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Will the Termination Date be the End of the Lease?

  • United Kingdom
  • Real estate

16-10-2018

We reported in May 2018 on the Scottish Law Commission’s discussion paper which deals with various issues relating to the termination of commercial leases in Scotland.  The SLC’s paper deals with six areas of termination, which we discussed in our earlier briefing. Arguably one of the most important areas for consultation was tacit relocation, the principle by which leases may continue beyond their contractual end date if the parties do nothing to terminate them. In those circumstances, termination is typically achieved by serving a formal notice to quit.  If no notice to quit is given, the lease continues (generally) from year to year, based on the implied agreement of the parties. 

In our earlier briefing, we commented that this can be a surprise to parties – while some other jurisdictions do have a similar concept it often requires a positive act by the parties to extend the length of the lease.  Scots Law is unusual in that the lease continues when there is a failure to act.  The consequences obviously can be onerous – a tenant may become responsible for another years’ rent when alternative premises have been lined up or a landlord may be unable to redevelop a property because it is occupied for another year. 

The Scottish Law Commission suggested two options for reform in this area.  Firstly, it suggested that tacit relocation be disapplied from commercial leases entirely, unless the parties opt into it.  While this would give some certainty, it could still leave a vacuum at the end of the lease if the parties continue to act as if the lease remained in force.  Alternatively, the Commission suggested that tacit relocation should continue to apply but with a clarification so that parties are able to contract out. 

Responses to the Consultation address both of these options and opinions vary on the appropriate way forward. On the one hand, an advantage of the current position is that it allows the status quo to prevail, avoiding a state of limbo if the tenant remains in occupation after the expiry date.  If tacit relocation is abolished, parties may incur additional expense in renegotiating and renewing leases and dealing with issues such as Land and Buildings Transaction Tax.  On the other hand, both landlords and tenants have been “caught out” by the operation of tacit relocation and found themselves tied into a lease or unable to remove a tenant in circumstances where they presumed (not unreasonably!) that the lease would end on its expiry date. There is little regulation of, or legislation relating to, commercial leases in Scotland and this can make them attractive to businesses which are seeking flexibility. Conversely, this lack of regulation can lead to confusion and a lack of certainty.

The Consultation has now ended and the Scottish Law Commission’s report is awaited. We will need to wait and see what it recommends for not only tacit relocation but the other forms of termination discussed in the Consultation, such as irritancy. For the moment, the status quo continues - tacit relocation continues to apply and therefore a notice to quit needs to be served at least 40 days prior to lease expiry if the lease is to terminate. This is a key requirement of which both landlords and tenants should be aware.

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