by Sandy Reid
The widespread development of commercial leasing in Scotland has occurred only since the second world war. The Landlord and Tenant Acts and the Law of Property Acts do not apply North of the Border and there is no proper statutory code to replace them; case law is scant and not always convincingly authoritative; and there is a dearth of textbooks and published styles specifically intended for Scottish use. Consequently, commercial leasing has been grafted into the Scottish scene and has expanded very much in line with English patterns and most forms of lease used in Scotland still derive directly from English styles. This is consistent with the requirements of most institutions, developers and property companies operating in the two countries who wish their Scottish commercial leases to follow those used by them in England. However, the basic legal principles in England and Scotland relating to commercial leases vary in many ways and this article attempts to highlight some of the more important differences.
Interpretation
Given the lack of a statutory code and the scarcity of reported case law, a Scottish practitioner asked to advise on the law on a particular point arising from a commercial lease will generally have recourse to basic principles of contract law in Scotland and to English reported decisions, precedents and textbooks. It may be difficult to say with certainty whether an authoritative decision in England would be followed in Scotland. Some recent cases suggest that Scottish judges will consider comparable English decisions carefully and may find them persuasive. Traditionally, however, the Scottish courts tend to interpret the wording of a contract in literal terms and to enforce its provisions precisely in accordance with the actual wording unless there is any clearly established rule of law which would have the effect of overriding the wording. Parties having the capacity to contract are presumed to have understood, accepted and be bound by what the wording states, and the Scottish courts will not readily relax or rewrite the contract on equitable grounds.
Privity of contract
There is no Scottish equivalent of the English principle of privity of contract (ie the continuing liability which an original landlord and an original tenant owe to each other for the duration of a lease). In Scotland, if an original or any subsequent tenant assigns his interest in a lease (with the landlord’s consent if required), the outgoing tenant has no obligations to the landlord beyond anything arising out of the period prior to the effective date of assignation (ie assignment). However, Scottish landlords often seek to word their leases in such a way as to impose original tenant liability, or even joint and several liability of all persons vested in the tenant’s part of the lease, throughout the term. This would be resisted by a well-advised tenant, but drafting techniques may disguise a landlord’s intentions and create a trap for the unwary.
Although privity of contract remains at present a principle of English law, the matter is under review, and English law may be brought more into line with Scots law in terms of the draft Bill attached to the Law Commission’s Report of November 1988, Landlord and Tenant Law — Privity of Contract and Estate.
Irritancy (forfeiture)
Whereas in England forfeiture clauses are to be read and interpreted against a background of statutory and equitable protections for a tenant, there is no equitable relief in Scotland and, until recently, no statutory protection existed. Irritancy clauses (the Scottish equivalent of forfeiture clauses) were construed strictly according to their terms and the result for a tenant could be drastic, as demonstrated in the case of Dorchester Studios (Glasgow) Ltd v Stone 1975 SLT 153, where the House of Lords held that a lease had been properly irritated by a landlord on the grounds of the tenant’s non-payment of rent for 21 days.
The Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 has now introduced a degree of protection for a tenant. It distinguishes between monetary and non-monetary breaches:
1. If a tenant fails to pay rent or make any other payment on the due date, a landlord must, before he may proceed to irritate the lease, give to the tenant written notice, under express threat of irritancy, specifying the breach complained of and allowing a period of at least 14 days following the service of notice (or such longer period as may be provided in the lease) within which the tenant must settle the sum outstanding. Only if the tenant fails to comply with the notice may the landlord irritate the lease.
2. In the case of a non-monetary breach, a landlord is not, for the purpose of irritating a lease, entitled to rely on a tenant’s breach or a change in a tenant’s circumstances if, in all the circumstances of the case, a fair and reasonable landlord would not seek so to rely. In considering whether a landlord has acted fairly and reasonably, regard is to be had as to whether a breach is remediable and whether a reasonable opportunity has been afforded to the tenant to enable the breach to be remedied.
The Act provides some protection for tenants where none previously existed but, given the continuing lack of equitable relief, obvious dangers still exist. For example, although a tenant is entitled to 14 days’ warning on non-payment of rent or other sum, he may still suffer an irritancy if, through human, clerical or other error, payment is not made in time; and it is still conceivable that, in the event of a non-monetary breach, even if such a breach is remediable, a landlord might be entitled to irritate a lease without giving a tenant notice or an opportunity to remedy the breach. Accordingly, a well-advised tenant’s solicitor would endeavour to achieve broader protection for his client and any creditor by express wording in the irritancy clause.
