Insights

Introduction/Background

The majority of commercial leases in Scotland incorporate provisions entitling the Landlord to terminate a Lease in the case of Tenant breach.  Irritancy clauses, as they are known, entitle a Landlord to take steps to regain possession and reclaim rent and other monetary arrears including interest within a relatively short period of time. 

By virtue of Sections 4 and 5 of the Law Reform Miscellaneous Provisions (Scotland) Act 1985 (‘’the 1985 Act’’), prior written notice must be served on the tenant, before such steps can be taken.  Regardless of anything to the contrary set out in the Lease.  This pre-irritancy notice requirement was introduced, primarily, to afford tenants a reasonable opportunity to remedy breaches and make good rent arrears.

Under the 1985 Act, in cases where a Tenant is in arrears, at least 14 days prior written notice is required before the Lease can be terminated.  In the case of a non-monetary breach i.e. sequestration/liquidation, a reasonable period of written notice is required.  The reasonableness of any notice is to be judged according to what a ‘fair and reasonable’ Landlord would do in the relevant circumstances, regardless of the terms of the Lease.

Notice requirements under the 2020 Act

The Coronavirus (Scotland) Act 2020 offers additional protection for commercial tenants struggling to meet rent or other payments due under their Lease by extending the 14 day notice period referred to above to 14 weeks.  A Landlord must, therefore, give at least 14 weeks prior written notice before initiating court proceedings to terminate on grounds of non-payment of rent or other sums due.

The extended notice period does not apply in respect of non-monetary breach.  Having said this, taking account of the fair and reasonable Landlord test referred to above, a Landlord will still need to consider the impact of the CoVid lockdown on its tenants.  This could justify a longer notice period than that which would have been considered reasonable, prior to the 2020 Act coming into force.

The 2020 Act also renders void, any notices served prior to 7 April 2020, assuming the notice period hasn’t already expired (which is now likely to be the case for the majority of such notices served prior to that date).   

As it stands, the 2020 Act is in force until 30 September 2020.  The Scottish Government are, however, entitled to extend its application to 31 March 2021 and then again by a further six months to 30 September 2021. 

Practical Effect

Contractual obligations (including obligations to pay rent and other sums) set out in a commercial lease are still binding - the 2020 Act doesn’t change that.  Nor does it remove a landlord’s right to terminate a lease on grounds of monetary arrears.  It does, however, significantly extend the timescale for doing so.  Tenants have additional breathing space during which they can continue occupying premises, despite being in arrears. 

The 2020 Act does not offer commercial tenants a rent holiday. This remains something to be negotiated and agreed with the Landlord.  Meantime, during the extended notice period, rent and other monetary arrears continue to accrue along with any interest due.  As was the case prior to the coming into force of the Act, a tenant can clear such arrears during the notice period, effectively removing the grounds for termination.   If future arrears accrue, a fresh pre-irritancy notice will be required, triggering a new 14 week notice period.

Unfortunately, the 2020 Act doesn’t offer much protection for commercial landlords.  Tenants will accrue additional arrears during the pre-irritancy notice period putting landlords at risk of losing more in the way of passing rent and interest, for example, prior to terminating the Lease - perhaps with little or no prospects of recovering same. 

Given the economic challenges faced by many commercial tenants during the lockdown, commercial landlords will have a difficult balancing act - weighing up the pros and cons of terminating a lease in the hope of recovering sums due (prior to a tenant becoming insolvent).  All relevant commercial factors need to be taken into account.  It may not be in the landlord’s best interests to terminate the Lease given the additional financial burden of rates, insurance, service charge this will trigger.  Especially in a market where there may be less prospect of re-letting to a new tenant. 

As an alternative to irritating a commercial Lease, commercial landlords can still instigate debt recovery proceedings for sums falling due by a tenant. Having said this, at present, the Court of Session is only dealing with 'essential business'. Only 10 of Scotland's Sheriff Courts remain open, dealing only with 'emergency' civil applications. In addition, the onus is on the landlord to demonstrate that their action satisfies either test.

Looking ahead

Given the effect of the extended pre-irritancy notice period instigated by the 2020 Act, many who are contemplating the grant of a new lease may be more inclined to insist on a rent deposit to cover the additional 14 week notice period.  The Chancellor has also come under pressure to implement a rent-support scheme working in tandem with the economic relief packages already available. This proposed scheme (referred to as the Furloughed Space Grant Scheme) would see a proportion of a business’s property costs covered by the government, similar to the model introduced in countries like Denmark and Sweden, with a view to keeping a healthy property ecosystem. It remains to be seen whether the government will act on this proposal. 

Finally, as we see the lockdown restrictions lifted, it is hoped the extended notice period will be reduced, perhaps in the first instance to 7 weeks and thereafter, back to the original 14 day minimum.  Meantime, it is hoped the breathing space offered to tenants may result in arrears being cleared prior to the landlord having to take steps to irritate the lease.  Especially if businesses start opening and trading (albeit in a limited capacity) over the next few months. 

Meantime, any landlord experiencing tenant breach or rent arrears should consider fully, all options open to them including the statutory requirements for serving a valid pre-irritancy notice.  Our commercial property team are perfectly placed to advise in this regard.