- the property is occupied, and hopefully kept heated and repaired (to a degree);
- there may be some income inflow, albeit hard won, sporadic and not as much as is due; and
- perhaps as important as any income stream, the rates liability does not revert to the landlord.
However, there often comes a time when either the owner is relatively confident that a new potential occupier could be secured or is just fed up with the defaulting tenant, and so the instruction is issued to the owner's solicitor to terminate the lease for non-payment of the overdue sum. So the question is, what is the overdue sum? The answer is, perhaps, not quite as simple as you might think.
Irritating (or terminating or forfeiting) the lease of a Scottish commercial property
Before considering what is the overdue sum, I first want to mention the Scots law rules on irritancy for failure to pay a sum of money - as they are relevant to the question.
In Scotland, no matter what the lease says, statute dictates that a landlord of a commercial property cannot irritate (ie terminate or forfeit) the lease for a monetary breach unless it has first given fair warning and the debt has still not been paid.
The rules require the landlord to serve notice on the tenant (which I'll call the "Warning Notice") which:-
- requires the tenant to pay the sum due, together with any interest on that sum in terms of the lease, within the period set out in the notice - which period can't be less than 14 days; and
- states that if the tenant doesn't comply, the lease may be terminated.
Only if the sum demanded has not been paid within the notified period can the landlord proceed to terminate the lease.
Now, to get back to our question, the recent case of Shetland Leasing & Property Developments Limited v Younger considered the position of interest on rent arrears - in the context of whether it is part of the overdue sum and how that affects what must appear in the Warning Notice.
Interest due on the rent or other sums in arrears
In this case, the tenant (Mr Younger) was in arrears with several months' rent. Solicitors for Shetland (the landlord) served a Warning Notice on Mr Younger which noted that he had failed to pay £10,167.64 in rent and interest on it at 3% over Clydesdale Bank base rate in terms of the lease (but without stating the exact amount due in interest). The notice went on to say that if the rent (not mentioning the interest) was not paid within 14 days then the lease may be terminated.
Nothing was paid by Mr Younger and, once the 14 days had expired, Shetland's solicitors served a formal notice terminating the lease. Mr Younger challenged the termination on the grounds that the Warning Notice had been defective. He tried various arguments, including that the notice was unclear as to whether the £10,167.64 included interest and, as the period to which the £10,167.64 rent related hadn't been set out in the notice, it was impossible for him to work out how much interest was due on the arrears.
The Court agreed with the landlord that the notice was not defective (in this or any other respect). Its reasons, as regards the interest arguments, were:-
- The lease required the tenant to pay interest on unpaid rent from the due date for payment until payment (of the rent) was actually made. It followed that until the rent was paid, the interest could not be calculated - and indeed the obligation to pay the interest did not arise until after the arrears of rent had been paid.
- As the Warning Notice requirement was to demand payment of the rent together with any interest on it in terms of the lease, it was not necessary or indeed even appropriate for the Warning Notice to include a demand for the interest - as such was not yet due in terms of the lease.
- In this case, although the Warning Notice had referred to interest being due, it had not demanded payment of any amount of interest as part of the threat of irritancy - only the rent arrears required to be paid.
Take care not to demand too much
Most leases contain similar wording on interest to that set out in the lease in this case ie to the effect that interest runs for the period from the due date until payment of the principal sum and they do not go on expressly to allow the landlord to issue interim demands for interest as it is accruing on the debt.
Therefore generally the lesson from this case is to restrict sums demanded in Warning Notices to the principal sums that are overdue, and to leave interest to be demanded later. This will involve two notices (and therefore, possibly, slightly more cost) - but at least it ensures that the notice for the larger amounts of principal is not at risk of challenge on the grounds of inclusion of a sum that is not yet due.