One of the most common questions I receive from clients is around the termination of leases, with confusion reigning around the terminology and procedures used in Scotland.
It is not surprising that when given a remit to consider the law of commercial leases, the Scottish Law Commission (SLC) first turned its attention to the law relating to the termination of leases at expiry.
In October 2022, following consultations, the SLC published its Report on Aspects of Leases: Termination. A draft bill, the Leases (Automatic Continuation etc) (Scotland) Bill, has also been published – proposing changes to the termination of leases in Scotland.
Currently, in Scotland, a lease does not end on its expiry date, unless proper notice has been given by either the landlord or the tenant.
If no such notice is served, the lease will continue on the same terms for a further year - if the original term is for a year or more - or for the same duration of the original lease, if less than a year. This is by virtue of a doctrine known as tacit relocation.
The ‘proper notice’ required is a notice to quit - from landlord to tenant - or notice of intention to quit - from tenant to landlord - that generally requires to be served at least 40 days ahead of the expiry date.
Landlords and tenants are often surprised to find that their leases have not come to an end at the stated expiry date, and even for parties familiar with the legislation, a notice period of 40 days can be viewed as too short to allow a landlord to viably market and agree terms with a new tenant, and for a tenant to remove what might be a valuable and complex fit-out.
There is one exception to the law as stated above, with the Tenancy of Shops (Scotland) Act 1949 allowing a tenant to extend its lease for a further year on application to the court.
Although the SLC consultation did ask for views on the Tenancy of Shops Act, the Bill does not propose any amendments to this. It is still on the SLC’s agenda, however, and a discussion paper is expected shortly.
The SLC, reflecting a widely held view amongst respondents to its discussion paper, took the view that the common law rules on tacit relocation formed ‘an uncertain and illdefined foundation on which to build any reforms’, and instead the Bill provides for a new statutory scheme to clarify and reform the law.
The main proposals in the Bill include:
- Tacit relocation is renamed ‘automatic continuation’ – the intention being that this is more easily understood
- A new statutory code is introduced to replace the previous common law
- Confirmation that, while automatic continuation would still apply, parties are free to contract out of this
- Confirmation of the period and effect of automatic continuation
- New notice periods are introduced
- New rules are proposed to govern form and content and methods of service of notices to quit
Automatic continuation still to apply
The default position remains that a lease will continue beyond its stated termination date unless it is terminated by notice - of the prescribed period and in accordance with the new requirements, by agreement between the parties or because the parties have contracted out of the giving of notice.
The proposed legislation states that ‘a lease…may include a term (however expressed) the effect of which is that the lease will not continue after its termination date’. Confirmation of this legal position is welcome, but questions will remain as to what clauses in existing leases will constitute a ‘no warning removal clause’ and for new leases the parties will need to take a view at the outset as to how they want to deal with the position at expiry.
New notice periods
The proposed new default notice periods, which the parties are at liberty to amend, are:
- For leases of six months or more, notice needs to be served at least three months prior to the expiry of the lease
- For leases of less than six months, notice of at least half the length of the lease needs to be given and no notice is required for leases of less than 28 days
During the consultation, some parties argued that whilst the current 40 days is much too short a period, even three months is not long enough.
Most current break clauses negotiated in the market provide for a minimum of six months’ notice. Applying the same logic to termination at expiry would give a landlord more time to secure a new tenant and would give a tenant a more realistic period within which to remove from the property and, if required, source alternative premises.
However, the SLC decided that the period in question should not oblige parties to decide whether they wish to continue the lease too far in advance of its agreed termination date and settled on three months. These periods can be varied by the parties to the lease, but for existing leases that do not contain any such agreement the default position will apply.
Period and effect of automatic continuation
If a lease does continue automatically after its expiry date, the new rules will mean that for leases of over one year, the period of continuation is one year or such shorter period - of not less than three months - as may be provided in the lease.
For leases of between 28 days and one year, the period of continuation is the original duration of the lease or such shorter period - of not less than 28 days - as may be provided in the lease. For leases of less than 28 days, the period of continuation is the original duration of the lease; and as at present, the lease continues on the same terms as before.
What happens next?
It remains to be seen whether the Scottish Government will find space for these proposals in its legislative programme.
What is certain, however, is that the law in this area would benefit from clarification and until such time as reforms are brought in, Scottish practitioners can expect to continue to field calls from clients looking to clarify whether their lease will end when it says it will.