Scotland: Tacit Relocation

Introduction

This article confines itself to an aspect of commercial leasing. For many businesses, it makes sense to occupy their business premises under a lease granted to them by a commercial landlord.  Equally for landowning investors, rent can provide a good return on capital and, subject to satisfactory covenant strengths of their tenants, represents certainty of income stream. These concepts will be well understood by practitioners in other jurisdictions.

Where jurisdictions diverge however is how they define the rights and obligations of landlords and tenants.  An aspect of commercial leases which has been causing creeping concern among business people in Scotland is the lay person’s uncertainty as to how a lease may be effectively brought to an end when the termination date approaches.

The distinction is made between “the lay person” and the legal professional. Lawyers have little difficulty in interpreting conventional leases and identifying the steps required to terminate them. Most commercial landlords and tenants, however, are not lawyers, and are therefore not alert to the intricacies and procedures which must be followed to bring a lease to an end. It therefore comes as no surprise that further legislative changes are in contemplation.

The existing law

In Scotland, a commercial lease does not automatically come to an end on the termination date. To terminate a lease, it is necessary for either the landlord or tenant to give notice* to the other party that they intend to terminate the lease on the termination date. If neither party provides a valid notice, the lease will continue on the terms of the existing lease for one year at a time, and this is known as the doctrine of tacit relocation (the one year extension applies to commercial leases with a duration of 12 months or more. The rules differ for more short-term commercial leases). As an example, a lease may stipulate that it is in place for 10 years, from 1 January 2016 to 31 December 2025, but if neither party serves a valid notice on the other party, the doctrine of tacit relocation will apply, and the lease will continue for another year until 31 December 2026. The lease will continue year on year until a valid notice is served. The notice is, rather unsurprisingly, known as a notice to quit.

*The notice period referred to above may be defined in the lease. If no notice period is defined in the lease, then Scots common law provides that the period of notice shall be not less than 40 days ending on the termination date stated in the lease.

Pros and Cons of Existing System

In some instances, it will be of benefit to both the landlord and tenant to continue the lease for another year without incurring costs that come with consulting professional advisors. This may be the case with low value leases of a relatively short original duration. With these types of leases, the landlord and the tenant may be content with letting the lease run on for a number of years based on tacit relocation. It also reduces the likelihood of commercial property being left vacant.

There are, however, obvious problems that can arise from such a doctrine, particularly for those unfamiliar with the Scottish system, and the stakes can be high (and costly). If a tenant fails to serve valid notice, they are tied into their lease obligations for another year. If they are already committed to a new lease elsewhere, there will be unforeseen financial implications for them. Likewise, a landlord who fails to serve valid notice may find their plans to bring in a more lucrative or reliable tenant and/or sell a vacant property are thwarted for another year. The volume of case law on this topic suggests that it is not always easy to state with confidence whether a valid notice has been served.

This has unsurprisingly led to issues whereby many have ended up in situations where they have had to pay rent under two leases for a year. Tenants have entered into new leases at different premises, on the assumption that their original lease will cease automatically on the end date, only to find out that it has not.

Proposed Reform

A draft Leases (Automatic Continuation etc.) (Scotland) Bill is presently being considered by the Scottish Parliament, that proposes to:

• replace tacit relocation with a new statutory system;
• adjust the current period of notice required to end a lease to 3 months; and
• make it clear that automatic continuation of a lease can be contracted out of by parties.

It is apparent that the law of commercial leasing in Scotland would benefit from clarification when it comes to terminating a lease. This clarification would undoubtedly be advantageous to tenants who have too often been caught out by the lack of the need for automatic continuation to be expressly mentioned in the lease. If there is no mention of this, it is understandable how someone without knowledge of Scots Law could be caught off guard by this. Landlords could also stand to benefit from the opportunity to perhaps, renegotiate the terms of the lease. Under the current system, they could unsuspectingly let the lease roll on for another year under the same terms, where it may be the case that market standards put them in a position to increase the rent.

Concluding Comments

The Bill was introduced to the Scottish Parliament on 11 December 2024 and it is currently at stage 1 of the Parliamentary process, which means that it has been given to a lead committee who will decide whether the Bill should become an Act and move onto the statute book. It is currently anticipated that Stage 1 will be complete by mid-September 2025. The changes proposed in the bill only extend to partial codification, and case law will still be relevant, but even having a partially codified system reduces ambiguity, and thereby reduces the scope for litigation, which certainly seems to be a positive development.