Biggart Baillie Solicitors

Irritancy of Leases – the facts

Thursday, September 01, 2005

What is Irritancy?

Irritancy is the technical term given to a landlord’s right to terminate a lease early as a result of the tenant’s failure to comply with its lease obligations.  It is the Scottish equivalent of the right of forfeiture or re-entry in England, but there are significant differences. 

When can the Landlord irritate?

Most leases contain bespoke clauses setting out the circumstances which will entitle the landlord to irritate.  These usually include failure to make any monetary payment when due, failure to comply with any non-monetary obligation (such as failure to repair) or a change in the circumstances relating to the tenant (these are normally related to insolvency situations, such as the tenant going into liquidation or receivership).   If there is no express irritancy clause, the landlord can only irritate where the tenant has failed to pay the rent for two years.

What protections does a Tenant have against irritancy?

Prior to 1986 there was nothing to prevent a landlord of a commercial lease using its right of irritancy in an oppressive manner and without even giving the tenant an opportunity to rectify the breach in question (unless specific provisions requiring the landlord to give the tenant a chance to remedy its default had been expressly written into the lease). 

Although the Scottish Courts have always had an equitable power to prevent the misuse or oppressive use of the landlord’s right of irritancy, they were generally reluctant to exercise this power.  A classic example was the case of Dorchester Studios (Glasgow) Limited –v– Stone & Another 1975 SLT 153, where the House of Lords permitted the landlord to irritate the lease as a result of the tenant’s failure to pay an instalment of rent on the due date, even though the tenant offered to pay the arrears in full shortly after that date and before the Court action to enforce the irritancy was raised.

Cases like the Dorchester Studios case prompted the passing of the snappily titled  Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 introducing a number of provisions to protect tenants against abuse of irritancy.  In brief the 1985 Act provides that:

1. For a monetary breach, such as failure to pay rent, service charge, insurance premia etc, the landlord must serve notice on the tenant giving the tenant a minimum period of 14 days (but longer if the lease provides for this) to make payment of the arrears.  The notice must be served by recorded delivery and must state that if the tenant does not make payment within the requisite period, the lease may be terminated. 
2. For a non-monetary breach or a change in the tenant’s circumstances, a landlord is not entitled to terminate the lease if “in all the circumstances of the case a fair and reasonable landlord would not seek to do so”.  If the breach is one which is capable of being remedied in a reasonable time, the tenant must be given a reasonable opportunity to remedy the breach. 

Only if the tenant continues to fail to remedy the breach may the landlord then terminate the Lease.

The 1985 Act gives tenants a limited degree of protection.  Unlike the position in England, however, a tenant has no statutory right to apply to the Court for relief against forfeiture.  There is likewise no right for a sub-tenant to apply to the Court for relief if his immediate landlord’s head lease is irritated.  Termination of the head lease will cause the sub-lease to terminate automatically. 

Are there any protections for chargeholders?

The simple answer to this is no.  The holder of a floating charge or standard security over the tenant’s interest in a lease has no statutory protections.  Unless the lease specifically provides otherwise, a landlord can exercise his right of irritancy and bring the lease to an end without reference to the security holder.  If a lease is to be of any value for security purposes, the irritancy clause needs to contain provisions obliging the landlord to give the security holder notice of any breach which might give rise to an irritancy and allowing the security holder an opportunity to remedy the breach or in an insolvency situation dispose of the tenant’s interest. 

Future Reform

Although the 1985 Act does give tenant some degree of protection, concern still exists as to whether the Act strikes the right balance between providing adequate protection to tenants and retaining an effective remedy for landlords in dealing with defaulting tenants.  The current law can still produce harsh results, as in the case of Dollar Land (Cumbernauld) Limited –v– CIN Properties Limited, where Dollar Land lost the valuable right to an annual income stream amounting to some 22.4% of the rents payable by the occupational tenants of Cumbernauld Town Centre due to Dollar Land’s  failure to pay their rent on time.

As a result, proposals have been put forward by the Scottish Law Commission for further reform to the law of irritancy.  The recommendations of the Commission are that the 1985 Act be replaced by a new comprehensive scheme of statutory regulation.  The main proposals are as follows:

1. The right to terminate should only be exercisable by service of a termination notice on the tenant.
2. Where the breach can be remedied the tenant should be given a reasonable opportunity to remedy the breach.  The landlord should serve a warning notice on the tenant specifying the outstanding obligation and the consequences of failure to perform.  The period allowed for performance should not be less than 28 days.  In the case of a non-monetary breach, the tenant can apply to the Court for more time if the period proposed in the notice is unreasonably short.  Where the period in the notice expires without the tenant having performed, the landlord may terminate the lease.
3. Where the right to terminate is triggered by an insolvency event and where assignation of the tenant’s interest is not prohibited by the lease, the tenant should be given an opportunity to dispose of the tenancy.  As the law currently stands, subject to the “fair and reasonable landlord” test under the 1985 Act and any restrictions placed by insolvency statutes, the landlord would be entitled to irritate immediately unless the lease specifically gave the receivers, liquidators etc a period of time within which to dispose of the lease.  Under the new proposals, the landlord would be required to serve a moratorium notice allowing the tenant at least six months to negotiate an assignation.  During that time the landlord would not be permitted to terminate the lease on account of the insolvency event, but would retain any other right to terminate (subject to statutory control) for any other breach, e.g. non-payment of rent. 
4. In any other case (and these are likely to be fairly rare as most breaches will be remediable) it is proposed that the landlord should be entitled to terminate unless to do so would be a manifestly excessive response to the circumstances of the case.  Again a termination notice would be required and it would need to give at least 28 days’ notice of the proposed date of termination.  During that period the tenant would have the right to apply to the Court to strike down the notice or delay its effect. 

Conclusion

The net result of all of the above, including the proposals for reform, is that care must be taken to ensure that any irritancy clause in any lease suitably protects the parties involved.