John Stirling, partner and property litigation specialist at Gillespie Macandrew, discusses the rules around landlord and tenant relationships when it comes to leases
FEW contracts shape economic activity for as long as leases. A lease can underpin an investment, support a business and generate income for generations. It is therefore unsurprising that Scots law has developed special rules around leases. Those rules are not new. The Leases Act 1449, removed the successor landowner’s right to demand vacant possession to sell. It’s a ban on no fault evictions.
Tenant security generally means longer tenancies, and long contracts create economic ecosystems around them. The landowner and their dependants feed off the income stream. The tenant and their dependants feed off the right of possession.
A lease is not ownership, but neither is it a normal contract because in broad terms it is often not personal to the original parties. The tenant’s right can usually be assigned and, when ownership changes, the purchaser steps into the former landlord’s position. That has led to a number of legal specialities. Perhaps the most unusual is the landlord’s hypothec, a priority right over a tenant’s goods for unpaid rent arrears.
Contract law behaves differently when applied to leases. The law generally wants leases to continue. It promotes damages claims, orders tenant businesses to stay open, and forbids deviation from the permitted use,in preference to the premature ending of a lease.
The distinctive nature of leases does not arise simply because every lease is different, that is true of all contracts. Rather, it reflects the range of interests, both upstream and downstream of the lease itself, dependent on the tenant meeting their obligations.
Termination rights and remedies
The right to ‘irritate’ derives either from the lease or the general law, and allows a landlord to terminate a lease for past breaches, most commonly failure to pay rent. Irritancy is a landlord’s remedy and is often incorrectly used as a synonym for rescission.
The right to rescind on material breach of contract also exists. Both tenant and landlord have it. However, rescission operates differently in lease law than in other contracts; it’s a remedy for material breaches threatened in advance (repudiatory breach). Classically, a tenant who cannot occupy due to a prison sentence, is in repudiatory, or future, breach.
The key point about irritancy is that it is more often a bespoke contractual remedy than a common-law one. If a lease says nothing, it can be brought to an end when there are two year’s rent arrears. That’s the common law remedy, known as ‘legal irritancy’.
Two years is often too long to wait, particularly as the landlord’s hypothec secures only arrears. That, combined with the limitation of rescission to repudiatory breach, means that parties will usually agree at the outset what breaches will allow the lease to be terminated. These are “conventional” or contractual irritancies. For landlords and tenants alike, this means the drafting of termination provisions is one of the most important parts of the lease.
Where a conventional irritancy is used, recovery of possession becomes a manifestation of the contractual remedy of implement rather than a common law remedy.
Once you realise that you are creating a bespoke enforcement regime your horizons open. You can provide remedies beyond recovery of possession. Interest on arrears is common, but the list is not closed. Parties can agree other remedies provided they are not penalties. The courts see conventional irritancy as displacing common law remedies, so if you want compensation for lost rent, as well as getting the property back, spell that out.
Another source of complexity is the body of rules, mostly statutory, that parties cannot contract out of and therefore do not need to repeat in the lease. That’s why the lease itself is not all you need to read.
Consider two examples. One often comes across a term that says, if certain events occur, often including ‘any breach by the tenants of their obligations under the lease, then the lease hereby granted shall become ipso facto null and void’. The lease doesn’t come to an end just because something happens. The landlord still requires a court declarator and warrant to eject; yet, the fiction is near universal.
Secondly, the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 applies to both irritatancy and rescission. The Act requires landlords give warning for monetary breaches and act reasonably for other breaches.
Conclusion: balancing certainty and flexibility
From very early times, leases have cast longer shadows than ordinary contracts. Special rules have developed to protect those dependant on those shadows. Private regimes are allowed but controlled and there is much parties cannot contract out of. That’s led to leases whose words don’t tell you the whole story, but the opportunity to create sophisticated, tailored contracts that foster benefits for both landlord and tenant and the economic ecologies around them. For anyone negotiating, managing or investing in leased property, understanding the legal framework behind the lease can be just as important as understanding the wording of the lease.
