Terminating a commercial lease for non-payment of rent

If a commercial tenant in Scotland fails to pay rent or other sums due under the lease, can the landlord 'irritate' (terminate) the lease?

Here is a five-step process that landlords can follow to know when and how they can exercise a right of irritancy and bring a lease to an early end because a tenant is in arrears:

1. Check the terms of the lease.

The starting point is that a landlord, faced with non-payment of rent by a tenant, is normally only entitled to terminate the lease if the lease itself allows this.

At common law, a landlord can only irritate a lease if the tenant has failed to pay rent for two years. Most landlords will not be prepared to allow rent arrears to build up that long; they will want to take action much sooner. So what can the landlord do? To answer that question, one needs to check the terms of the lease.

Almost all commercial leases in Scotland will contain an irritancy clause setting out the circumstances in which the landlord is entitled to bring the lease to an early end. The terms of such clauses vary, but they frequently allow the landlord to terminate the lease in a range of circumstances, including if the tenant is subject to an insolvency event or breaches its obligations under the lease. 

We have considered the rules in relation to termination for non-monetary breaches in another article. This article is concerned solely with irritancy on the basis of a monetary breach (i.e. where the tenant is in arrears of rent or other sums due under the lease).

Irritancy clauses will normally provide that, before terminating a lease for non-payment, the landlord must first give the tenant an opportunity to clear the arrears. The period of time the tenant must be given to do this will usually be set out in the irritancy clause itself - 14 days is the most common timescale but some leases (particularly older ones) may stipulate a different period.

Whatever the irritancy clause says, the landlord must comply with it in order to bring the lease to an end validly. A failure to stick to the process set out in the irritancy clause is likely to make any purported termination null and void, meaning that the lease will continue to run.

2. Serve a pre-irritancy warning notice.

There are also statutory restrictions on the landlord's right to terminate for non-payment. In particular, section 4 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 provides that a landlord can only rely upon an irritancy clause to bring a lease to an end if it has first served on the tenant a notice (known as a 'pre-irritancy notice' or 'pre-irritancy warning notice') which meets certain criteria.

A pre-irritancy warning notice must set out the sums which are overdue under the lease and require the tenant to make payment of those sums within a specified period. The period specified cannot be less than 14 days immediately following the service of the notice. If the irritancy clause in the lease demands that the tenant be given more than 14 days prior warning of irritancy then that longer period must be used.

The landlord must serve the pre-irritancy warning notice by recorded delivery. It will be sufficiently served if it is sent to the tenant's last business or residential address in the UK known to the landlord or to the last address in the UK that the tenant has provided to the landlord for service of notices. You can read more about 'sufficient service' here.

3. Wait.

Once the pre-irritancy warning notice is served, the landlord must wait to see whether the tenant clears the arrears.

If the tenant pays up before the end of the period specified in the notice then the landlord cannot proceed with the irritancy and the lease will continue. However, if the tenant fails to make payment by the deadline then the landlord will become entitled to terminate the lease immediately.

4. Serve an irritancy notice.

In order to bring the lease the lease to an end, the landlord will serve on the tenant a further notice (an 'irritancy notice') informing the tenant that the lease is terminated. The notice will require the tenant to vacate the property and deliver the keys to the landlord. Service of the irritancy notice formally brings the lease to an end (in accordance with the terms of the notice) and both parties will be released from any future obligations.

5. Remove the tenant.

The landlord will hope that, following service of an irritancy notice, the tenant will promptly remove itself and its belongings from the property. This does not always happen. If the tenant remains in occupation after the lease is terminated then the landlord will need to take steps to secure the tenant's removal.

If you are a commercial landlord or tenant looking for advice on irritancy or any other matter, get in touch with our market leading Real Estate Litigation team or your usual Brodies contact.