Strange as it may sound, during the lifetime of a Scottish lease of commercial property, rarely is there as high stakes a moment as the point at which the lease is – on the terms of the document – due to come to an end.
Unlike the English and Welsh position, where the lease ends at the end of the term, in Scotland steps have to be taken to bring a lease to an end. Failure to do so is likely to mean that lease can continue beyond its “ish” (the end date) by the doctrine known as “tacit relocation”.
Against this background, the Scottish Law Commission’s recent report on Aspects of Leases: Termination proposes a restatement of the rules which govern the termination of leases of commercial property in Scotland. The lead commissioner for the project, David Bartos, stated: “The common law of tacit relocation is unclear and uncertain.”
The Scottish law of commercial leases has its roots in Roman law, common law and elderly statutes such as the Leases Act 1449 (the Landlord and Tenant Act 1954 does not apply). The system is therefore largely based on common law rules which the SLC perceives to be behind the lack of clarity and certainty. Tacit relocation is a totemic example of a doctrine which can cause unknown and unintended consequences for landlords and tenants.
How do you end a Scottish lease?
To terminate a lease on the termination date in Scotland, a party to that lease must serve notice, or otherwise make their intention to bring the lease to an end clear. There are some exceptions to this rule that have been applied by statute which are beyond the remit of this article. The termination date of the lease is therefore better understood as being an “option” to terminate.
Notice of usually not fewer than 40 days before the termination date must be given. The form of the notice to be served also requires the careful attention of parties.
Despite its long history, there remains confusion as to the precise meaning and effect of tacit relocation. As recently as October 2021, the Inner House of the Court of Session has considered the effect of communications between parties and whether they dislodge the application of tacit relocation (Rockford Trilogy Litd v NCR Ltd [2021] CSIH 56; [2022] SC 90).
How does tacit relocation operate?
Tacit relocation is limited almost exclusively to leases of commercial property – it is not applicable to residential or agricultural leases. In the event that no valid notice to quit is served by either party, and the parties have not otherwise made their intention to end the lease clear, a commercial lease continues beyond the contracted term as follows:
- If the lease is for a period of one year or more, the lease will continue for one year beyond the termination date;
- If the lease is for a period of less than one year, the lease will continue for the same period as the lease term (eg a six-month lease will continue for a further six months).
The terms of the lease other than the duration remain the same following the operation of tacit relocation insofar as they are consistent with the new term. A lease is then able to renew again and again by tacit relocation until steps are taken by either party to bring the lease to an end.
What are the issues with tacit relocation?
Tacit relocation has a branding problem. Few people other than property professionals realise it exists, which is unfortunate considering its significance. The term “tacit relocation” also does not immediately conjure a sense of its meaning in the layperson’s mind.
Tacit relocation and the relevant rules on the service of notices to end the lease have their basis in the common law. The effect of this is that both the doctrine and the practical steps required to end a lease are not accessible to a layperson without specialist advice.
Parties are presently stuck with tacit relocation regardless of their preference – they are not permitted to contract out of it. Any contractual term seeking to avoid the automatic continuation of the lease rule is not effective. Where commercial parties have a stated intention not to be bound by such a rule, it is unfortunate that the law of Scotland continues to step in to impose it.
The SLC report
Following the publication of a discussion paper in May 2018 and consultation held in December 2021, the SLC published its report on 5 October 2022.
The report concludes that tacit relocation should be codified. The SLC has published its draft Leases (Automatic Continuation etc.) (Scotland) Bill.
The key provisions of the Bill and report – insofar as they relate to tacit relocation – are as follows:
- Codifying tacit relocation under the new name of “automatic continuation”. Commercial leases will “continue” following their termination date for a period of one year (for leases of one year or longer) or for the same period as the lease (for leases of under one year);
- Parties may contract out of the automatic continuation of the lease, or may adopt a flexible approach and instead vary the period of the continuation to a minimum of 28 days or seven days (if the lease is for under 28 days); and
- Creating a statutory framework setting out how parties must serve notices to quit (ie notice to terminate a lease served by a landlord) and notices of intention to quit (ie served by a tenant). This includes detail such as whether service of notices is required, what format they must be in, and the period of notice to be given.
An overdue modernisation?
The reforms in the SLC’s report are not radical in the way that some had anticipated. It was speculated that the SLC may even go as far as giving parties the option to “contract in” to tacit relocation. The conclusion of the report and the content of the draft Bill amount more to a refresh of the existing law, rather than a novation.
Putting these rules of significant commercial importance on a statutory basis is to be welcomed. This alone will significantly improve the awareness of laypersons of what is required of them to bring their lease to an end.
Enabling parties to contract out of automatic continuation – or vary its terms – serves to bring Scots law into the 21st century. It is only proper that in modern times the law is there to uphold rather than overwrite the commercial agreement reached between parties.
It will be interesting to see what the default terms for commercial parties would become, should the draft Bill become legislation. Will they opt to retain the flexibility which “automatic continuation” offers parties at the end of the lease, or the certainty of having a fixed termination date? Time will tell.
An oversight on service of notices?
The SLC’s proposals may create more issues than they resolve in one respect. By introducing rules on the notices which may be served by parties seeking to terminate a lease, the SLC risks creating a system where there are different rules for the service of notices under the same lease.
The draft Bill covers only notices which terminate a lease at the termination date. It does not cover other important notices which can be served in the duration of a lease, including break notices, and notices seeking a landlord’s consent.
It would be desirable, potentially as a future project, for the SLC to review the law of the service of notices as a whole. Having a law of notices which has application across sectors would be preferable to introducing multiple new statutory regimes which apply in addition rather than in place of the existing law. In the draft Bill, the SLC has proposed yet another statutory regime which will apply in addition to notices to be served under, for example, the common law or the Electronic Communications Code.
Scottish practitioners, landlords and tenants alike will largely welcome the modest reforms proposed by the SLC. However, in terms of creating clarity for the law concerning the service of notices, it unfortunately appears that this opportunity has been missed.
Steven Blane is a senior associate and Brian Grierson isan associate in the litigation team at Pinsent Masons LLP
