Commercial Lease:

In Scotland (unlike in England), the law of commercial property leases, when it comes to ending a lease, is based largely on ancient common law and some obscure statute law, and is deemed to be out-dated for modern commercial practice.

Although there has been a general reluctance to legislate – and in contemplating it there is disagreement among stakeholders as to what should replace the existing rules – there is nevertheless concern that the current system is likely to discourage investors and occupiers, giving England a competitive advantage when attracting inward investment.

In England and Wales The Landlord and Tenant Act 1954 (Part II) was an important piece of legislation which has governed the letting of commercial premises relatively effectively for many years. English & Welsh Business Tenancies are primarily contractual in nature, i.e., based on English contract law, a contractual agreement between the parties and usually result from a protracted pre-contract negotiation of the terms between landlord and tenant.

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However, in England & Wales Part II of the Act recognises that business tenants need protection since they stand to lose their business and any goodwill they may have built up over years, and perhaps much of the value of their stock and equipment, if they have to leave the premises abruptly at the end of their lease term. Therefore, the statutory rules kick in when the lease terms ends.

So, the L&T 1954 Act is primarily intended to provide business tenants with some certainty, the right, if they wish, to renew their lease on the expiry of the contractual term on essentially the same terms, subject to a review of the rent to open market rent.

The landlord is entitled to oppose lease renewal on limited and specified grounds (such as redevelopment), but may have to compensate the tenant. The downside is that if the tenant contests the issue, the matter is referred to arbitration or court potentially resulting in significant uncertainty, cost and delays.

The 1954 Act does give a degree of certainty for both sides if they follow the statutory rules, which are quite clear. It is well tried and tested and many precedents have been set through court cases over the years, meaning the process, though not perfect, works well for both landlords and tenants, large and small.

In Scotland, commercial lease law is a “grey area of lease law” and needs to be in black and white argues Stephen Webster, a Partner, Commercial Property, at Urquharts writing for The Scotsman newspaper.

Following an extensive consultation exercise, the Scottish Law Commission (SLC) is soon expected to make recommendations for the reform of Scots law relating to the termination of commercial leases.

Landlords and tenants will often assume that a Scottish commercial lease will end on the date the lease says it will, but that is not necessarily so. Under the Scottish common law doctrine of ‘tacit relocation’, if neither party has given the required notice to quit in time, the lease is extended automatically at the same rent and otherwise essentially on the same terms, for at least a year.

For the unwary landlord or tenant this can cause much disruption and possibly financial distress if a new tenant has been lined up, or the tenant has made commitments elsewhere. On the other hand it can sometimes work to the advantage of one or other party if they are ignorant of the rules.

According to Mr Webster, there is no obvious reform solution in Scotland.

“If tacit relocation is abolished, should parties have the right to opt back in? But if they don’t opt back in and then, after its expiry date, act as if the lease is continuing, does there need to be a new statutory scheme to regulate what happens (like there is in England)?” he says.

“…would such a statutory scheme provide more certainty, or would it just introduce a raft of new areas for dispute? If tacit relocation is retained, could its main dangers be addressed by allowing the parties to agree at the outset that any automatic extension will be only for short rolling periods, rather than potentially a whole year?”

“Consultation responses indicate that there is no clear consensus on what should happen. Tacit relocation operates where neither party has given the requisite notice to quit. It is therefore vital that landlords and tenants know exactly what is required (i.e. when notice needs to be given, what it needs to say, and how it needs to be given).”

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