The Tenancy of Shops (Scotland) Act 1949 ("the Act") is a lesser-known piece of legislation that, if successfully applied, can provide retail operators with a greater security of tenure than is often seen in Scottish commercial leasing.

The Act was introduced after World War II to mitigate the risk of smaller retailers being forced out of business against the backdrop of rising rents and the short 40 clear day notice period that applies in Scotland to bring a lease to an end. It allows successful applicants additional time to find new premises and continue to trade in the interim.

However, the application and enforceability of the Act has been open to debate for some time and so the Scottish Law Commission ("SLC") is consulting on whether it should continue to apply or be updated or scrapped altogether.

The Current Position

The Act enables tenants of "shops" (which is broadly defined) who are in actual occupation of the premises to apply to the Sheriff Court to renew their lease if they have received a notice to quit from the landlord, subject to some exceptions. There is no limit on the number of renewals that can be sought by the tenant, although the maximum renewal period is one year. The granting of the application, which can be opposed by the landlord, depends on whether the Sheriff considers the renewal of the lease to be "reasonable" "in all the circumstances". If granted, the lease will renew on terms which the Sheriff considers reasonable.

The Act has rarely been used successfully and has been criticised for various reasons, including that:

  • it is outdated given current market conditions;
  • it is not necessary for the law on the expiry of shop leases to differ from that for offices and industrial units;
  • the "reasonableness" test lacks clarity;
  • the definition of "shops" is unclear as to whether it includes certain types of non-retail premises; and
  • it unduly favours sitting tenants that are national or multi-national retailers in renewal negotiations with landlords.

Proposals for Reform

Setting aside the question of the appropriateness of a separate legal regime for retail and certain other premises, which is separately addressed in the consultation paper, the SLC has presented two options for consideration.

1. Notice-Based Option: Mindful of the original concerns behind the introduction of the Act, the SLC proposes replacing the Act with mandatory notice periods for ending leases which would give tenants time to relocate if necessary. They propose a mandatory six-month minimum notice period for notices served by the landlord to terminate retail and other qualifying leases for one year or more, and for leases of less than one year a 3-month minimum notice period. Any shorter notice period provided for in a lease would be ineffective. In addition, the SLC recommends that the default periods of automatic continuation in the absence of a valid notice to terminate become mandatory – with leases of one year or more continuing for a period of one year, and leases of six months or more but less than one year rolling over for its existing term. This would be subject to the power of the tenant to prevent or shorten such mandatory continuations and aligns with the SLC's previous recommendations for reform of tacit relocation – more information on which can be found here.

It is thought that this approach would encourage landlords to commence discussions with the tenant regarding renewal in good time before the expiry of the notice period. Tenants should however continue to be alert to the possibility of the lease continuing automatically by tacit relocation if no notice is served by either party – which is the current position for all commercial leases under Scots law. If a tenant does not wish their lease to continue for whatever reason and has received no notice to quit from the landlord, they are advised to take advice as early as possible to ensure that they do not inadvertently miss out on the opportunity to bring their lease to an end.

2. Reforming the 1949 Act? The other option proposed is to retain the 1949 Act and address the issues identified with the Act. A gateway test is proposed to allow only small businesses to apply to the court for an extension to the lease term, with the consultation asking how small businesses should be defined for the purposes of the Act. In addition, the SLC proposes that a statutory statement of the objects of the court's discretion be introduced to provide guidance to decision-makers when considering whether to grant an application and to address the current concerns regarding the existing reasonableness test. Other proposals include clarifying on whom the onus lies to prove the relevant elements of any application and introducing a requirement for a tenant to offer mediation to the landlord before making an application for renewal under the legislation.

    Conclusion

    Although in its early stages, the SLC's consultation raises interesting questions around the termination of retail and other leases, and how best to strike an equitable balance between the interests of landlords and tenants. As is always the case, both landlords and tenants are advised to seek advice as early as possible if looking to bring a lease to an end and to be alert to any future changes in the law in this area.

    Please get in contact with either Danny George or Emma Barnett in our retail and leisure team if you would like to discuss in more detail.

    Contributors

    Emma Barnett

    Solicitor

    Danny George

    Partner