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Notices in Commercial Leases – a welcome clarification for landlords and tenants

Notices in Commercial Leases – a welcome clarification for landlords and tenants

Over 100 years after an Act came in, we finally have some clarity. On 1 October 2019, the Court of Session provided welcome clarification on the Scots law concept  of “tacit relocation” in M7 Real Estate Investments Partners VI Industrial Propco Limited v Amazon UK Services Limited [2019] CSOH 73.


What is tacit relocation and how can it be prevented?

Tacit relocation is the concept that provides for the automatic (and silent) renewal of both commercial and residential leases on expiry of the original agreed duration. Nothing has to be said or written by the parties for this renewal to take effect.

The inevitable consequence for businesses that don’t know about this, is that they remain bound to a lease that they probably thought had come to an end. This often leads to tenants being liable to pay rent for a property they no longer want. Failing to deal with tacit relocation can be very costly.

The most common way of preventing a lease from silently renewing is for a landlord to serve a tenant with a notice to leave the property or for the tenant to serve the landlord with a notice of its intention to do so. Such notices are known as “Notices to Quit”. The law governing these notices is complex and has caused many to go to court for a ruling on whether a lease has been validly brought to an end or not.
 

Section 34 of the Sheriff Courts (Scotland) Act 1907

The common law on tacit relocation is relatively straightforward. 40 days’ clear notice is required; otherwise a commercial lease will renew. The operation of tacit relocation was thrown into some uncertainty however by the terms of section 34 of the Sheriff Courts (Scotland) Act 1907, and has remained uncertain for over 100 years - at least until the recent judgement in M7 Real Estate Investments.

Section 34 provides a statutory procedure for removing tenants without having to obtain a court order. The procedure only applies however to certain leases over land exceeding two acres in size. To make use of this procedure, landlords are required to serve a Notice to Quit between one and two years before the termination date. Section 34 provides that if such notice is not given “… the lease shall be held to be renewed by tacit relocation for another year...”


Uncertainty, risk and cost

The wording of section 34 gave rise to uncertainty as to how it interacted with the common law operation of tacit relocation. Would a 40 day notice under the common law still prevent tacit relocation where the land let exceeded two acres in size? It was thought by some that the effect of section 34 was that at least one year’s clear notice had to be given in respect of all leases over land exceeding two acres in size.

One of the many issues with section 34 was whether or not it was restricted to certain removal procedures. Uncertainties in these types of matters means risk for landlord and tenants. Most practitioners chose to deal with this uncertainty by giving at least one year’s clear notice.


The clarification: M7 Real Estate Investments Partners VI Industrial Propco Limited v Amazon UK Services Limited

M7 were the landlord and Amazon the tenant of premises in Gourock. The premises exceeded two acres in size. M7 gave slightly less than six months’ notice for Amazon to leave the premises.

Amazon argued that as M7 had not given a year’s notice, the lease was held to have renewed by tacit relocation for another year in terms of section 34. M7 argued that section 34 was merely an additional means of removing a tenant, and so M7 only had to give 40  days’ notice (the common law period).

The court agreed with M7. It decided that section 34 did not make a substantive change to the common law of tacit relocation. The requirement to give at least one year’s notice only applied to landlords wishing to make use of the statutory removal procedure. The six months’ notice served by M7 did not entitle them to use that, but it did prevent tacit relocation and termination of the lease.

 

One less uncertainty?

We wait to see whether the decision will be appealed.

In the meantime, anyone who has served a notice to quit a lease of land exceeding two acres in size can sleep a little easier. Most will probably still prefer to serve one year’s notice given the consequences if insufficient notice is given. However, for those who either miss that one year deadline (make sure it is in your diary!) or only decide to terminate the lease after the one year deadline, M7 Real Estate Investments provides welcome clarification that section 34 does not trample over the common law operation of tacit relocation and that 40  days notice is sufficient to terminate all commercial leases. M7 Real Estate Investments is a big step in resolving a long-standing uncertainty.

 
A final word to the wise: we serve commercial lease notices on a daily basis, and are always happy to take the strain and risk away from you, no matter the size of the lease.
 

Andrew Smith, Associate

Burness admin