Ken Carruthers: Scottish Law Commission proposes important changes to law regulating commercial leases

Ken Carruthers: Scottish Law Commission proposes important changes to law regulating commercial leases

Ken Carruthers

Ken Carruthers considers the proposed changes to the termination of commercial leases in Scotland.

The Scottish Law Commission (SLC), the body in Scotland charged with proposing legal reform, has recently published a report making a number of important recommendations concerning the termination of leases. The report addresses, amongst other things, the law of tacit relocation and the related question of formal notices.

Leases in Scotland can continue automatically beyond the termination date, usually for a further year and on the same terms, where tacit relocation is found to apply. This can happen where neither landlord nor tenant gives a valid and timeous notice to quit before the lease termination date. Automatic continuation can apply also where, after the termination date has passed, the tenant remains in occupation and the landlord accepts rent or fails to take steps to remove the tenant. It is assumed, in these circumstances, that both parties are happy for the lease to continue essentially on the same terms and both are so bound usually for another year.

Overlooking the need to give proper notice to quit can give rise to serious consequences for both parties - the tenant is obliged to pay rent and other outgoings for a further year in circumstances where the decision to close or relocate may already have been made; the landlord’s plans to redevelop the property may have to be deferred until the tenant can finally be removed a year or more after originally planned. Both, for their own reasons, may seek to exploit the silence of the other, most obviously where a landlord, with a decent tenant paying a generous rent and no new tenant waiting in the wings, will sit cross-fingered earnestly hoping that the tenant overlooks the need to serve a valid notice to quit to bring the lease to an end.

The possibility of a commercial lease extending beyond a defined termination date simply on the basis that neither party has given notice to the other that the lease is to end may seem anomalous to many non-Scottish practitioners. Matters are complicated further by legal uncertainties relating to whether or not properly informed parties should be permitted to “contract out” of the law of tacit relocation on the basis that neither party wants the lease to continue beyond the specified termination date. In the 21st century, if that is what commercial parties want why should Scots common law provide otherwise?

Review and revision of this area of Scots law is long overdue and the SLC ‘s detailed review is to be welcomed. Whilst stopping short of the wholesale abolition of the law of tacit relocation, a number of important recommendations are nonetheless made. Principal amongst the report’s proposal for the introduction of a new statutory code more clearly setting out the circumstances in which leases continue automatically and how this can be avoided. Notices to quit containing certain essential requirements should still be required. The notice procedure was seen by many commentators as useful reminder to both landlord and tenant that the lease end date was approaching; either could continue to terminate by notice but in the absence of notice being given, the lease would continue for another year. But the report also recognised that contracting out should be permitted putting beyond doubt that leases will end on the termination date.

Comprehensive guidance is also proposed on the content and method of service of notices to quit, a fertile source of litigation between landlords and tenants in Scotland and what the report describes as the mini-industry which has grown up around seeking to discredit the validity of notices. Certain essential requirements are still required to be included in notices to be served by both landlords and tenants but a less strict or prescriptive approach is proposed, broadly informed by the “reasonable recipient” test. Adopting a more common-sense approach, minor inaccuracies or other drafting errors should hopefully no longer have the fatal consequences so dreaded by many property lawyers and professional indemnity insurers.

Reform along these lines will require to find space within the Scottish Government’s legislative programme. It remains to be seen whether, if a new law as recommended is enacted, commercial parties elect simply to disapply any statutory assumptions about automatic continuation and instead decide that all commercial leases will automatically terminate, without the need for notices to quit, leaving parties free to negotiate short lease extensions if they wish as termination approaches.

Ken Carruthers is a partner at Morton Fraser

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