Underleases
An undertenant in England is entitled to receive notice of court proceedings by a superior landlord to recover possession of the demised property by forfeiture. An English undertenant whose immediate landlord’s lease is forfeited by a superior landlord may approach the court for relief and the court is likely to order the superior landlord to enter into a new lease with the undertenant on the same terms as the superior lease, although the court will probably order that the breach complained of be remedied by the undertenant. In Scotland an undertenant is not entitled to be given notice of irritancy proceedings by a superior landlord and if an undertenant’s immediate landlord himself holds under a superior lease (or there may be several such leases) and any of these leases should be forfeited by operation of its irritancy clause, then all subordinate leases immediately fall without any entitlement on the part of affected tenants to relief. In such circumstances the undertenant has no entitlement, either statutory or equitable, to a new lease from any superior landlord.
Security of tenure/compensation
The general rule in Scotland (which is subject only to one minor statutory exception) is that a tenant has no security of tenure and no right of renewal at the natural expiry of the lease; nor is a tenant entitled, at his outgoing, to any compensation for disturbance or improvements. However, if requisite notice of termination (generally 40 days or such longer period as may be prescribed in the lease) is not given by either the landlord or the tenant the lease will be extended automatically for a further period of one year (or for a period equating to the original term of the lease if less than one year) at the same rent and on the same terms and conditions in accordance with the Scottish principle of tacit relocation.
Landlord’s consent
It has always been considered that if a commercial lease in Scotland provides that the consent or approval of a landlord is required for some action by his tenant (eg assignation, underletting, change of use, alterations etc) then there is no presumption that the landlord must act reasonably in granting or withholding such consent or approval. However, the case of Gordon District Council v Wimpey Homes Holdings Ltd 1989 SLT 141 should be noted. It tested whether a clause in a contract for the purchase of land making the purchase conditional upon the purchaser’s obtaining planning permission “to the satisfaction of the purchaser” required the purchaser to act reasonably in determining whether it was satisfied with the permission granted. Perhaps surprisingly, in light of the tendency to literal interpretation in Scotland, the court imported such a “reasonableness” test and the decision, by the Outer House of the Court of Session, has not been appealed. Notwithstanding Gordon District Council, a Scottish tenant should try to minimise those provisions of the lease requiring consent or approval from a landlord and to qualify such provisions to the intent that consent or approval is not to be unreasonably withheld. The Scottish tenant does not have the protection of the Landlord and Tenant Act 1927, which implies, in the case of covenants not to assign or make improvements without landlord’s consent, a proviso that such consent must not be unreasonably withheld.
Would a requirement that a landlord should not unreasonably withhold consent to an application by a tenant be construed differently in Scotland from in England? The English case International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [6] 1 EGLR 39; (1985) 277 EG 62 sets out a number of principles and it could be argued that most of these are also relevant in Scotland; but the persuasiveness of such argument and the application of such principles to any particular case will be influenced by factors particular to Scots law. For example, as privity of contract does not apply in Scotland, a Scottish landlord, in considering an application for consent to assign, might argue that the status of a proposed assignee and his ability to perform the tenant’s covenants is of greater significance in Scotland than in England where, as the law currently stands, a landlord has the benefit of original tenant liability. Conversely, as an English undertenant is likely to be allowed relief in the event of forfeiture of a superior lease and to be awarded a new lease by the superior landlord on the same terms as the superior lease while a Scottish undertenant is not, an English landlord, in considering an application for consent to underlet, might argue that the status and substance of a proposed undertenant is of greater significance in England than in Scotland.
In both countries the onus of proving that a party has withheld consent unreasonably rests with the person seeking consent. A landlord in Scotland is under no obligation to give reasons for withholding consent. A tenant in England now has the benefit of the Landlord and Tenant Act 1988 relating to a landlord’s obligations when a tenant applies for consent to assignment or underletting. It provides that, in such cases, where a landlord’s consent is required and is not to be unreasonably withheld, a landlord refusing consent is obliged, inter alia, to provide written reasons for refusal within a reasonable time after receiving an application.
