Proposed reforms to lease termination process in Scotland

The Scottish Law Commission – a public body established to keep Scots law under review and recommend necessary reforms – has published a report recommending several significant reforms to the Scots law of leases.

Specifically, the Commission’s aim is to modernise, clarify and simplify several key rules applicable to the termination process for commercial leases in Scotland (i.e. leases which are neither of residential nor agricultural property).

 

Background

Unlike residential or agricultural leases, which are mostly governed by statute, the rules for commercial leases in Scotland come primarily from the common law and have remained largely untouched for several centuries.

Amongst these common law rules is the process known as “tacit relocation” whereby commercial leases can continue beyond their original term without the landlord and tenant entering into an express extension.

Tacit relocation can occur in two scenarios, both of which are characterised by the failure to act (or “silence”) of the parties to the lease.

The first situation occurs before expiry of the lease term and applies where (a) neither the landlord nor the tenant give valid notice of termination, and (b) the tenant does not give up vacant possession at the termination date.

The second situation arises after the termination date if (a) the tenant remains in possession of the property, and (b) the landlord fails to take steps to remove the tenant within a reasonable period or conducts themselves in a way which is incompatible with the lease having ended (e.g. accepts rent from the tenant).

Where tacit relocation applies, the default rule (which can be amended by drafting) is that the lease will continue for a further period of one year (for leases of one year or more) or a period equal to the term of the lease (for leases of less than one year).

 

Concerns with current rules

Following an extensive review of the existing rules the Commission have concluded that the commercial lease termination process in Scotland is widely misunderstood and regularly overlooked, particularly by unrepresented tenants or tenants from other jurisdictions. Tenants are often unaware that the law requires them to give notice to prevent the lease continuing beyond the termination date.

The Commission also notes that, in the case of large property-owning landlords, substantial resources are being allocated to the management of leases generally, but particularly in the avoidance of tacit relocation by service of notices. The Commission believes that if landlords had the ability to negotiate leases which terminated without notice at the end of a fixed term, there would be substantial cost savings and that this would provide greater certainty to parties.

Overall, the Commission is of the view that the current system is uncertain, inaccessible, outdated and generally unfit for the realities of modern commercial practice.

 

Proposed solutions

The Commission has made 86 recommendations intended to improve, simplify and update the law relating to tacit relocation and the termination of commercial leases generally. The key proposals include: -

• Replacing technical legal terminology such as “ish” (meaning the end of the period of a lease) and “tacit relocation” with more user-friendly language, namely “termination date” and “automatic continuation”.


• The creation of a new statutory code for automatic continuation to replace and disapply the common law rules for tacit relocation and lease termination generally.
• The parties to a lease should be able to contract out of automatic continuation, ensuring their lease will not continue beyond its termination date even if no notice is served. The proposals clarify that any such provisions would need to be constituted in writing, irrespective of the length of the lease. It will also not be possible to contract out of the second type of automatic continuation, where the parties proceed as if the lease was in place after the termination date (e.g. by paying and accepting rent).


• Any obligations of a guarantor in relation to the performance of either the tenant or landlord during the period of automatic continuation would not apply, except in so far as the guarantee document expressly provided otherwise. This seeks to clarify uncertainty in the current rules.


• The parties should be given limited powers to reduce (but not extend) the default continuation periods subject to minimum continuation periods of 28 days (for leases granted for a period of more than 28 days) and seven days (for leases granted for a period of 28 days or less).


• A termination notice from landlord to tenant – referred to as a “notice to quit” under the new code – would need to be in writing. A termination notice from tenant to landlord – referred to as a “notice of intention to quit” under the new code – would also need to be in writing, unless the lease is for less than one year, in which case notice could be given in writing or orally.


• The new code would regulate the minimum information requirements for notices to quit (by landlord to tenant) and notices of intention to quit (by tenant to landlord) to be valid, but the Commission have not prescribed a statutory format for the notices.


• The Commission have anticipated scenarios where notices include one or more errors. For example, it has been proposed that where a notice to quit specifies an erroneous termination date, the notice would still be effective if the erroneous date fell (a) after the actual termination date, and (b) before the end of the seven-day period beginning with the day after the actual termination date. In those circumstances, the tenant would be entitled to remain in occupation until the erroneous date specified in the notice, and would not be liable to the landlord for the usual penalties enforceable against tenants who remain in situ beyond the termination date (e.g. the common law form of penal damages known as “violent profits”).


