It is often not appreciated by commercial landlords and tenants that, despite the fact that their lease will invariably specify a date when the lease is due to come to an end, if neither party gives any indication to the other that the lease is actually to end (either by serving a notice to quit or notice of intention to quit, or some less formal but nonetheless clear indication of intention to terminate) then the lease will continue for usually a further year on the same terms and conditions. Leases for less than a year will continue for the same period as the original lease.
This effect is known as “tacit relocation” and can catch out the unwary landlord or tenant, who takes no steps to end the lease, but who may have already made other plans for when the lease ends.
This and other aspects of termination of leases were the subject of a Scottish Law Commission project, resulting in a Report (Report on Aspects of Leases: Termination Scot Law Com No 260) published in October 2022 that contained a draft Bill to address a number of the problems around ending commercial leases.
This Bill has now been introduced to the Scottish Parliament and seeks to clarify the law in relation to tacit relocation – now rebranded as “automatic continuation”, and other issues including the period of notice to be given, service of notices of irritancy and apportionment of rent.
Leases (Automatic Continuation etc.) (Scotland) Bill
It has never been entirely clear whether it is possible to contract out of tacit relocation. The Bill now sets out a statutory code allowing parties to contract out of this if they wish and clarifies what happens at the end of a lease if they do not.
Automatic continuation
The Bill provides a default rule that any lease will automatically continue after the termination date specified in the lease unless:
- either party gives written notice to the other; or
- the parties otherwise agree that the lease will end and the tenant gives up possession; or
- the lease provides that it will not continue beyond the end date.
However, if:
- the tenant remains in possession after that date; and
- the landlord does not take any steps to remove the tenant within a reasonable period after the termination date, or otherwise acts in a way that is inconsistent with the lease having ended, such as continuing to accept rent, the purported ending of the lease will be of no effect.
Where a lease continues in this way, it will continue on the same terms and conditions for a further year, if the original lease is for a period of one year or more. If the lease is less than a year, but more than 28 days, it will continue for the same period as the original lease. In both cases, if the lease expressly provides for automatic continuation for a shorter period, then the lease will only continue for that shorter period. Provision is also made for leases of 28 days or less.
Certain types of leases will not automatically continue. These include leases for less than three months, leases for the lifetime of the tenant, leases granted with the authority of the court, the Accountant of Court or the Accountant in Bankruptcy, grazing leases for one year or less and sporting leases for less than a year.
Contracting out of automatic continuation
The parties can elect to opt out of automatic continuation. To do so there must be express provision in the lease clearly stating the lease will not continue after its termination date. If a tenant remains in the property after that date, the landlord may take steps to remove them.
Termination by notice
To prevent automatic continuation of the lease, one or other of the parties must give notice to terminate the lease prior to the end date specified in the lease. That is the law at the moment, and although there is no mandatory rule about the length of notice that must be given, or indeed that notice must be in writing, in practice most parties will give 40-days’ notice as provided for in the Sheriff Courts (Scotland) Act 1907 (Sections 34 to 38A). The notice provisions in the 1907 Act are widely regarded as confusing and uncertain: the new Bill will set out clear provisions for notice to be given, either by the landlord (notice to quit) or the tenant (notice of intention to quit) and will disapply the 1907 Act to commercial leases entered into after the Bill is enacted.
Both notices to quit and notices of intention to quit must be in writing (except, in the latter case, where the lease is for one year or less). There is to be no statutory form of notice, but the Bill sets out the type of information that such notices should contain, and in particular should clearly state the requirement, or intention, to remove from the leased premises (which must be sufficiently identified) and the date on which that is to happen. In the past some notices to quit have failed due to some technical irregularity; the Bill will make the law more forgiving in this respect: an error may not necessarily be fatal if a reasonable recipient would in all the circumstances know that the information was incorrect.
Notices to quit and notices of intention to quit may be given electronically (i.e. by email) only if the parties have agreed to that method in advance.
Period of notice
The Bill provides for a standard default period of three months prior to the end date specified in the lease for either party to give notice. Notice must be received by the party to whom it is sent on or before the last day of that three-month period. If the lease is for a period of less than six months, the default notice period is one month.
The parties may vary the default notice periods in the lease if they wish, but if they do so, they must provide for the same period of notice for both the notice to quit and the notice of intention to quit.
Most commercial leases will contain some wording dealing with “deemed” receipt: i.e. the notice will be regarded as having been received (whether or not it has been) within the period stated in the lease (e.g. 48 hours of sending) unless the contrary can be proved. The Bill sets out detailed statutory deeming provisions depending on the delivery method used.
Once sent, a notice to quit or notice of intention to quit may only be withdrawn by the party sending it with the agreement of the other party.
Irritancy notices
Where a landlord wishes to end the lease due to some breach by the tenant, they must serve an irritancy notice on the tenant (after having served a notice of intention to irritate in the case of monetary breach) before the lease can be terminated. The Bill makes some amendments to the procedure; in particular by permitting service of notice by sheriff officers as an alternative to service by recorded delivery.
In addition, where a heritable creditor holds a security over the leasehold interest, the landlord must also serve a copy of any irritancy-related notice on that creditor at the same time as, or as soon as reasonably practicable after serving it on the tenant. Failure to comply with this requirement may render the notice invalid in the case of a non-monetary breach.
Apportionment of rent
The rent under commercial leases is usually paid quarterly in advance. Under the current law, unless the lease makes specific provision for this, a tenant is not necessarily entitled to reimbursement of a proportion of rent paid in advance, when the termination date falls between two quarterly payment dates.
The Bill will correct this anomaly, by providing a statutory default that, except in cases of termination by irritancy, where the tenant has paid rent in advance, all or part of which related to a period falling after the lease ends, the landlord must pay the tenant the proportion of the rent that applies to that period not later than 10 working days after the end of the lease.
Next steps
The Bill was introduced to Parliament on 11 December 2024. It is currently at Stage 1 of the parliamentary process during which the terms of the Bill are examined by Committee, and views on the Bill’s provisions are sought from interested organisations, experts and members of the public. This time is an opportunity for any interested parties to make representations about the terms of the Bill to the relevant Committee (in this case the Delegated Powers and Law Reform Committee) who have just launched a consultation on the Bill that is open until 7 March 2025.
It should be borne in mind that amendments can be made to a Bill at Stage 2 of the process and some Bills can be radically overhauled. This is less likely with a Scottish Law Commission Bill, which has been produced after much consultation with stakeholders, but amendments are still possible.
Overall, the Bill proposes sensible changes that will clarify areas of the law that have until now been unclear, unfair or overlooked. It is likely that standard form lease documents will be overhauled to take account of the changes that are ultimately enacted, and the provisions of the Bill will prompt parties to leases to address directly the issues of notice periods and automatic continuation, and encourage earlier engagement when the termination date is approaching, providing greater certainty for them at the end of the lease period.