Parties to a commercial lease need certainty about its duration

Commercial leases contain many clauses regulating the rights and obligations between the parties. Some clauses appear to contain a degree of certainty – such as the initial rent and the duration, but each of these might change in certain circumstances. With regard to rent, the lease is likely to contain rent review provisions which set out the arrangements for when and how the rent can be reviewed. However, whilst the lease will contain a start date and a duration, it is by no means certain that the lease will actually end on the date the landlord and tenant expect it to. Why is that?

Tacit Relocation

In Scotland, despite it appearing that a commercial lease has a termination date, both the landlord and tenant need to be aware of the principle of tacit relocation.

This principle takes its roots from Roman Law and it means unless and until either the landlord or tenant serves notice to quit on the other and where no alternative arrangements have been made, the lease will automatically continue for a further 12 months on the same terms and conditions.

The only way either party can be certain that the lease will come to an end on the expected termination date is to serve a Notice to Quit on the other at least 40days before the termination date.

If a party to the lease wishes to claim that the lease does not continue under the tacit relocation principle, there must be clear evidence of the communication of the intention that the lease will end on the expected date by one party to the other.

What are the circumstances which prevent tacit relocation from operating?

One of the latest cases to examine the principle of tacit relocation is the case of Rockford Trilogy Ltd v NCR Ltd [2021] CSOH 49. NCR Ltd were the tenants in a commercial lease with Rockford Trilogy Ltd being the landlords. Whilst NCR Ltd did not serve any formal notice to quit, they argued that lengthy negotiations were enough to show tacit relocation was excluded. The judge agreed and found in favour of NCR Ltd. However, the judge also indicated that negotiation alone might be insufficient to exclude tacit relocation. The judge, Lord Clark, referred to the tenant’s position of giving a clear indication that they intended that the existing lease should end when he referred to an email which said (o the tenant’s behalf) “the only way they would consider remaining at the building is if the dilapidations are capped at £300k together with the nil rent proposed for 12 months”. There were many email exchanges between the parties and their representatives, but it was because of this email that Lord Clark decided that tacit relocation was not available to the landlords on this occasion.

There was a lot riding on this decision for both parties – the annual rental was £800,000!

Is there any change to tacit relocation likely in the future?

A discussion paper entitled “Aspects of Leases: Termination” was published by the Scottish Law Commission in 2018. It contains a wide-ranging discussion on tacit relocation along with options for reform. In December 2021 a draft consultation bill entitled Leases (Automatic Continuation etc.) (Scotland) Bill was published. This Bill looks at how commercial leases may be properly terminated. We do not know if or when this Bill will come into law but will continue to monitor the position and, if it does, we will then review its terms.

Is there anything else I need to know?

It is also important, when serving a Notice to Quit that the terms of the Notice Clause in the lease are properly understood and adhered to. If you fail to follow the correct method of serving the Notice to Quit, it might be ineffective and the principle of tacit relocation will apply. As can be seen from the NCR case, the financial implications of that can be expensive!

If you are a landlord or tenant in a commercial lease or are thinking about entering into (or getting out of) a commercial lease and need legal advice, please contact us.

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