Aspects of the leasehold market are being reviewed
Changes are being recommended to a peculiar Scottish legal term, says ELOISE ROBB
Question: a tenant signs a commercial lease, in Scotland, for a 5-year term. The commencement date is 1 January 2020 and the end date 31 December 2025. When does the lease end? Answer: Maybe on 31 December 2025, but only maybe. And this is due to the common law principle of tacit relocation, a peculiar term, and a peculiarity of Scots Law.
In simple terms, if neither the landlord nor tenant serves notice of an intention to end a commercial lease, and no other alternative arrangements have been put in place, then the lease will automatically continue, on the same terms and conditions for a further year, and that is tacit relocation.
While, in certain circumstances, this can make commercial sense, the automatic and unintentional continuation of a commercial lease beyond its contractual expiry date can, in other circumstances, be problematic for both landlord and tenant.
To avoid tacit relocation written notice requires to be given, which for the majority of commercial leases must be served at least 40 clear days in advance of the end date, and that notice must follow precisely any notice provisions in the lease itself to be valid and effective.
The present law is complex and in most cases the lease in question does not specify the period of notice required, this is a matter of common law. This can and does from time-to-time trip up tenants especially; resulting in a potentially inconvenient, not to mention expensive, outcome.
The tenant may not have budgeted for the continuation of the commercial lease, it may simply be unable to afford the rent, insurance, rates and/or service charge associated with the extension, or may have outgrown or, for some other reason, finds the premises no longer suitable.
Additionally, and depending on the wording of the lease, its continuation beyond the contractual expiry date may mean that a rent review falls due which is an additional outlay for the tenant.
The landlord on the other hand, may have an alternative tenant lined-up with a stronger covenant, or a tenant who is willing to take the premises on terms more advantageous to the landlord. Or they may simply want the premises vacant as part of redevelopment or sale plans.
The Scottish Law Commission is alive to the fact that tacit relocation causes what it has described as “complexity, uncertainty, expense and risk” and in October issued a report entitled Leases: Aspects of Termination in which the Commission called for reform of the law on the ending of commercial leases and recommending the replacement of the common law of tacit relocation with a modern, statutory code of automatic continuation.
The new code sets out clear rules on whether notice must be given, the necessary content and timing of notice, and the effect of automatic continuation of a commercial lease.
It also makes it clear that parties to a commercial lease may agree that it will end on a specified date without the need for notice to be given. And it is proposed that the term “tacit relocation” is replaced with “automatic continuation” which is consistent with a general desire to modernise and make clearer this area of the law.
Additionally, the Commission recommends several technical amendments to the requirements for the service of other documents which have the effect of bringing a commercial lease to an end, including irritancy notices, where there has been a default under the terms of the lease.
From a business perspective, it is hoped that the reform of the law of automatic commercial lease renewal will make investment in Scotland more attractive. Without doubt, the greater clarity and certainty will be welcomed by landlords and tenants alike.
So, a big change may be coming, and the clock is ticking on tacit relocation. Meanwhile we would always encourage our client, whether landlord or tenant, to be alert to termination dates of commercial leases and to serve notice in good time if the lease is not to be continued. We would always recommend that any termination or break notice is drafted by an appropriate adviser. As lawyers, we would say that wouldn’t we?
But the experience of others may serve to prove our point here: One tenant of which we are aware, a significant sized business, served a break notice by email, but omitted to follow the specific provisions in the lease.
This notice failed to comply with both the terms of the lease and with the implied timescales for notice. The notice period in this case was six months and the landlord made no response for four and half months whilst the clocked ticked (it should be noted that a response is not required from the landlord, but it is normal in order that dilapidations can be discussed, and entry obtained to erect to-let boards).
When they did formally respond it was to say that the break notice had not been effective. The result was another notice required to be issued, which covered all of the necessary requirements and the tenants had another six months’ rent to pay.
So be warned, not getting it right can be costly.
Eloise Robb is a senior legal Adviser at Vialex