Modern commercial leases contain a termination date and most tenants and landlords probably think it clear the lease will end on that date. However, it has come as a surprise to many that this isn’t always the case.
When or whether a lease terminates is fraught with uncertainty, and the Scottish Law Commission (SLC) is seeking views, by 14 September, on options for reform of some of the problems around termination of commercial leases, in its recently published discussion paper.
The understandable expectation is that when a lease expires you simply hand back the keys on the due date. The reality is quite different. In fact, the law requires one or other of the parties to give clear advance notice that the lease is to come to an end.
If neither does, the lease automatically runs on (a lease of more than a year will continue for another year on the same terms). This effect is called “tacit relocation” and is seldom directly addressed in the lease. This Rumsfeldian “unknown unknown” can have negative repercussions for both landlords and tenants.
For example, expecting a lease to end on the stated date, a landlord may have agreed a new tenancy with another party at a higher rent.
If neither the landlord or tenant serves a notice to quit, and the tenant continues in occupation, both parties’ silence means that tacit relocation applies: the tenant stays on for another year at the existing rent and the landlord loses out on a more lucrative tenancy.
Conversely, a struggling tenant, relieved a lease is coming to an end, could be dismayed to discover that, by failing to give 40 days’ notice to quit, the lease continues and they are tied to paying rent for a further year.
One option is for tacit relocation to be dis-applied, allowing the parties to “contract in” if they wish, but it is certainly desirable also to raise awareness of what is required to end a lease effectively. Typically, 40 days’ written notice is required, although a longer period may be necessary for large areas.
Notice need not be in writing, provided it is explicit, but that can lead to misunderstanding and disagreement. The SLC’s discussion paper proposes a notice to end a lease should be in writing, with perhaps a longer period allowed – three or six months – that would clarify the law.
While Scotland has little legislation regulating commercial leases, one exception is the Tenancy of Shops (Scotland) Act 1949. It provided protection for small shopkeepers in the period after the Second World War, by allowing them to apply to the court to renew their tenancy for up to a year after receiving notice to leave.
This Act is now rarely used, and some recent (unsuccessful) attempts by larger retailers to rely on it were generally regarded as an abuse of the spirit of the Act. The discussion paper proposes its repeal.
Irritancy is a remedy open to landlords to end the lease when the tenant is in breach of its terms, and most stakeholders consulted consider that it works reasonably well, and there is no pressing need for reform. Respondents, if they disagree, now have the opportunity to say so.
Another thorny issue is how rent paid in advance should be apportioned if the lease ends during the period the rent covers. Is the tenant entitled to reimbursement of any of that rent?
There is no clear rule on this issue, and what legislation exists only applies to rent paid in arrears in Scotland. While some leases, like the Property Standardisation Group leases address this point specifically, many do not. Parties should make sure the point is addressed in the lease.
A lease may (or may not) end when the landlord and the tenant become the same person, such as where a tenant acquires the landlord’s title to the property. The legal term for this effect is “confusion”, and there is real confusion about this effect – even the courts and legal commentators disagree.
The SLC discussion paper clearly sets out the pros and cons of various options for reform, though, in practice, the Land Register will not merge the property and leasehold titles unless specifically asked to, but considerable doubt persists about the true effect of confusion, and the status of sub-leases.
To avoid complicated and time-consuming workarounds, an unequivocal statement of what the law is (or should be), is required to put the position beyond doubt. Reform to clarify the position around the termination of commercial leases is very welcome, always bearing in mind the potential unintended consequences of such reform.
Those that wish to make their voice heard and contribute to the SLC consultation should visit: www.scotlawcom.gov.uk/law-reform/consultations/
- Ann Stewart is a property and real estate adviser with legal firm Shepherd and Wedderburn LLP