Proposed legal reform could see commercial leases in Scotland end automatically at their termination date, providing much needed clarity for landlords and tenants.
Now, a lease automatically continues by default unless either party takes action to end it. This is currently known as tacit relocation.
It can also happen unintentionally, even if notice has been served. For example, if a landlord continues to accept rent, or a tenant carries on using the premises.
Given the automatic continuation period is 12 months for leases of a year and longer, and the often-significant financial and commercial ramifications of an unintended lease extension for both parties, it’s easy to see why the current common law approach gives rise to considerable uncertainty and increases the chance of disputes.
There was also uncertainty over whether parties could contract out of tacit relocation, or give immediate notice to avoid the lease being continued at the expiry date.
This area of law has needed reform for some time.
With that in mind, the Scottish Law Commission has published a report suggesting valuable improvements to the current regime that will bring welcome change for landlords and tenants.
Background
The commission published its Report on Aspects of Leases: Termination(Scot Law Com No 260) in October last year, recommending reform of the way commercial leases are ended.
The report follows a 2018 discussion paper and a consultation on the draft bill my colleague Hannah Patience wrote about last year.
The report recommends legal reform in four main areas —
- Tacit relocation should be modernised and renamed automatic continuation
- Changes to how notices are served to prevent automatic continuation
- Inclusion of an implied term in new leases that rent paid in advance must be returned to the tenant if the lease is terminated before the rental period ends
- Additional recommendations on irritancy notices, which a landlord uses to bring a lease to an end if a tenant defaults
Automatic continuation overview
The Scottish Law Commission-proposed reform says automatic continuation occurs if the tenant or landlord doesn’t properly serve notice, or if the tenant leaves the property without the landlord’s acquiescence.
A significant proposal is the lease can expressly exclude automatic continuation.
Being able to contract out of automatic continuation is a safety net for tenants. They know exactly when a lease ends, and it’s something of a warning for landlords to make sure they’re on the ball when it comes to negotiating new leases, or indeed finding new tenants.
The recommendations also say a notice of intention to quit would only prevent automatic continuation if the tenant unconditionally states they intend to leave on the termination date.
Rockford Trilogy Ltd v NCR Ltd 2021 concerned a commercial lease where neither party served a notice to quit.
The court held an email from the tenant saying they would stay, but only subject to certain conditions, was sufficient to demonstrate tacit relocation didn’t apply.
The Scottish Law Commission recommends this decision is reversed, adding to prevent automatic continuation, the tenant ought to have unconditionally said they intended to leave on the termination date.
Answering concerns the current notice period doesn’t give tenants enough time to find alternative premises, or the landlord enough time to find new tenants, the report recommended the current 40-day notice period (unless the lease expressly states otherwise) is increased to three months for leases of six months or longer.
The commission recommended a one-month period for shorter agreements.
What types of leases does this apply to?
The new law would apply to all leases, following a one-year transition period. This would include any historic leases entered into previously. This is subject to express terms in existing leases still being bound by those terms.
What now?
The recommendations will bring considerable improvements and clarity (which may prove useful even in terms of attracting investment), as well as protection for tenants in Scotland.
Over now to the Scottish Government to take steps to make them a reality.