In Scots law, where the duration of a lease approaches its date of expiry (called the “ish”), and, where no party to that lease serves a notice to quit on the other (or where each party are silent) and have made no other alternative arrangements, there is a presumption that parties are in agreement that the lease may be prolonged by their tacit consent, otherwise known as tacit relocation.
Sounds straightforward and simple enough, right? Not quite. It is an area of law which is, unfortunately, quite complicated.
Such complications were highlighted in the most recent commercial property case to consider the operation of tacit relocation, Rockford Trilogy Limited v NCR Limited (2021).
The case
The pursuers, Rockford Trilogy Limited (the landlord) were renting out office space to the defenders, NCR Limited (the tenant). The lease was entered into on 27 March 2003, for a duration of seventeen years and was due to expire on 26 March 2020. From around June 2019, the parties’ agents were engaged in discussions regarding the tenant’s occupancy of the premises in question. Various alternatives to the continuation of the lease were discussed between the parties’ agents, but nothing was formally agreed.
On 26 February 2020, agents for the landlord wrote to the agents for the tenant stating:
“Our clients have been in touch with us today to advise that they have not received notice from [the tenant] to bring the lease to an end as at the contractual expiry date, and that as the minimum notice period for service of a termination notice (40 days prior to expiry) has now elapsed, they are treating the lease as continuing for a further period of one year from 27 March 2020 on the same terms and conditions (including rent), by virtue of the Scottish common law doctrine of tacit relocation.”
The tenant’s agent replied on 28 February stating:
“… We are somewhat surprised by the landlord’s assertion that notice of NCR’s intention to bring the lease to an end has not been provided. NCR, through its JLL broker, has had regular communications with the landlord’s agent since October 2019. NCR provided notice through the course of discussions and negotiation of Heads of Terms for the letting of a smaller area of the premises after termination of the current lease. In fact, the final draft of those Heads of Terms was sent to JLL by Savills on 6th February and is under final review by NCR.”
Put simply, the landlord’s agents contended that the lease did not terminate on the due date but was continued as a result of tacit relocation and, as a consequence, that the tenant was liable to make payment of rent, interest, insurance and service charges for a further year.
Agents for the tenant submitted that that there was no continuation of the lease by tacit relocation because the tenant’s agents had clearly demonstrated an intention not to continue with the lease on the existing terms and that intention was sufficient to displace the presumed consent which would be required for tacit relocation meaning therefore that no further payments under the previous lease were due.
The law
Following consideration of each parties’ submissions and in his decision, Lord Clark identified key legal principles that can assist in identifying whether tacit relocation is presumed or excluded.
Very briefly, the key legal principles identified were that:-
- the concept of tacit relocation is based on presumed consent by silence – if neither party gives notice of his intention to terminate the lease at its expiry, the parties are presumed to have agreed that the lease is to be prolonged.
- the actings of the parties to the lease must show that they are consenting to the prolongation
- silence on the matter is, in effect, being silent about not consenting to prolongation - there may be negotiations about alternative lease arrangements, but that can still constitute silence on the matter of prolongation
- informal notice that the lease is not to continue will suffice
- the notice must constitute sufficient notice of intention not to prolong the lease and it must satisfy the court that the party did not intend to continue with the lease on the same terms
- unless another period is stipulated in the lease, not less than 40 days’ notice of termination by a tenant will suffice to prevent tacit relocation
- to constitute sufficient notice, a party must give “overt intimation that they did not consent to the prolongation of the lease”
- where parties have entered into an agreement that is inconsistent with consenting to prolongation on the same terms as before, that will exclude tacit relocation
- there is nothing in the authorities governing tacit relocation that suggest such an agreement must be reached before the last date on which notice may be completely given
- such an agreement, whenever reached will supersede any implied consent to tacit relocation
- tacit relocation will not stand against express agreement
- “the expression of a contract under the hands of both parties” or “a bargain as to the terms which the tenant is to stay” even if not probative, will suffice rather than “a mere draft or paper of proposals for a lease”.
Lord Clark concluded that the tenant in this case (given the statements and intentions expressed in the correspondence between the parties) had overtly intimated that there was to be no continuation of occupancy on the old terms and that staying on could only be on new terms.
Tacit relocation, Lord Clark decided was therefore excluded in this case.
What does this decision mean?
When it comes to the operation of tacit relocation in a commercial capacity, this case is yet another example of the court’s willingness to accept an informal form of notice. The take home message therefore is that to be on the safe side if a party to a lease wishes for it to be brought to an end they should always send written notice to the other party in accordance with the notice provisions in the lease while ensuring that it is served 40 clear days before the lease expires.
Additionally, if it has not already been made clear from Rockford, parties involved in lease negotiations should take particular care in their responses to one another as they may find that it is those statements which may just be relied upon in court to determine the outcome.
Law reform is on the agenda
The Scottish Law Commission’s “Discussion Paper on Aspects of Leases: Termination” published in May 2018 compared the Scottish legal system to other legal systems throughout the world and found that the Scottish system was somewhat of an anomaly in so far as its operation and automatic application is concerned.
It notes at p16
“All comparable legal systems described above allow fixed term leases to be created. Where tacit relocation, or an equivalent doctrine, bears to operate, all of these systems allow the parties to contract out of tacit relocation. These comparable systems all expect parties to consider the duration of the lease when it is drafted. No other system, so far as we are aware, provides that the failure to serve a notice of termination before the stipulated expiry date results in the lease being tacitly relocated.”
Two options relating to reform of the doctrine of tacit relocation were identified:
- To disapply the doctrine of tacit relocation to commercial leases
- To create the right for parties to simply “contract out” of the doctrine of tacit relocation.
Option one would allow the parties to have the option to contract in or opt into tacit relocation. However, what happens if the parties do not opt in and at expiration of the lease both parties act in a manner consistent with the lease continuing? Will there be statutory provisions drafted to cover this situation and would those provisions only serve as a remodel of what is already achievable by the existing doctrine of tacit relocation?
Option two is currently in effect across different legal systems throughout the world and allows parties to address their issues at the outset of the lease and draft any appropriate terms into the lease. Where parties contract out of tacit relocation, the lease proceeds on a fixed term and ends at the expiry of that fixed term without the need for prior notice.
Parties to a lease who are silent on contracting out of tacit relocation still have the benefit of the doctrine. This option does provide certainty to some degree but where parties to a lease are silent and tacit relocation operates, will the courts still have to deal with questions of, among other things, overt intimations of notice?
The new bill is expected in 2022 and there is no doubt that there will be significant interest in its application in a commercial capacity.
