The idea of ‘unintended consequences’ is used to explain outcomes of an action that are not foreseen. And that is the likely result of a proposed change in law relating to leases for shops in Scotland.
The Scottish Law Commission has asked for responses to a consultation on reforming a very old piece of regulation called the Tenancy of Shops (Scotland) Act 1949.
The Act was originally introduced during a post-Second World War shortage of retail premises due to the bombing of towns and cities – and there was a fear landlords would profiteer as a result.
It was intended to reduce the risk of smaller retailers being forced out of business by rent hikes. Successful applicants are given additional time, over and above the 40 day notice period to bring a lease to an end, to find new premises and continue to trade in the interim.
It also enables tenants to apply to the Sheriff Court to renew their lease if they have received a notice to quit from the landlord, subject to some exceptions.
Those circumstances are in contrast to the current retail market and in particular to vacancy rates on high streets today.
As a leading law firm headquartered in Scotland, our experience in acting for both landlords and tenants in the real estate sector is considerable. We work on such deals on a weekly basis.
Yet we have no experience of the 1949 Shops Act assisting negotiations in any way.
It is seldom invoked by tenants when dealing with modern-day lease negotiations – and we urge caution in potentially seeking to solve a problem which in practice does not exist.
The fact tenants almost never refer to the Act, nor remark on its limitations, suggests the status quo does not currently present a problem.
Indeed, many of our clients who invest across the UK regard the current Scottish system as an exemplar – especially when compared to some of the challenges presented by security of tenure in England and Wales.
Lease terms in Scotland are already certain (subject to the existing requirement for 40 days’ notice) and both landlords and tenants know exactly when a lease will end and can plan accordingly.
Landlords tell us that the absence of automatic renewal rights provides greater certainty for both them and tenants, swifter transactions, and lower costs.
The last court ruling on the topic found “the mischief which the 1949 Act was designed to address is no longer self-evident today”.
That seems a succinct summary of the situation given retailers are unlikely to suffer hardship due to the closing of a unit in the way a shopkeeper may have when the legislation was originally conceived.
A question posed by the consultation is whether a reformed 1949 Act should have a “gateway” test that ensures that only small business tenants are eligible to seek renewal of their leases.
We see an immediate difficulty with a “gateway” test for what constitutes a retailer.
For example, many landlords who operate large shopping centres or retail parks lease kiosks to operators who are small businesses that would not otherwise have the opportunity to trade in such environments.
Should a reformed 1949 Act grant such kiosk operators enhanced security of tenure then landlords may simply vote with their feet and not grant leases to them at all.
A complex form of enhanced security of tenure may also frustrate refurbishment and redevelopment of retail assets, when currently as an investing landlord you are normally able to plan for lease expiries with certainty.
Both of these outcomes would be contrary to what was originally intended by reforming this area of legislation.
The simple fact is that in the current market, we see no great desire on the part of anyone involved to use or replace the 1949 Act.
It is an historical anachronism.
That’s why we believe the best solution would be to repeal it altogether, rather than reform, which risks creating uncertainty for landlords – who may opt to invest elsewhere.