TERMINATING COMMERCIAL LEASES - NEW PROPOSALS

In December 2024, the Scottish Government introduced the Leases (Automatic Continuation etc.) (Scotland) Bill setting out proposals which change aspects of the law in relation to the termination of certain leases.

To what leases does the Bill apply?

The Bill applies to all leases other than residential leases, agricultural leases and leases of crofts, small landholdings and allotments – all of which are defined by reference to statute.

The intended net effect is that the Bill will apply to all commercial leases. However, there may be some leases of residential or agricultural land which do not fall within the statutory definition of “residential leases” or “agricultural leases” and are therefore caught by the Bill. The Bill should therefore be checked to determine whether or not it applies to any given lease.

What are the headline points?

Currently, most leases will not terminate automatically on their contracted termination date. This will only happen if the landlord or the tenant sends the other a “notice to quit”, which must usually be sent at least 40 days before the end date. If no such notice is sent, the law presumes that both want the lease to continue and it is extended automatically by a further period of one year by “tacit relocation”. Different periods of notice and/or tacit relocation may apply for short leases and leases of more than two acres.

The Bill proposes to:

• Replace the current rules on tacit relocation with a new statutory regime under which leases continue automatically after the contracted termination date. This new statutory regime also uses the term “automatic continuation” rather than “tacit relocation” as part of an attempt to clarify and modernise this area of the law.
  
• Provide that the default period of automatic continuation will be one year unless the lease in question is for less than one year in which case the period of automatic continuation is equivalent to the length of the lease. The lease parties can agree to a shorter (but not longer) period of automatic continuation, subject to certain minimums.
  
• Allow a lease to provide that it will terminate automatically on its end date, removing the requirement for any notice to be served to bring the lease to an end. Should this proposal be carried forward into legislation, it is expected that some new leases will be drafted to take advantage of this provision.
  
• Say that if a lease does not provide that it will terminate automatically on its end date, it will continue by automatic continuation unless the landlord or the tenant serves the other a valid termination notice, which must be served at least three months before the end date (or at least one month before the end date where the lease is for less than six months). This is a significant change from the current default notice period of 40 days, although the parties can agree to a different notice period in the lease.
  
• Remove the longer notice period for leases of more than two acres, so that the acreage of a lease caught by the Bill will have no bearing on the notice period. This longer notice period will however continue to apply for leases of more than two acres which are excluded from the Bill.

Should these proposals be carried forward into legislation, they will apply to all new and pre-existing leases caught by the Bill. There will however be a six month transitional period during which time pre-existing leases with an end date which falls within that period can be terminated under the current law. The Bill contains other more minor modifications of the law in respect of leases.

Summary and timing

It remains to be seen whether these proposals will become law. The Bill awaits the parliamentary process where it will be considered and amendments to it may be made. A target date for passing the Bill into law has not been publicised, but it is expected to be early 2026. Once enacted, there will be transitional provisions and secondary legislation may be required for certain elements.

Should the Bill be passed as anticipated, the parties to a new commercial lease may wish to consider what they expect to happen at the end of the lease as part of the initial lease negotiations. For landlords and tenants of existing commercial leases, they will need to be aware that the notice procedure for bringing the lease to an end may have changed and that notice might have to be served much earlier than expected.