Commercial leases in Scotland almost always contain provisions allowing the landlord to terminate the lease in certain circumstances.
These provisions, known as 'irritancy' clauses, usually make a distinction between situations where the tenant is in breach of its monetary obligations – i.e. it has failed to pay rent and/or other sums due under the lease – and other situations. In addition, the landlord's ability to terminate the lease is restricted by legislation.
We have written about how landlords can terminate a lease when a tenant is in breach of a monetary obligation in another article. This article considers the position in relation to other circumstances. This includes where the tenant is in breach of a non-monetary obligation - such as a failure to repair and maintain the premises in accordance with the lease – but will also encompass situations where the landlord is given a right to terminate because a particular circumstance has arisen (e.g. the tenant enters administration or liquidation).
Here are our top tips for commercial landlords when they are considering terminating a lease for a non-monetary reason.
1. Read the irritancy clause carefully.
The irritancy clause in the lease will often place restrictions on the landlord's right to terminate for non-monetary reasons. For example, the landlord may be entitled terminate only in the case of a 'material' breach or only in specific circumstances which are listed in the clause. The lease may also require the landlord to follow a particular procedure before terminating, such as serving a warning notice beforehand.
Whatever the irritancy clause says, a landlord will need to follow it carefully for the termination to be effective.
2. Apply the legislative test of the 'fair and reasonable landlord'.
In addition to the provisions in the lease, legislation gives commercial tenants some protection against irritancy. In particular, a landlord cannot terminate a commercial lease for a non-monetary reason if in all the circumstances a fair and reasonable landlord would not do so.
Deciding how a fair and reasonable landlord would act can be tricky and we recommend seeking legal advice on how the test would be applied in the particular circumstance which the landlord is facing. In broad terms, however, a fair and reasonable landlord is unlikely to terminate the lease in response to a very minor breach by the tenant or the occurrence of a circumstance which doesn't have any real impact on the landlord's interest.
3. Termination can be lawful even if some landlords would choose not to do it.
The 'fair and reasonable landlord' test doesn't mean that termination is possible only if every landlord would take that course. It may still be reasonable for a landlord to bring the lease to an end even if other landlords might be more lenient in the circumstances.
4. If the breach can be remedied, give the tenant a reasonable opportunity to do this.
If a landlord chooses to terminate a lease because of a tenant's non-monetary breach which is capable of being remedied, a court will look to see whether the tenant was given a reasonable opportunity to fix the problem. It will rarely be permissible for a landlord to issue a termination notice without any warning if the tenant could have resolved the breach within a reasonable time.
5. Be careful if another remedy is available.
Sometimes the lease will give the landlord other remedies if the tenant is in breach of specific obligations. For example, many commercial leases provide that if the tenant fails to keep the premises in good repair then the landlord can carry out repairs itself and recover the cost from the tenant.
It will usually be unfair for a landlord to decide to terminate the lease if there is another, less drastic remedy available to it. For this reason, the fair and reasonable landlord will rarely terminate a lease because its tenant is in breach of its repairing obligation.
6. The test is not a 'balance of hardship'.
The use of the term 'fair' in the legislative test does not mean that it is a simple case of weighing up the hardship caused to the landlord by the breach or circumstance that has arisen against the hardship caused to the tenant by being evicted.
It will sometimes be fair for a landlord to terminate the lease even if this causes great hardship to the tenant. In one case, a landlord was held to be entitled to terminate a lease with 76 years left to run even though the tenant had spent significant sums of money developing the premises.
If you are a commercial landlord and need advice on terminating a lease then get in touch with our Real Estate Disputes team or your usual Brodies' contact.