Changes aim to bring commercial leases legislation into 21st century - Neil Brannigan and Giorgio Basile

It will surprise most people to hear that, in Scotland, a commercial lease will not automatically terminate at the end of the agreed contractual term, but will continue unless landlord or tenant expressly serves notice to terminate.

In Scots law, this peculiarity is known as ‘tacit relocation’, which means renewal by silence. To properly terminate a lease, the landlord or tenant must ensure they formally notify the other that the lease is terminating (‘notice to quit’). For example, for a lease originally granted for a year or more, if neither gives notice, or if the tenant remains in possession without the landlord’s objection, the lease will continue on the same terms for a further year.

For each party, this could present a particularly unwelcome development. A tenant aiming to enter a lease for another property might find themselves trapped paying two rents – the existing lease having been extended. Similarly, a landlord might find themselves stuck with a tenant they have no wish to rent to again, unable to arrange terminal dilapidations and in breach of contract with any new intended tenant.

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With the commercial letting industry contributing £4.8 billion to the Scottish GVA in 2018, the Scottish Law Commission has been intent on reforming tacit relocation since 2018, calling the present law “uncertain, inaccessible and outdated”. It has since produced a draft bill, the Leases (Automatic Continuation etc) (Scotland) Bill, to bring the law into the 21st century. Can the new Bill make the procedure for terminating leases clear and unambiguous?

Neil Brannigan, trainee, TLT
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Step one has involved renaming “tacit relocation” to the more accessible “automatic continuation”. Just as with tacit relocation, the period of automatic continuation is referable to the original lease period.

More importantly, it is now clear that official “notices to quit” are required for terminating leases. The new Bill provides no notice is required for leases of less than 28 days, and provides different notice periods linked to the original lease duration. If the original lease was longer than six months, the parties will have to give written notice to quit, or intention to quit, at least three months prior to the termination date.

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In this way, the Bill sets the record straight on whether formal notices are required in the first place. The case of Rockford Trilogy Ltd v NCR Ltd (2021) muddied the waters on this point, deciding that even without serving an official notice, a tenant will be able to avoid tacit relocation if their intention to terminate was evident in email communication with the landlord. The case left a question mark on whether official notices to quit were essential. The new Bill makes it clear that a notice must be unconditional, clear and given in formal writing. - a positive change and move away from Rockford.

The next, perhaps most significant, change has been to allow parties to ‘contract out’ of automatic continuation. This means parties can agree when entering a lease that it will end on expiry of its contractual term. This introduces a welcome degree of flexibility; however, it requires the parties to remember to draft such an opt-out clause at the outset of the lease and is still, as per the current law, subject to any contrary actings of the parties. Of course, parties often currently make provision contractually that a lease will only continue monthly or quarterly at the end of the contractual term due to the uncertainty of whether tacit relocation could competently be contracted out of.

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Giorgio Basile, trainee, TLT

Other notable changes are the Bill’s introduction of saving provisions for minor notice errors of the addressee and the termination date (the latter particularly being very welcome), the requirement for UK service addresses for leases over a year, and the introduction of a new implied term. This implied term will specify that a tenant who overpays rent, or insurance premiums will have an automatic right to have this repaid. Currently, it is unlikely a tenant will be able to oblige a landlord to repay such sums in the absence of specific contractual provision. More certainty will undoubtedly be welcome in this area.

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While this Bill may represent a welcome step forward, it will be interesting to see what final version will be enacted after consideration by the Scottish Parliament.

Neil Brannigan and Giorgio Basile are trainees, TLT

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