Scottish commercial leases do not automatically end at the lease expiry date; and break options do not automatically occur. Notices need to be served on the other party to the lease to effect termination; and such notices need to be carefully prepared. We only consider commercial leases here, not agricultural leases or large commercial properties (see 3 things to remember about terminating a commercial lease of large premises | Brodies LLP) which have different processes.
These notices are short letters and it can be tempting to assume the process is simple. However, these notices often give rise to disputes as whilst they may be simple in form, they can be complex in practice if not done right.
A notice that is served late, addressed incorrectly, or which fails to comply with the lease can be invalid. The consequences of getting it wrong can be significant, leaving parties tied to a lease for longer than planned, exposing them to further financial and other liabilities.
Why do notices matter?
The fact that Scottish commercial leases do not automatically terminate on the specified end date often trips people up. If valid notice is not served, the lease will continue under tacit relocation (similar to holding over), usually for a further year on the same terms and conditions. To prevent tacit relocation, notice of the intention to terminate the lease needs to be given by either party. These are known as notices to quit.
A notice is also needed to validly exercise an early termination right. That may only be effective if associated break conditions are satisfied. These are known as break notices. Again, failure to comply with the lease requirements can mean the lease continues.
What should one consider when preparing notices?
- Timing is critical
Break notices: for break options, the lease will specify the required notice period. The period depends on the commercial agreement made and can be anything from a month to a year.
Notices to quit: with notices to quit, however, the lease is likely to be silent (i.e. no notice period is specified). In this situation, at least 40 clear days' notice is required.
Calculating timescales: this is not as straightforward as counting backwards from the termination or break date. Most leases contain ‘deemed service’ provisions. They will set out when a notice will be treated as having been received if it is sent by a certain method. Those periods need to be factored in when calculating the deadline – so 3 months’ notice period may actually mean a 3 months and 5 days’ period. Waiting until the last minute can be risky. See Notices under commercial leases – what is the purpose of 'sufficient service' and 'deemed service' provisions? | Brodies LLP .
- Review the lease
Review the lease notice provisions carefully. Notice provisions may not be in one clause or only the original lease – variations, assignations etc could contain notice requirements. Checking the full suite of lease documents is therefore critical.
- Consider legal developments
The law on notices evolves through court decisions. That can affect the interpretation of notice provisions and validity requirements. Accordingly, notice provisions should be considered in light of the lease and current legal authority.
- The notice has been served, what else should one consider?
Break conditions:
Break options often contain conditions (e.g. paying all sums due, giving vacant possession, removing tenant’s stock by the break date). Even where notice has been served validly, failure to satisfy a break condition could prevent the lease from terminating.
Consider reinstatement obligations (dilaps)
Tenants are likely to have carried out works to the property, whether fit out and/or subsequent refurbs. Both landlords and tenants should check the lease provisions:
A landlord may need to serve a terminal dilapidations (dilaps) notice, specifying what works the tenant has to carry out at lease expiry to comply with its lease obligations.
A tenant may be required or entitled to serve notice on the landlord asking for clarification of the works it is to carry out; or to opt to leave certain items in the property.
Again, early review of these obligations is prudent. Early engagement allows time for parties’ surveyors to review the lease, inspect the property and, if possible, negotiate the dilapidations.
What if the notice is invalid?
If a notice is served incorrectly and the deadline for service has passed, the notice will generally be invalid.
With an invalid notice to quit, the lease will typically continue under tacit relocation - a further year on the same terms. With an invalid break notice, the opportunity (at that break date) will be lost altogether. In both situations, the lease remains in force and neither party has an automatic right to renegotiate its terms.
If the notice was served sufficiently in advance of the notice period expiry date, there may be time to issue a new / correct notice. The invalidity of an initial notice does not prevent a party from serving a new notice provided that all requirements are met.
The practical consequences of an invalid notice can be significant for both landlord and tenant:
- Landlords could be tied to lease terms that no longer reflect market conditions; and/or are not being able to secure vacant possession to relet or redevelop.
- Tenants will have to comply with all its lease obligations, both monetary (e.g. rent, service charge, insurance and rates) and non-monetary (e.g. repair, decoration, keeping the unit open and trading). Where the tenant was relocating and new property had been secured, they may face the cost of paying for two properties at the same time.
Key takeaways
Although lease termination notices are often short and seemingly straightforward, the underlying requirements can be complex.
A valid notice requires careful attention to the provisions of the lease and / or case law, ensuring that all requirements are met. An invalid notice leaves the lease in place and the parties committed to a lease they intended to exit from.
Engaging in the process early is key to providing sufficient time to meet all requirements. And one does not need to go to the wire – unless there is a maximum notice period, a notice can be served at any time before the notice period expires.