Repairs
In England, a tenant faced with an obligation to repair a property recognises that the obligation will include restoration by renewal or replacement of subsidiary parts of the whole but not, as decided in Lurcott v Wakely and Wheeler [1] 1 KB 905, reconstruction of substantially the whole; and the English case Ravenseft Properties Ltd v Davstone (Holdings) Ltd (1978) 249 EG 51 decided that the extent and scope of an obligation to repair in England is, in each case, a question of degree as to whether what a tenant is being asked to do can properly be described as repair or whether it would involve giving back to its landlord a wholly different thing from that which the landlord demised and stated that, in deciding such question, the proportion which the cost of the disputed work bears to the value or cost of the demised property may sometimes be helpful as a guide. In Scotland, the word “repair” has not been the subject of the considerable judicial scrutiny which it has received in England and it remains uncertain as to how broadly the Scottish courts would interpret the term. It is also relevant to note that a Scottish landlord, unlike his English counterpart, is subject to a common law implied warranty that a property let (ie demised) by him is reasonably fit for the purpose for which it is let and has a common law duty to keep the let property in tenantable repair and wind and water tight. He will generally seek to negate such warranty and duty in the wording of the lease.
Although it is suggested that the principles set out in Ravenseft might be treated as persuasive by the Scottish courts, a Scottish landlord may argue that in order to put a Scottish tenant in the same position as an English tenant who has covenanted to repair, additional obligations require to be imposed on the Scottish tenant. However, that argument does not justify the imposition of obligations to renew, rebuild or reinstate a let property, as these exceed what is properly comprehended by an English obligation to repair and would be resisted by a well-advised tenant; in relation to renewal, while an English (and possibly Scottish) obligation to repair will include restoration by renewal or replacement of subsidiary parts, this should not be confused with a straightforward obligation to renew (cf Lurcott).
Frustration
In Scotland, by the common law principle of rei interitus, if the let property is destroyed or so substantially damaged that it cannot be used by the tenant for the purpose for which it was let, the lease automatically determines, and subsequent actions by the parties, such as rebuilding or paying rent, do not revive it. This principle can be, and frequently is, contracted out of in Scottish leases and the matter of destruction or damage is then dealt with in the repair, insurance and cesser of rent clauses. The principle of rei interitus does not apply in England, although in National Carriers Ltd v Panalpina (Northern) Ltd [1] AC 675 the House of Lords decided that frustration could apply to leases in England.
Rent review
This vast topic cannot be covered adequately in an article of this length, but the following are a couple of the more significant aspects:
1. The principles set out in the English case United Scientific Holdings Ltd v Burnley Borough Council (1977) 243 EG 43 in relation to whether time is of the essence in rent review clauses have been cited with approval in a number of Scottish cases in recent years and, in general terms, these cases suggested that time might not be regarded as being of the essence in Scotland in the absence of any contra-indication in the express words of the lease, the inter-relation of the rent review clause with other clauses or the surrounding circumstances. Notwithstanding that United Scientific Holdings was decided on peculiarly English considerations it appeared to be treated as authoritative in such cases by single judges in the Outer House of the Court of Session. However, many Scottish practitioners were concerned that it had not been validated by a Scottish court upon a thorough consideration of the underlying principles of Scots law. This concern has been justified by the case Visionhire Ltd v Britel Fund Trustees Ltd in which judgment was issued by a single judge in the Outer House on September 4 1990. In that case it was held that there was no presumption in Scots law that a timetable specified in a rent review clause was not of the essence of a lease. It was observed that, although there are many similarities between the laws of England and Scotland with regard to the effect of stipulations as to time, there are also material differences. The law in Scotland is therefore uncertain at this time.
2. In contrast to the English position, a Scottish tenant effectively has no statutory right of renewal of his leas . In England there is authority for the proposition that the possibility of a tenancy’s being continued or renewed pursuant to the Landlord and Tenant Act 1954 may be taken into account in the valuation exercise unless the lease provides otherwise.
Arbitration
There are fundamental differences between the law of arbitration in England and Scotland. The Arbitration Acts of 1950 and 1979 set out detailed procedures governing arbitration in England, but the law of arbitration in Scotland is based almost entirely on common law. Rules developed over the centuries since an Act of 1695 have been only minimally affected by the Arbitration (Scotland) Act 1894, which runs to a mere handful of sections; and the decision of a Scottish arbiter (ie arbitrator) is still challengeable only on the ground of breach of natural justice, which will be extremely difficult to establish.
There are clear distinctions between the powers, duties and liabilities of arbitrators and experts in England: one of the more important is that an independent third party resolving a dispute as an expert is liable for his negligence, whereas if he acts as an arbitrator he is not so liable owing to the judicial nature of an arbitrator’s function. The English distinction between arbitrators and experts is less clearly defined in Scotland, and one view is that if a so-called “expert” resolves a conflict between parties in Scotland and considers competing submissions and evidence, he is acting in a quasi judicial capacity and is therefore a de facto arbiter, whatever he be called. If so, he could not be sued for negligence.
