Tacit Relocation in Scottish Commercial Leases

At the end of last year, I produced a blog on the withdrawal of the Leases (Automatic Continuation etc) (Scotland) Bill – legislation aimed at reforming how commercial leases come to an end [How the Bill’s Withdrawal Affects Scottish Property Transactions]. As a result of the withdrawal of the Bill, the existing rules based on the doctrine of tacit relocation remain in place.

In the last few months, I’ve had several situations which have highlighted the importance of understanding how the law operates in relation to the ending of a lease at the termination date. Knowing what the law says, and getting things right, is important to both landlords and tenants.

Issues often arise due to the common misunderstanding that a lease simply ends on the termination date. That is not the position in Scots law.  Generally, for leases of commercial property, unless clear written notice is given to terminate not less than 40 days before the end date, it will continue on the basis of tacit relocation.  For the majority of commercial leases, this will be for a period of one year, essentially on the same terms as the existing lease. This result is often unintentional, and sometimes unwanted, by the landlord and/or the tenant.

Considering some real-life scenarios where I’ve recently been asked to help clients highlights the importance of being aware of the legal position and timeously taking legal advice and any necessary action.

Scenario 1

We were acting for the tenant who had agreed with the landlord to buy the property it leased. Notwithstanding this agreement, the landlord served a notice to terminate the lease, and the tenant questioned why this had been done, given that when the property was purchased so owned by the tenant, the lease would no longer be relevant.

Serving the notice protected the landlord’s position to ensure that if the sale did not complete, either:

1. the landlord could negotiate the terms of an extension with the tenant (perhaps with an increased rent or other more favourable terms to the landlord) or;
2. the lease would be terminated, and the landlord would be free to deal with the property as they desired, including leasing to another party.

If the notice had not been served and our client did not ultimately buy the property, the lease would then have continued under tacit relocation.

LESSON: Even if plans for the leased property may mean that a notice to quit would not be needed, send a ‘protective’ notice in case the position changes.

Scenario 2

A lease was due to end soon, and the landlord and tenant had been discussing the terms of a lease extension directly between them.  We were then approached with a view to documenting the extension.

Serving a similar “protective” notice (as discussed in Scenario 1 above) to terminate the lease pending finalising the extension was raised. This was, however, not possible as the landlord’s solicitors were contacted less than forty clear days prior to the end date of the lease, so it was too late to serve such a notice.

If the extension could not therefore be agreed, the lease would continue on the basis of tacit relocation. The rent agreed for the proposed extension was significantly higher than in the existing lease, so if the tenant did not ultimately agree to the extension, the landlord would suffer financially, with the lease continuing at the current rent.  If the landlord changed its mind and did not agree to the longer lease extension, the lease would continue for a year, and the tenant would not have the comfort of the extended lease term proposed for the variation.

LESSON: If you are a landlord or a tenant, ensure you diarise the correct termination date of your lease sufficiently in advance of the forty-day clear date to ensure that if any notices to terminate the lease are required, they can be timeously served.

Scenario 3

The final example is given for contrast of the legal position in Scotland and England. Tacit relocation is a concept of Scots law and does not exist in England. I was recently acting for Scottish clients taking their first lease of a property in England. The Heads of Terms provided that the lease was to be contracted out of the security of tenure provisions in terms of the Landlord and Tenant Act 1954. Very briefly, this is an English Act which provides rights to a tenant to automatically renew their lease and to stay in the property when the term ends.

Contracting out of the 1954 Act means that the lease simply ends on the termination date. This was easily understood and readily agreed by our clients, and simplifies matters at the end of the lease.

One of the proposals for reform in the Scots law of tacit relocation was to make the legal position more similar to that in England.  This does have a degree of support, with a view to introducing clarity and certainty into the position relating to lease termination.

HOW CAN WE HELP?

Our commercial real estate team advises landlords and tenants across Scotland (and England and Wales) in relation to all aspects of leasing. In particular, we can:

• Review your current leases and identify risks associated with tacit relocation
• Advise on lease renewal and termination strategies tailored to your operational plans.

If you would like advice on your commercial leases or wish to discuss any of the issues raised above, please get in touch with our team.

The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek a solicitor’s advice from Gilson Gray.