Termination of a lease in Scotland: Consultation on proposed reforms

On 10 December 2021 the Scottish Law Commission published a consultation seeking views on the proposed reforms to the termination of a lease at its expiry in the draft Leases (Automatic Continuation etc.) (Scotland) Bill. All commercial leases are included within the scope of the project.

Comments are invited by 28 January 2022. A final draft Bill, informed by consultees’ responses, and a final Report will be submitted to the Scottish Ministers and published in the spring of 2022.

Background

In Scots law, generally to terminate a commercial lease on its contractual end date one party must provide notice to the other. If formal notice is not given the lease is automatically extended under the same terms (other than duration). This is known as tacit relocation.

This draft Bill makes proposals to codify the common law doctrine of tacit relocation (to be renamed automatic continuation), and provide clarity on matters where there is uncertainty in the current law as well as making statutory provision for the option to contract out of automatic continuation at the point of entering a lease.

What’s in the draft Bill

The draft bill sets out provisions across a number of areas. We have summarised the key points below.

When does a lease continue automatically?

• It ends on that date by termination notice or consensus; or
• Parties have contracted out of giving notice

Giving notice

The draft bill sets out what information must be included in a termination notice, when the termination notice must be provided and where it should be delivered.

Under the present law, difficulties giving a valid notice arise when there has been a change to the other party to the lease, or a party to a lease has died.

These points are clarified in the draft bill so that when there is a change in the identity of the landlord or tenant the serving party may serve any termination document on the former landlord or tenant until written notice of the change is provided.

Likewise, in the event of the death of the landlord or tenant, the serving party may send any termination document to the deceased party until notified in writing that an executor has been appointed, or that a heritable creditor has taken over the deceased’s interest in the property.

Contracting out

The draft bill provides that a commercial lease may include a written term that the lease will not continue automatically after its termination date. If a lease includes such a term, it will come to an end on its termination date – essentially enabling the contracting out of automatic continuation. No prescribed wording for the contracting out term has been provided yet.

However, that termination of a lease under the contracting out provision may be overridden by the parties behaviour after the termination date.

This draws certain parallels with the way in which commercial leases are dealt with in England & Wales. Most commercial leases are business tenancies, and are afforded protection under the security of tenure provisions on the Landlord and Tenant Act 1954 (LTA 1954). This means that the tenant generally has an automatic right to a renewal tenancy after the contractual termination date. However, parties can contract out of the security of tenure provisions. This must be done before the lease is entered into (or, if the lease will be entered into pursuant to an agreement for lease, before that is entered into) by the landlord serving notice in a prescribed form on the tenant. The tenant then has to either sign a declaration, or swear a statutory declaration, confirming that the lease will not be afforded protection under the LTA 1954. As is envisaged in Scotland, even if the parties have agreed to contract out of automatic continuation of the lease, the parties’ conduct can, if not consistent with the ending of the lease, in some cases, lead to the tenant obtaining security of tenure.

Automatic continuation of lease on basis of behaviour after termination date

Under the present law, tacit relocation may also take place where the tenant has remained in possession of the subjects of the lease after the expiry of the lease and the landlord has either failed to take reasonable steps to remove the tenant within a reasonable time or has accepted rent in respect of a period after the expiry of the original term of the lease, regardless of whether either party gave notice prior to the expiry of the lease.

The draft bill continues this rule by providing that a lease does not end on its termination date if the tenant remains in possession after that date, and the landlord takes no steps to remove them within a reasonable timeframe or otherwise acted inconsistently with the lease having ended. In these circumstances, the lease is to be treated as if it had continued after its termination date. This rule cannot be disapplied by either landlord or tenant.

The draft bill provides clarification that where there are multiple landlords and/or multiple tenants one notice served on the tenant by one of the landlords will suffice and likewise notice given by one of the tenants has effect as if it were given by all the tenants.

Period and effect of automatic continuation of lease

The draft bill sets out rules governing the length of an automatic continuation of a lease and the terms of the continued lease.

• If the period of the lease is one year or longer, the period for which it is continued is one year, or such shorter period (of not less than 3 months) as may be provided for in the lease.
• If the period of the lease is more than 28 days but less than one year, the period for which it is continued is the period equal to the period of the lease, or such shorter period (of not less than 28 days) as may be provided for in the lease.
• If the period of the lease is 28 days or less, the period for which it is continued is equal to the period of the lease.

Where a lease automatically continues after its termination date it continues on the same terms as immediately before its termination date, unless those terms are inconsistent with the period for which the lease is continued. This restates the current effect of tacit relocation at common law.

What leases do not continue automatically?

Certain leases end automatically on their termination date and cannot automatically continue. These include:

• holiday lets;
• student lets,
• a lease granted for the lifetime of the tenant;
• judicial lets.

Other matters

The draft bill makes provision in relation to several matters which are relevant to the termination of leases more generally. These provisions aim to simplify, improve and, where necessary, reform existing rules on the termination of leases which have been identified as vague or confusing. This includes:

• Clarification on how the duration and date of entry of a lease should be calculated in the absence of a provision in the lease;
• Confirmation that the common law rule of tacit relocation and other rules relating to the unilateral termination of leases (e.g. Tenants letters of removal) are disapplied;
• A new obligation on parties to a lease over 1 year in duration to provide a UK address where a termination notice can be sent and the consequences for failure to provide this;
• Expanding the means by which pre-irritancy warning notices can be served, to make provision for their service on creditors having a heritable security over a registered lease, and to allow such creditors title to challenge any irritancy of the registered lease;
• A new provision that a lease has an implied term obliging the landlord to repay to the tenant any rent or other payment relating the period after the termination of the lease within 10 working days of termination. This does not apply where the lease is terminated by the landlord under an irritancy clause, and may be contracted out of by express provision in the lease.

The potential impact on landlords and tenants of commercial properties

The proposals in the draft bill may offer some much-needed clarification on the issues around the automatic continuation of commercial leases, including around the formality and content of notices to quit. In one recent case in the Scottish courts Rockford Trilogy Ltd v NCR Ltd [2021] CSIH 56 it was confirmed on appeal that, where no formal notice to quit was served by either party, an email from the tenant’s agent indicating the conditions which would have to be met before the tenant would remain in a property after expiry was deemed to be sufficient notice to terminate the lease when those conditions were not met and tacit relocation was excluded.

Proposed provisions such as requiring a UK address for service will remove some difficulties and cost associated with service of a notice to quit and clarity around the landlord’s obligation to repay over-paid rent is helpful.

However, there is still scope under the proposed legislation for tenants and landlords to be caught out by the principle of tacit relocation. In particular the extension of the termination notice period to 3 months in the case of leases of 1 year or more in duration.  Often only notice of 40 clear days is required under the current law. 

A landlord should also be clear on what “reasonable steps” it must take to remove a tenant before the termination date to ensure the lease does not continue.

Although the draft bill does envisage some relief for certain errors, if enacted it will still be important to ensure that the notice is served timeously and that the information contained in the notice is correct. As with the present law mistakes may lead to the notice being held as invalid.

TLT has extensive experience in advising on landlord and tenant law in Scotland, and across the other UK jurisdictions. If you would like to discuss your matter, please get in touch.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.