Scotland v England (and Wales) - Leases on either side of the border

England and Wales

Scotland

Security of Tenure

Tenants have a statutory right to renew a commercial lease under the Landlord and Tenant Act 1954 unless the parties have “contracted out” of this right.

Where the lease is not “contracted out”, the tenant benefits from security of tenure. At the end of the contractual term, the tenant occupies under a statutory extension. Either party can then terminate it; and the tenant has a statutory right to renew the lease unless the landlord can establish one or more of the limited statutory grounds for resisting renewal.

Where the statutory right has been excluded, there is no right for the tenant to remain in occupation at the end of the term.

Other than one obscure exception applying to shops, there is no legislation which provides business tenants with security of tenure.

At the end of the contractual term, if neither party serves notice to terminate, the lease automatically renews for a further year on the same terms.  There can be exceptions to automatic renewal, but those will be determined by the parties’ actions. 

Formation

Usually, leases must be signed by the parties as a deed. In limited circumstances, leases for terms under 3 years can be signed underhand.  

Leases are usually executed in counterpart so that one is executed by the landlord and one is executed by the tenant.  Both counterparts are dated and “swapped” on completion. 

Since the pandemic, leases are increasingly executed electronically.  The Land Registry now accepts such execution subject to certain procedural steps being satisfied.

The parties can proceed straight to lease, but it is more usual to proceed by way of missives (see textbox). 

Missives are signed on behalf of the parties’ lawyers as agents for their clients and bind the parties before they sign the lease.

Leases can now be executed in Scotland in counterpart, but electronic execution is not commonly used.

Registration

The Land Registry was established in 1862 as a non-governmental department to provide a reliable record of information about ownership and interests affecting land.  The Land Registry provides a government guaranteed land title.  The Land Registration Act 2002 expanded the categories of registrable leases so that when a lease is granted today:

• With limited exceptions, it must be registered at the Land Registry if the term is longer than 7 years; and
• For leases which are not capable of being registered with their own title, the Land Registry can note them against the landlord’s title.

The Land Register of Scotland was introduced in 1981.  Like the Land Registry, it records ownership of land and property and provides a state backed guarantee of title. Leases for longer than 20 years must be registered in the Land Register.   

Leases for terms under 20 years are not registrable, but are recorded in a public court register to facilitate a quicker court procedure for monetary defaults under the lease.

SDLT, LTT and LBTT

Stamp duty land tax (SDLT) in England is a tax on land transactions, defined as any acquisition of a chargeable interest.  Therefore, a return is required following the grant of most leases for valuable rent.  Further returns are only required in limited circumstances.

SDLT rates are set by the UK Government and HM Revenue and Customs collects and manages SDLT.

Land Transaction Tax (LTT) is the equivalent tax in Wales.  Rates are set by the Welsh Government and The Welsh Revenue Authority collects and manages LTT.

Land and Buildings Transaction Tax (LBTT) replaced SDLT in 2015 and is payable for most leases. 

LBTT rates are set by the Scottish Government and Revenue Scotland collects and manages LBTT.

Unlike SDLT and LTT, LBTT tax returns need to be submitted to Revenue Scotland by the tenant every 3 years (irrespective of lease changes) and on lease expiry. 

Varying Leases

Variations extending the lease term or increasing the demise will result in a surrender and regrant.  This may have several unintended consequences e.g. SDLT and registration.

Variations will not result in a renunciation and are often used for simple changes.

Landlord’s Consent

Under the Landlord and Tenant Act 1988, if a lease allows a tenant to deal with its interest with landlord’s consent, the landlord is under a duty to give consent in a reasonable time unless it is reasonable not to consent.

There is no obligation for the landlord to act reasonably unless specifically stated in the lease. 

Assignment (England and Wales), Assignation (Scotland)

Original tenant liability was abolished by the Landlord and Tenant (Covenants) Act 1995 so tenants will no longer be liable for the tenant covenants once they have assigned the lease. 

The only exception is where the landlord has required an authorised guarantee agreement (an AGA) from the outgoing tenant as a condition of consent to assign, in which case the outgoing tenant remains liable until the lease ends or is assigned again.  Leases usually specify that an AGA must be provided. 

On assignation, the outgoing tenant is relived from all liability to the landlord. 

An assignation is not binding until intimated to interested parties, including the landlord. 

Forfeiture (England and Wales), Irritancy (Scotland)

The right to forfeit (or re-enter) must be specifically reserved in a lease.  Most leases detail the specific circumstances where the right arises, but the landlord must comply with statutory and common law rules.  Unless there has been non-payment of rent, a landlord will usually have to serve a prior notice under section 146 of the Law of Property Act 1925. 

Irritancy cannot be overridden by the lease terms and requires notice to be given to the tenant for a breach of covenant. 

A landlord can only take steps to terminate the lease where it would be reasonable to do so.  This is more straightforward with monetary breaches, but there is a statutory process. 

Dilapidations

Dilapidations generally refer to items of disrepair that arise due to a tenant’s breach of its repair obligations.  The landlord’s remedies depend on the specific lease terms and are restricted by statute.  Claims are limited to the diminution in the value of the landlord's reversion caused by the breach and may be reduced to zero if the landlord has done works after the tenancy that would render the breaches effectively irrelevant.

The dilapidations’ value is the loss to the landlord.  This means that the loss could exceed the value of the premises. 

Improvements

Under the Landlord and Tenant Act 1927, a landlord cannot unreasonably withhold consent to the tenant making “improvements” to the premises. Tenants have a statutory right to compensation for improvements at the end of the term, albeit these provisions are seldom relied on.

Unless specifically stated in the lease, the landlord does not have to act reasonably in consenting to improvements and there is no right to compensation for any that the tenant carries out.

Damage and Destruction

The lease will continue irrespective of damage or destruction unless the parties have agreed a right to terminate the lease.  Mutual rights are therefore usually incorporated.

Under common law, destruction of the premises terminates the lease automatically.  The lease usually overrides this and provides that the term will continue.

Scottish Translator

Assignation

The Scottish term for assignment.

Heritable Title

Broadly equivalent to a freehold title in England and Wales.

Irritancy

The Scottish equivalent of forfeiture

Intimation

The Scottish equivalent of a notice of assignment. 

Missives

An offer to lease which attaches the agreed form of lease and which is then accepted and forms a legally binding contract.  Similar to an agreement for lease.

Renunciation

The Scottish term for surrender.