Terminating Leases in Scotland
04 October 2022 04 October 2022
UK Real Estate Insights
Unlike England where there is a statutory foundation in the form of the Landlord and Tenant Act 1954, in Scotland, leases are governed by common law. It means that those opting not to take proper legal advice can be caught out, by what is not in the Lease.
In the usual way a Lease will contain a start date and an end date. Notwithstanding the end date in the Lease, Notice to Quit must be given by one of the parties to the Lease. Failing to serve a Notice to Quit will automatically renew the Lease (subject to some exceptions such as seasonal lets, residential tenancies and agricultural holdings which have different rules) for a further year on the same terms and conditions as before, under the common law principal of tacit relocation (or silent re-letting).
The notice period to be given in the Notice to Quit prior to the Lease end depends on the type of and size of the Premises. Generally for commercial premises (but advice must be sought on a case by case basis) 40 clear days' notice is required, so essentially 41 days, plus time for postage, usually set out in the notice provisions of the lease, failing which there are common law presumptions to be considered.
Validity of a Notice to Quit
The Notice must comply with the Notice provisions under the Lease and must be served on the correct entity as specified under the Notice provisions in the Lease, which may include successors in title. It is, therefore, critical that the appropriate notices are served not only on time, but on the correct parties, following the method in the Notice provisions of the Lease (i.e. a specified form of postage, minimum period of time, a specific address or current registered office).
Contracting out of Tacit Relocation
There is doubt whether the parties are able to contract out of the common law principal of tacit relocation. Equally it is not a provision expressly written into the Lease, so the parties to the Lease need to be alive to the fact that it exists and diarise accordingly. Currently the Scottish Law Commission are considering a Discussion Paper which includes review of the principal of tacit relocation but for now the principal is very much alive in current Scottish leases.
However, exclusion of tacit relocation can apply in limited circumstances as case law has shown over the years, principally around the parties agreeing a new lease. Advice should be sought on individual circumstances if there is a concern.
If you are a Tenant and are served a Notice to Quit by your Landlord but have granted a Sub-Lease (without having obtained all consents required under your Lease), the Notice to Quit does not affect the Sub-Tenant and you, as the Tenant (or Mid Landlord), are obliged to serve a further Notice to Quit on your Sub-Tenant, otherwise you could fall foul of your obligation to vacate the premises under the Notice to Quit.
If you are a Tenant (or Mid-Landlord) serving a Notice to Quit to bring an end to your Lease, you must ensure that a Notice to Quit is served on both your Landlord and Sub-Tenant. When negotiating a Sub-Lease you must take into account the timescales required to enable you to comply with notice provisions and whether you require a buffer to remove any works, not forming part of the Sub-Tenant's obligations or carry out inspections in good time.
A Guarantor's liability is not extended by tacit relocation unless it is expressly stated to do so in the Guarantee.
Land and Buildings Transaction Tax
At the end of a Lease, the Tenant is obliged to notify Revenue Scotland that the Lease has come to an end, if during the period of the Lease, it was a Land and Building Transaction Tax notifiable Lease. Failure to do so can result in penalties and is not likely to come to light until the next tri-annual return date being due, at which point some heavy penalties may have accrued.
Equally, if the principal of tacit relocation is to apply and the Lease is extended for a further year, a further tax return may need to be submitted.