly unsatisfactory and leaves the way open to misunderstanding and disagreement. In practice, most written notice will follow the (optional) statutory rule of giving 40 days’ notice, although for premises of more than two acres, a longer period – as much as a year or more – is required. However, computation of the 40-day period is not without its complications.
The Discussion Paper proposes that notice to end a lease should be in writing. It asks respondents to consider whether a notice to quit should be in prescribed form or merely that there should be a list of essential requirements that it should contain. How long should the notice period be, whether that be 40 days, or some longer period such as three months, or perhaps six months, which is typical when exercising a break option to terminate a lease early; and how should the period of notice be calculated, to provide clarity and certainty?
Apportionment of rent
An issue that may arise at early termination, usually following a break, is how any rent that has been paid in advance should be apportioned, and whether the tenant is entitled to reimbursement of any rent for the period that post-dates the date of termination.
This issue came into sharp relief in 2015, following the Supreme Court decision in the English case of Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Limited, which decided that the tenant could not recover this portion of rent paid in advance.
Legislation3 dealing with apportionment of payments does apply in Scotland, but only to rent paid in arrears, which is rare, and almost unheard of in modern commercial leases. While some leases, for example the Property Standardisation Group leases do address this point specifically, many do not.
Amendment of the legislation is one option, although careful consideration would be needed to ensure there were no unintended ramifications from such a change. A simpler solution may be to ensure that leases contain appropriate wording to deal with the situation, although that is, of course, dependent on the drafter.
Corner shop tenancies
Any comparison of Scots leasing law with that in England and Wales will invariably highlight the fact that Scotland is not subject to any significant legislation regulating the terms of leases. That is often considered to be an advantage, allowing for flexibility.
One particular exception to this that is usually cited is the Tenancy of Shops (Scotland) Act 1949, originally enacted to provide protection for small shopkeepers in the period after the Second World War to help to stimulate the post-war economy. It allows the tenant to apply to the Sheriff Court for renewal of their tenancy for a period of up to a year after receiving notice of termination from the landlord, and to re-apply once that one-year period has ended.
While the Act was used a lot in the years following its introduction, there is evidence that it is now rarely used, and some recent instances of (unsuccessful) attempts to rely on it brought by larger chain retailers are generally regarded as an abuse of the spirit of the Act, if not the letter of it.
The SLC Discussion Paper highlights criticisms of the Act, and that it is now regarded as something of an anomaly, and proposes its repeal.
Irritancy is a remedy open to landlords to end the lease when the tenant is in breach of its terms. The SLC has already covered the law of irritancy in detail, in a Discussion Paper published in 20014 followed by a Report in 20035, and the current Discussion Paper therefore does no more than summarise the SLC’s earlier findings and proposals and how irritancy works in practice generally. The 2003 Report, which contained a draft Bill, remains unimplemented, although commercial practice can be said to have changed in the intervening period, given landlords are more likely these days to look for ways to retain, rather than remove tenants. The SLC has the impression that most practitioners and other stakeholders consulted consider that the law of irritancy is working reasonably well and that there is no pressing need for reform. Respondents, if they disagree, now have the opportunity to say so.
While there are a number of ways that a lease can end when the landlord and the tenant are separate parties, there is also a process by which a lease may (or may not) end when the landlord and the tenant become the same person, such as where a tenant acquires the landlord’s title to the property. The Scots law rule of confusio (or confusion) applies where the creditor and the debtor in an obligation become the same person. The circumstances in which this happens are poorly understood, and even the courts and legal commentators are in disagreement. The SLC Discussion Paper sets out the pros and cons with exemplary clarity.
There is a distinction to be drawn between rights which are personal, such as those under a contract, and those which are “real”, such as rights to heritable property. More properly, the merging of two heritable, real rights should be characterised as consolidation, rather than confusion, which concerns the merging of personal rights. Confusion happens automatically, whereas consolidation does not: which effect applies to leases? There is no clear consensus among the authorities, and the distinction is an important, often crucial one.
In practice, when two property interests (such as ownership and leasehold) are acquired by the same person, the Registers of Scotland (assuming the lease is a registrable one) will not merge the titles unless specifically asked to do so. Since both ownership and the right of a tenant under a lease are real rights, and ought therefore to be subject to (non-automatic) consolidation, that would appear to be the correct approach.
However, some doubt remains. Does a lease that is registrable differ from a lease that is not, in this context? Both can become real rights, the former by registration and the latter by possession? As the Discussion Paper puts it, “…leases in Scots law exist in an interesting intersection between the law of contract and the law of property”. The distinction, it appears, is critical in identifying whether confusion or consolidation operates when the rights are merged. Certainty in this area is essential to avoid complicated and time-consuming workarounds, as well as to provide clarity about the status of sub-leases. Interestingly, the practice with agricultural leases is to regard the interests of landlord and tenant as automatically merged, although this does not occur very often.
This persistent divergence of views clearly requires an unequivocal statement of what the law is (or should be), and whether positive action, such as written confirmation to the effect that the interests are regarded as having merged, should be required to put the position beyond doubt.
1 Where a lease automatically continues for a further period if neither party takes any steps to terminate it.
2 The merging of two formerly separate interests – e.g. ownership and tenancy – in the same person.
3 Apportionment Act 1870
4 Discussion Paper on Irritancy in Leases of Land DP No 117
5 Scot Law Com No 191