Tacit Relocation
The common law rule of tacit relocation frequently means that, commercial landlords and tenants are unaware that a lease does not end automatically on its termination date. Instead, unless a valid notice to terminate the lease has been served by either party timeously (typically a minimum for 40 days before the termination date) and the intention to terminate is made clear, the presumption is that the parties want the lease to continue. Thereafter the lease will automatically extend for another year (if the lease is one year or more) or a duration equal to that of the original lease (if the lease is less than a year).
This lack of understanding can lead to unfortunate consequences. Tenants or landlords may find themselves unexpectedly bound for another year because of their failure to provide a valid notice to terminate, interfering with planned commercial decisions and may leave them in financial disarray. Indeed, uncertainty surrounding the application of tacit relocation and valid notices to terminate, has caused costly disputes and litigation between parties.
Leases (Automatic Continuation etc.) (Scotland) Bill
Consequently, the Scottish Law Commission (“SLC”) published the draft Leases (Automatic Continuation etc.) (Scotland) Bill (“the Bill”). The Bill proposes to clarify the common law of “tacit relocation”, on a clear statutory basis, by taking a modernised and simplified approach to provide clarity and certainty for practitioners, landlords and tenants in terminating leases.
Proposals in the Bill include the renaming of tacit relocation as “automatic continuation”. The intention is that the name change will convey that the lease will continue unless steps are taken. There is a belief that this concept will be easier to understand especially for unrepresented parties! The Bill provides a new statutory code which will replace common law but does confirm that the lease will automatically continue after the termination date unless a valid notice has been served by either party, or the parties have contracted out of automatic continuation in the lease. The SLC recommends that any contracting out should be in writing to encourage parties to consider carefully what they would like to happen at the end of a lease.
Proposals for a new system
The Bill codifies the essential elements of a valid notice. It allows for flexibility, by taking a common-sense approach to ensure that a notice is not invalidated by what are deemed as minor errors, provided that the essential elements are fulfilled. These essential elements will differ between the landlord’s notice (“notice to quit”) which must be in writing and will be more prescriptive than the tenant’s notice (“notice of intention to quit”), which can be given orally where the lease is less than one year.
Additionally, the Bill proposes to reform the period of service, increasing the common law rule from 40 days to at least 3 months, where the lease is longer than 6 months, and 1 month, where the lease is less than 6 months but more than 3 months. No notice is required where the lease is less than 3 months. The Bill permits that the periods can be varied by parties agreeing variation, but for any existing leases that do not contain any such agreement the default position will apply i.e. the 40 days.
New rules for automatic continuation would mean that for leases of more than one year, the period of continuation is one year, or such shorter period (not less than three months) as may be stated 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 (not less than 28 days) as may be provided in the lease.
An unambiguous ending?
The SLC recognised that the resulting litigation frequently involved errors in the content or in the service, of the notices but the intention to terminate the lease was clear! Therefore, the SLC provided in the Bill that where a notice to quit specifies an erroneous termination date, the notice would still be effective if the inaccurate date fell (a) after the correct termination date, and (b) before the end of seven days beginning the day after the correct termination date. This would entitle the tenant to remain in occupation until the invalid notice date. This safety net is beneficial for those drafting notices but does not mean less care in drafting!
How shall we end this?
Repackaging the common law rule of tacit relocation into the codified automatic continuation, should increase accessibility, transparency and certainty for landlord and the tenant as well as practitioners when terminating the lease. Risk of disputes in relation to valid notices should reduce. That said, the parties must remain diligent in exhibiting and delivering a valid notice, so that they are not forced to stay in the lease because of the automatic renewal.
It is still unclear what the Scottish Parliament will do with the Bill, so tacit relocation applies for the moment. That being the case, we recommend that landlords and tenants take advice when terminating a lease at the earliest possible opportunity.
When considering termination of a lease please contact the Commercial Property team for guidance on 03330 430350.
