July 2018 – Commercial leases under the microscope

Author: Mitchells Roberton
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  • Commercial leases are big business in Scotland. But while there are acres of excruciating legislation covering residential and agricultural leases there’s precious little covering commercial ones. That can be an advantage. The absence of detailed legislative provision allows for greater flexibility when it comes to the terms of commercial leases. But the downside is that there can be uncertainties about how such leases work.
  • The Scottish Law Commission has recently published a Discussion Paper looking at some of these uncertainties and asking for views on alternative suggested improvements.
  • This note looks at one particular area of uncertainty identified by the Scottish Law Commission and flowing from a recent case in the Supreme Court referred to below as “the Marks & Spencer case” (Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and another [2015] UKSC 72).

Introduction 

“Break clauses”

  • Commercial leases vary in duration. But often they are lengthy e.g. 20 years or so. Particularly in longer leases it is common for there to be a “break clause”. In other words (as the term “break” suggests) the terms of a lease may provide that it can be brought to an end at a stipulated point or points in time before its natural term of e.g. 20 years.
  • The break option may be in favour of either the landlord or the tenant or both. Termination at a break is normally governed by the terms of the lease and the lease will normally say how much notice is required if the tenant and / or landlord wishes to exercise the break.

Payment of rent – “in arrears” and “in advance” 

  • In the old days it was common enough for rent to be paid in arrears. In other words, if the rent was payable monthly it would be due at the end of each month to cover the period from the beginning of that month. But usually nowadays rent is payable in advance. In other words, if the rent was payable monthly it would be due at the beginning of each month to cover the period to the end of that month.

How do “break clauses” and payment of rent in advance work in combination? 

  • In the Marks & Spencer case the tenant paid its rent in advance. It exercised its right under the “break clause” to terminate the lease. So, some of the rent it had paid in advance related to a period after the termination of the lease under the “break clause”.
  • The question before the court was whether the tenant could recover the apportioned rent in respect of the days which post-dated the early termination. The court decided it could not. It could only have done so if the lease had made express provision for recovery of the apportioned rent.

One of the tenant’s key arguments – the Apportionment Act 1870 

  • One of the arguments for the tenant harked back to an old Act called the Apportionment Act 1870. The “preamble” to the Act (in quaintly Victorian language) gives the general gist:

“An Act for the better apportionment of rents and other periodical payments. 

Whereas rents and some other periodical payments are not at common law apportionable (like interest on money lent) in respect of time …And whereas it is expedient to make provision for the remedy of all such mischiefs and inconveniences:”

  • In other words, under the common law, interest accrued from day to day – and so was apportioned under the common law. What the 1870 Act did was to bring other types of income – such as rent – into line with the pre-existing common law rule that applied, in any event, to interest so that (in particular) rents “shall be apportionable in respect of time accordingly”.
  • In the Marks and Spencer case the 1870 Act was a crucial feature. But the court held that while it applied to rent payable in arrears it did not apply to rent paid in advance.
  • That decision rested at least in part on the fact that the 1870 Act in saying rent “shall, like interest on money lent be considered as accruing from day to day” could only be taken to refer to rent payable in arrears on the basis that it was really unheard of for “interest” to be paid in advance. So the Act could not sensibly be taken to refer to any advance payments of rent.

The Scottish Law Commission’s discussion paper

  • Whilst accepting that that seems to be the position in Scotland the Commission notes there are really two ways of dealing with this rather unsatisfactory situation: (1) amend the 1870 Act or (2) make specific provision in a lease to cover repayment of rent paid in advance.
  • The Commission asks for views from “stakeholders” as to which they think is the better option. One rather suspects that amending the 1870 Act is unlikely to happen and that the alternative of making specific provision within the lease will continue to be the answer. 

Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Joyce Moss: jmm@mitchells-roberton.co.uk

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