Automatic Continuation: Proposed reforms to termination of commercial leases in Scotland

Terminating a lease is often a source of trepidation for both Landlords and Tenants. Under Scots law, a failure to comply strictly with the relevant notice procedure can mean that a lease will automatically continue on the same terms for a further year. This is known as tacit relocation. This can be costly for both parties: a Tenant may find itself committed to an existing lease despite having signed a new lease elsewhere, and the rollover may curtail the Landlord's plans for redevelopment. The current system is widely seen as uncertain, unfair and generally unfit for purpose, prompting the Scottish Law Commission (SLC) to consider statutory reforms.

In this article, we will discuss some of the proposals advanced by the SLC in its recent report and how Brodies' retail and leisure team can support occupiers to bring existing arrangements to an end and navigate any future changes in law.

What is tacit relocation?

Tacit relocation is one of the quirks of Scots law. Both Landlords and Tenants can be caught out by expecting a lease to terminate automatically at the expiry of its agreed term. While some leases contain an express provision regarding the amount of time that should be given by either party to terminate the lease at expiry, it is not uncommon for leases to be silent on the amount of notice required. This can make it easy for parties to overlook the fact that a notice must be served.

Information regarding terminating commercial leases can be found here.

Proposed Reforms

In October 2022, the SLC published its Report on Aspects of Leases: Termination with a view to modernising the current position and making the rules more accessible. This has led to the introduction of 'The Draft Leases (Automatic Continuation etc.) (Scotland) Bill'.

Some of the key proposals are:-

1. Changes to Terminology – The SLC proposes that the existing terminology should be modernised, replacing the term "tacit relocation" with "automatic continuation". It is hoped that this will make the law more accessible, particularly for unrepresented parties.
2. Statutory Code – It is proposed that a new statutory code should be created to replace the existing common law position. While it would still be possible for leases to continue automatically parties should be able to contract out of that position. The SLC recommend that this should be done in writing to encourage parties to consider carefully what they would like to happen at the end of a lease.
3. Renewal Periods – It is recommended that the default continuation period should be one year where the lease is for a period of more than one year, or a period equal to the period of the lease for shorter leases. The SLC recommends that the parties may agree to reduce these default periods to a minimum of 28 days (for leases granted for more than 28 days). Again, this encourages parties to consider what they would like to happen at the end of a lease and gives parties greater control.
4. Codifying Notices to Quit – The SLC recommend that the new code should set out the essential elements which a notice should contain. Although the SLC do not go so far as recommending compulsory wording, failure to include each essential element would render a notice ineffective.
5. Changes to Notice Periods – The SLC has recommended minimum termination periods which are longer than the common law 40 day position. For leases of six months or longer, at least three months' notice should be given. Where the lease is for less than six months, at least one month notice should be given. No notice should be required to prevent automatic continuation for leases of less than three months.

What does this mean for Landlords and Tenants?

While the Report makes a number of recommendations, the reforms arguably do not extensively alter the existing position as a lease may still continue beyond its expiry date in the absence of a valid notice. Codifying and streamlining the rules regarding termination procedures has the potential however to simplify the process and thereby restrict the risk of dispute arising between parties following the service of a notice to terminate. This would be beneficial as notices are frequently a subject of contention between parties, and the consequences of failing to serve a valid notice are significant and costly.

If the proposals are signed into law, it is anticipated that leases will require much more extensive drafting regarding what parties would like to happen at expiry of a lease. As a result, there is likely to be more nuanced commercial discussions between parties regarding termination at the Heads of Terms stage. It is hoped that improving transparency around notice requirements will make it easier for parties to terminate a lease.

As we wait to see whether the Scottish Government will take forward any of the SLC's recommendations, the renewed focus on termination provisions serves as a useful reminder to both landlords and tenants of the importance of taking advice as early as possible if considering terminating a lease.

Please get in contact with the either Danny George or Emma Barnett in our retail and leisure team if you would like to discuss in more detail.