In Scotland, there is very little statutory protection for commercial tenants at the expiry of their lease. Typically, if a landlord serves a valid notice under the terms of the lease, that will be sufficient to bring the lease to an end.

That said, a unique and obscure piece of Scottish legislation governing retail premises – the Tenancy of Shops (Scotland) Act 1949 (the “Act”) – has the potential to frustrate a landlord's best intentions.

Rights of tenants under the Act

For the purposes of the Act, a shop includes any premises where any retail trade or business is carried on. The Act applies only to tenants and not sub-tenants.

If a shop tenant receives a valid notice to quit from their landlord and cannot obtain a renewal of their lease on satisfactory terms, the Act allows them to make an application to the sheriff court to have their lease renewed for a period of up to one year. A tenant needs to do nothing more than to start the process of negotiation with the landlord and be met with something other than a favourable reaction before making an application.

If the sheriff grants a renewal, the landlord and tenant are regarded as having entered into a new lease and the new lease would be granted at the rent and on the terms and conditions that the sheriff considers reasonable in the circumstances.

If a landlord wants to remove a tenant at the end of the extended period, they must serve another notice to quit. The tenant can then apply for further renewals under the Act once the initial renewal period expires.

Determining an application made under the Act

In determining an application made under the Act, the sheriff has discretion as to whether to grant an extension but in terms of the Act the sheriff must refuse an extension where:

  • the tenant is in material breach of the lease;
  • the tenant is insolvent;
  • the landlord has offered to sell the property to tenant;
  • the landlord has offered the tenant reasonable alternative accommodation on reasonable terms and conditions;
  • the tenant has previously given notice of its intention to terminate the lease and in consequence of that the landlord has arranged to sell or let the property to another party; and
  • greater hardship would be caused by allowing the extension than refusing it.

The approach of the court in recent cases indicates that a tenant will need to establish that they will suffer some form of hardship which has a significant impact on their business if they hope to succeed in making an application under the Act. The recent case of Select Service Partner Limited v Network Rail Infrastructure Ltd, considered the meaning of hardship. The court held that the question of hardship must be interpreted broadly and the hardship caused to both the landlord and the tenant must be considered and that it was proper to have regard to the needs of the "end user" (i.e. the ultimate retail customer) in determining whether to grant an extension under the Act.

If a tenant cannot show that it is likely to suffer hardship, it is unlikely the court will grant an application to renew their lease.

The sheriff can also refuse to grant an extension where, in all of the circumstances, the sheriff considers it's reasonable to do so.

The Act in practice

There is no doubt that a tenant's application under the Act could seriously impact or delay a landlord's plans to redevelop or re-let a property. That said, the court has broad discretion in determining an application made under the Act and the good news for landlords is that recent cases show that few, if any, applications succeed in practice.

The Act was originally introduced to protect the interests of small retailers in the post-war years where commercial property was scarce. The commercial property market has changed significantly since the Act was first put in place and the courts have since recognised that large national retailers are unlikely to suffer hardship as a result of the closing of a single store at lease expiry. Whilst the courts have largely decided against multiple or national retailers making a successful application under the Act they are certainly not prohibited from doing so.

Key takeaway

At first glance, the Act may well come as a shock to commercial landlords who would understandably assume that service of a valid notice to quit would be sufficient to recover possession of their property at lease expiry. Whilst the Act does exist and can be utilised by tenants, few are currently aware of it and there have been no recent successful cases. Those that do decide to raise an action have certain tests that they must meet to be successful. If a landlord does receive notice or intimation that a tenant is seeking to invoke the Act, do not ignore it but contact your litigation solicitor to assess your options.

Contributors

Jordon Reid

Associate

Elizabeth Ward

Legal Director

Catherine Reilly

Director of Knowledge (Real Estate)