UK: English And Scottish Law: Fundamental Differences Remain

In the second of the series looking at the differences between English and Scottish property law, Alexis Condie, Rachel Dunn and Lisa Cruickshank demystify some of the legal and practical differences between the two systems of commercial leasing.

Commercial leasing may appear to the untrained eye to be similar both north and south of the border. However, there are a number of fundamental differences between the two systems, even down to how a commercial lease is entered into. The process can be confusing and the differences surprising, particularly if it is the first time you are operating on the other side of the border. This article removes the confusion and explains some of the differences.

Unless otherwise stated, references to England/English are to England and Wales/English and Welsh. This article does not cover residential tenancies.

Some differences in terminology

Legal basis

Scottish commercial leasing law is almost entirely based on the common law (ie law developed through the decisions of the courts). Very little is set out in statute (ie acts of parliament). As such, it is often not necessary to look beyond the lease document itself to ascertain the parties' rights and obligations.

By contrast, English commercial leasing law, although having a basis in common law, is supplemented by a number of statutes. It may therefore be necessary to look beyond an English lease when considering the parties' rights and obligations.

Start of a lease

Documentation

In both jurisdictions, there are two main documents which govern the grant of a commercial lease: the contract preceding the lease; and the lease document itself. However, how they operate can be quite different.

In England, the contract is known as an "agreement for lease" and is usually signed in counterpart by the landlord and tenant, who then swap ("exchange") their signed copy with the other party. Agreements for lease tend only to be entered into where there are things that are required to be done prior to the start of the lease (for example, landlord's works or the obtaining of third-party consents).

In Scotland, the contract usually takes the form of "missives", which are offer and acceptance letters signed by and exchanged between the parties' respective solicitors to form a binding contract ("conclusion of missives"). Although it can seem odd, under Scots law the parties can be legally bound without actually having signed anything themselves. Missives tend to be entered into even for very straightforward Scottish commercial lease transactions.

In both jurisdictions, the lease itself will be signed by the landlord and the tenant. In England, the lease is usually signed in counterpart and then exchanged. While signing in counterpart is now legally permissible in Scotland, it is more usual that one copy of the lease is sent to the landlord and then to the tenant to sign.

Registration

In England, leases longer than seven years must be registered at the Land Registry and must contain certain prescribed clauses. (Various other leases must be completed by registration at the Land Registry. However, a comprehensive review of the rules is beyond the scope of this article.)

In Scotland, a lease need not be registered in the Land Register of Scotland unless it is for longer than 20 years, which is relatively unusual in the current market. Although most Scottish leases are therefore not land registered, they are almost always registered in a separate deeds registry known as the Books of Council and Session. They are registered in this way for preservation, as well as, usually, for "execution", which allows the landlord to pursue an expedited method of debt recovery against the tenant without the need for any preliminary court action.

Tax

In England, a tenant may be required to pay stamp duty land tax (SDLT) in connection with a commercial lease. The Welsh equivalent is Welsh land transaction tax, and the Scottish equivalent is land and buildings transaction tax (LBTT).

The taxes are similar, but different rates, bands and reporting requirements apply depending on the jurisdiction. For example, tenants of Scottish commercial leases must submit an LBTT return at the beginning of a lease and then further returns three-yearly throughout the duration, as well as on assignation and at termination. However, for an English commercial lease with a set rent for the first five years of the term, the tenant generally only needs to submit one return at the beginning of the lease.

During the lease

Repair and maintenance of premises

The concept of a "full repairing and insuring" (FRI) lease applies across both jurisdictions and remains the best form of institutionally acceptable lease from a landlord's perspective. An FRI lease will set out the tenant's obligations in respect of the condition of the premises.

However, case law on the meaning and extent of repair obligations has developed differently in England and Scotland, and the same words can have different meanings in the different countries. Also, in Scotland there is a common law warranty by the landlord that the premises are in tenantable condition and wind and watertight, which needs to be displaced by including particular wording in the lease if the landlord does not want to find itself responsible for repairs which it had intended to pass on to its tenant.