• A new set of default rules have been proposed in respect of notice periods, intended to replace the default 40-day period applicable to most commercial leases (subject to the lease provisions). For leases of six months or longer, notice to quit or of intention to quit would need to be received by the tenant or landlord (as applicable) no later than three months before the termination date. For leases of less than six months, notices would need to be received no later than one month before the termination date. For leases of less than three months, no notice would be required to prevent automatic continuation (which would never apply to leases of that duration).


• The Commission proposes to allow service of notices by sheriff officer, in addition to recorded delivery post (thus amending s 4 of the Law Reform (Miscellaneous Provisions) (Scotland Act 1985)). The report also recommends that a provision in a lease requiring service by email – in addition to service by recorded delivery or sheriff officer (but not as the sole method of service) – should be competent. The Commission suggests that delivery by email only, or by private courier, should not be allowed as these are less certain means of service.


• Subject to the provisions of the lease, notices to quit or of intention to quit would be capable of being withdrawn (and thus rendered ineffective in bringing the lease to an end) only with the consent of the recipient. If notice is given in writing, both the withdrawal itself and the agreement of the recipient would also need to be in writing.


• Subject to the provisions of the lease, notice to quit given by one of several co-landlords – or notice of intention to quit given by one of several co-tenants – would be sufficient to prevent automatic continuation (whether or not the consent of the other landlord(s) or tenant(s) had been given). Notice would need to be served on all co-tenants or all co-landlords as applicable.


• Where a head lease ends on its termination date – any sub-leases (a) having the same termination date also ends on that date, and (b) with a termination date purporting to fall after that of the head lease would be deemed to terminate on the same date as the head lease. Importantly, where a head lease and sub-lease terminate on the same date, the head lease and sub-lease would nevertheless continue automatically by virtue of the post-termination conduct of the parties if (a) the sub-tenant remained in occupation after the termination date, and (b) the head landlord did not take steps to remove the tenant (and therefore the sub-tenant) within a reasonable period following the termination date or otherwise acted inconsistently with the head lease having ended.


• There should be an implied term in new leases obliging the landlord to repay any rent or other payments made in advance by the tenant which relate to a period falling after the termination date. Repayment would need to be made within ten working days of termination. The implied term would not apply if the lease was terminated by the landlord by irritancy (the Scottish equivalent of forfeiture). At present there is no automatic apportionment of rent / payments in this scenario unless this is expressly covered in the lease, an issue which has been subject to previous litigation.


• The Commission suggests that landlords should not be entitled to terminate / irritate leases following a monetary breach by the tenant unless, at the same time as or as soon as reasonably practicable after serving any irritancy-related notice, they also serve a copy of the notice on all qualifying heritable creditors. A “qualifying heritable creditor” is one who (a) has a standard security over the lease which has been registered in the Land Register or recorded in the General Register of Sasines before the start of the 10-day period ending with the day on which the notice is served on the tenant, and (b) either has a UK postal address known to the landlord or has provided a UK postal address to the landlord for the purpose of serving the relevant copies. The scope of these provisions is therefore limited to long leases (i.e. leases of over 20 years) as standard securities cannot be granted over short leases. Qualifying heritable creditors will also be entitled to (a) challenge the validity of an irritancy notice, (b) seek to have the irritancy declared invalid where no notice is served, (c) challenge any non-compliance with the provisions of the lease in relation to irritancy, and (d) argue that a fair and reasonable landlord would not have terminated the lease in the circumstances. This is likely to open the door to further litigation risks for landlord exercising their contractual remedies against non-compliant tenants.

 

Conclusion

The Scottish Law Commission’s report shines a light on many of the inadequacies of the current lease termination process in Scotland. Their recommendations – and the draft Leases (Automatic Continuation etc.) Scotland Bill which accompanies the report – provide a path towards a clearer and fairer system offering solutions to many of the current shortcomings and risks. The changes proposed are likely to be largely welcomed by tenants, landlords and institutional investors alike, providing greater certainty and simplicity to commercial leasing in Scotland. That said, it remains to be seen if the Scottish Government will take forward any of the Commissions recommendations.

In anticipation of a final version of the Bill being implemented, both landlords and tenants should be mindful of the possibility of their leases continuing beyond their stated termination date and, where such continuation is not desired, legal advice should be sought at the earliest opportunity to mitigate risks.

The Scottish Law Commission’s report is available here.