Proposed legal changes to terminating commercial leases under scrutiny

The proposed legislation is at the committee stage at Holyrood

The Scottish Parliament is currently scrutinising a Bill that, if passed, would bring about significant changes to the law on ending commercial leases in Scotland. This will be of significant interest to both landlords and tenants in Scotland.

At present, if a party wants a lease to end on its contractual end date (not any break date), then one party must indicate to the other that the lease is not to continue on its current terms or is to come to an end. That needs to be done no less than forty clear days before the contractual end date. The purpose of doing this is to prevent a legal rule called “tacit relocation” operating. “Tacit relocation” is a default rule, which applies, in the absence of any timeous indication mentioned above, and means the lease continues on its current terms for (in most cases) a further year.

The Leases (Automatic Continuation etc.) (Scotland) Bill proposes to change the present position in several ways. The main way is by replacing “tacit relocation” for the leases to which the Bill applies with a similar but different concept, using modern language, called “automatic continuation”.

Kieran Buxton was invited to comment on the proposed legislation

The Bill is currently being scrutinised by the Delegated Powers and Law Reform Committee of the Scottish Parliament at Stage 1 of the three-stage legislative process, following a consultation period and the Government has engaged thoroughly with this process, receiving responses from a range of stakeholders, including Burges Salmon, and many of the comments raised important points about the substance and drafting of the Bill in its present form.

The Committee is very keen to ensure that the Bill provides legal certainty so far as possible and a few weeks ago I had the privilege of giving evidence at the Scottish Parliament on the proposed legislation.

If it becomes law in its present form, existing leases in place would be affected by most parts of the Bill – but subject to a set of complex rules governing the ‘transition’ between the current law and the proposed new law. What, then, are the key changes that would be brought about by “automatic continuation”? There are many, and they include:

(1) setting out stricter, formal requirements to be included when a notice needs to be given;

(2) for the most part, requiring written notice;

(3) confirming that a lease can opt out of ‘automatic continuation’; and

(4) changing the deadline for giving notice, if required, to be three months before the contractual end date, unless otherwise agreed by the parties in the lease.

There are a suite of other isolated reforms proposed within the Bill, including some reforms that would affect how leases are to be ended due to monetary breaches of the lease by the tenant (known as the law of “irritancy”) and setting out a default position obliging a landlord to repay a tenant in respect of any payments that relate to the post-lease end date period, where the lease is ended other than by irritancy.

My sense from the Committee session I attended is that, if the Bill is to progress further through the legislative process, several important, rather than technical, amendments will be proposed. From the discussion at the session, it could even include a proposed amendment such that the Bill only applies to leases entered into after the Bill becomes law.

I was thankful for the invitation to give evidence to the Committee and to play a role in the potential reform of this important area of law. This is testament to the strength of the Built Environment sector team at Burges Salmon and the high level of engagement from our team on proposed legal changes and how they might impact our clients.

Kieran Buxton, associate in the Scottish Dispute Resolution team at at UK law firm Burges Salmon