The Commercial Lease Bus - Don't miss your stop
Most commercial leases are like buses. You can only get off the bus (break the lease) at designated bus stops (fixed break dates) along the route (duration of the lease).
Alighting (ending the lease) only at the final destination (the fixed termination date contained in the lease). Just like the bus taking you where you expect to go, for the price of your ticket along the publicised route - it is a reasonable assumption that the lease will automatically end on that date, the tenant will vacate and hand back the keys, and the parties’ obligations to one another will cease.
In fact, the position is not so straightforward. The bell needs to be rung to stop the bus and if the parties have not served notice or taken legal advice, they may find themselves unwittingly unable to get off the bus and somewhere they didn’t expect to be: tied into the lease for a further period by the common law doctrine of tacit relocation (or “silent re-letting”).
With the current economic uncertainty, shift to remote working, and the rise in online retail sales, many commercial tenants and landlords will be reviewing their buses and routes (leases and terms) with interest.
Tenants will need to consider their lease commitments and future requirements for business space. Landlords may be seeking to recover property from tenants who are in rent arrears, or to re-develop their property to maximise its potential in the current market.
Getting off the bus along the route – Break Options
Many commercial leases contain an option for one or both of the parties to terminate (or “break”) the lease before the expiration of the term by service of a notice.
The party exercising the break option may be required to comply with additional conditions, for example payment of all rent and other sums due, or payment of an extra sum on top of the rent due to the exercise of the break.
It is vital that the break notice is served timeously, in the correct manner and all other conditions are complied with. Otherwise, the break notice may be invalid, you will have missed the bus stop and be required to continue until the end of the route (the termination date).
Missing the last stop - Tacit Relocation
In order to end a commercial lease at the date stated in the lease document, either the landlord or the tenant must give advance notice to the other by serving a notice to quit.
If you miss this last stop and notice is not given, you may be surprised to know that the lease will continue at the same rent for a further period. Leases for one year or longer are extended for a further one year period. Leases of less than one year will continue for the same period.
For example, a lease of three months will continue for a further three months. There are separate statutory rules for residential and agricultural leases, which we do not consider here.
The general rule is that all of the terms of the original lease will continue to apply for the period of extension, except the duration. But if a particular provision of a lease is inconsistent with the extended period, it will cease to apply.
For example, a Court has held that a clause giving the tenant the option to extend the lease for a period of 20 years no longer applied when the lease continued by tacit relocation. The rationale was that after the expiry of the original lease period, it became a yearly lease terminable at the end of each year with requisite notice. An option to extend was considered to be inconsistent with that.
Depending on the circumstances, if a formal notice to quit was not served but the parties acted and corresponded in a manner that is consistent with the lease ending on the termination date, it could be argued that tacit relocation did not operate and the lease terminated. However that would be a last resort and a notice to quit should always be issued.
Opinion is divided as to whether it is competent in Scots law to stipulate in a lease that tacit relocation will not operate. It is safer to assume it is not.
Ringing the bell to get off the bus - Notices to Quit
The law relating to notices to quit is complex - with traps for the unwary.
Some of the law is statutory. The lease document may set out the period of notice required and detail the mechanics of delivery and service. The party issuing the notice must strictly adhere to the terms of the lease.
In most cases, for a lease of four months or longer, the required period of notice is 40 days. If the term is less than four months, the notice period is usually one third of the duration, but no less than 28 days.
If the property exceeds two acres, the notice period may be longer (a year or more), depending on the original term, although there is some ambiguity regarding the application of that statutory provision as discussed in Andrew Smith’s previous blog here.
It is also necessary to allow additional time on top of the notice period for service and receipt by the other party. Knowing when to ring the bell so as not to miss the stop, that is calculating the last date for valid service, can be complicated.
Any failure to comply with the lease and any applicable statutory provision may mean you miss your stop, the notice being invalid, in which case the lease will continue.
The validity of notices to quit has often been the subject of litigation, with courts having to decide whether errors in the content of the notice or the method of service were fatal. Due to the complexities, we would always advise that any party issuing one should obtain legal advice.
Route changes - Time for Reform?
In some cases, the continuation of a lease by tacit relocation will be a simple way to extend a lease that the parties are happy to run on for longer, with no requirement to formally document the extension and no cost.
However, as with most bus timetables, the current law relating to the termination of commercial leases in Scotland is complex and confusing in some respects. A tenant unaware of tacit relocation may enter into a binding lease of new premises, without realising that they are committed to paying the rent for their current premises for a further year, because they failed to serve a notice to quit.
It can be burdensome for landlords with large property portfolios to continually monitor the expiry dates and deadlines for service of notices to quit. Clarification and simplification of the process in the future would be welcome.
Reform is expected. The Scottish Law Commission carried out a consultation in 2018 regarding the possible reform of the law relating to the termination of leases, including tacit relocation and notices to quit.
Until the Commission report we do not know what any changes will be, but it is likely that aspects of tacit relocation, service of notice and notice periods will be impacted.
If you are keen to make sure you don’t miss the bus or your stop, be a prudent landlord or tenant and review the terms of your current leases. Failure to do so may mean that you are caught out, and committed to the lease for a longer period than you expected.
If you have any queries about the terms of a commercial lease, please get in touch and we can assist you.
We offer clients a Commercial Lease Review Service giving a high-level review of the key bus stops in a lease.
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