Physical alterations to premises

In England, legislation provides that where the landlord's consent is needed for improvements (and almost all tenant's alterations will be improvements), then that consent is not to be unreasonably withheld or delayed. (There are also circumstances in which statute provides that a tenant may be entitled to carry out improvements, even if they are absolutely prohibited by the lease.) This does not apply in Scotland, where you do not need to look beyond the lease wording – if there is no express obligation in the lease on the landlord to act reasonably, the landlord will have absolute discretion in deciding whether to consent.

Assignment/assignation

There are differences in the rules regarding assignment/assignation (ie where a tenant transfers its interest in a lease to a third party). In England, if assignment is permitted with the landlord's consent, there are implied statutory obligations on the landlord not to unreasonably withhold or delay that consent. In Scotland, there is no implied obligation on a landlord to act reasonably in relation to an application for consent to assignation.

In addition, in Scotland it would be very unusual for an outgoing tenant to have any continuing liability following a permitted assignation. However, if an "old" English lease (ie one granted prior to 1 January 1996) is assigned, the outgoing tenant will generally continue to be liable for the tenant covenants post-assignment. When a "new" English lease (ie most leases granted on or after 1 January 1996) is assigned, the outgoing tenant is released from any future liability post-assignment unless the landlord secures an "authorised guarantee agreement" (AGA) from that outgoing tenant to guarantee the assignee's performance of future obligations under the lease. Scots law does not have an AGA regime, although it is theoretically possible, but rare, for an outgoing tenant to offer to guarantee a new tenant's liability post-assignation.

Underlease/sub-lease

Similar to assignment, in England if underletting is permitted subject to landlord's consent, statute implies covenants on the landlord not to unreasonably withhold or delay consent; in Scotland no such requirement is implied.

End of the lease

Forfeiture/irritancy

Forfeiture and irritancy are essentially the same concept, being the English and Scottish words, respectively, for the landlord's right to prematurely terminate a lease as a result of a breach by the tenant. However, there are differences in the rules and procedure for forfeiting/irritating a lease, which in each jurisdiction are different depending on whether it is a monetary or non-monetary breach (and/or the insolvency of the tenant).

In England, a tenant, undertenant or charge holder may be entitled to seek relief from forfeiture – ordinarily the right must be exercised within six months of the date of forfeiture. There is no such right of relief in Scotland. Enforcing irritancy is also different from enforcing forfeiture. Whereas in England it is possible for a landlord to effect forfeiture by peaceable re-entry, in Scotland a court order is required before the landlord can change the locks and grant a new lease.

Security of tenure

In England, the Landlord and Tenant Act 1954 (the 1954 Act) gives business tenants "security of tenure", whereby the tenant has a statutory right to seek a renewal of its lease and rights to "hold over" (ie remain in occupation) following expiry of the contractual term of the existing lease. It is possible to contract out of the security of tenure provisions of the 1954 Act, but only by following a strict procedure involving warning notices, declarations and the inclusion of certain wording within the lease.

The 1954 Act does not apply in Scotland. There are no automatic renewal rights in Scotland other than in limited situations set out in statute for retail tenants (rarely used in practice) or as a result of the operation of "tacit relocation".

Tacit relocation is where, if neither party has validly served a notice to quit on the other party by a certain period prior to the contractual expiry date (in compliance with strict rules as to the period, content and service of the notice), the lease will automatically continue for a further set period of time (usually a year if the original lease was a year or longer) on the same terms and conditions as the existing lease, including the amount of rent. It is a matter of academic debate whether or not tacit relocation can be contracted out of.

Final word

The above is a high-level overview of some of the differences between the two systems – it is by no means an exhaustive list. For example, each jurisdiction has its own rent payment quarter dates and energy efficiency standards; there are different rules about lease durations and disclaiming leases; and there are different approaches to the calculation of dilapidations. Even for aspects of leasing where the underlying concepts, rules or case law do not diverge, the actual wording of the relevant lease clauses may be different in the two jurisdictions.

The important point to take away is that, while there are many similarities between the systems, there are also fundamental differences. It is therefore important to seek legal advice from a lawyer who is qualified within the relevant jurisdiction. If you are dealing with portfolios that include properties both north and south of the border, it can be helpful to speak to a dual-qualified solicitor (ie qualified in both England and Scotland).

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.