Tread carefully when negotiating a new lease: Tacit relocations and the termination of commercial leases in Scotland

It is common practice in the commercial real estate industry, in Scotland and other jurisdictions, for a Landlord and Tenant to enter into discussions when a commercial lease is approaching its end. As has been widely documented, in Scotland a lease does not terminate on the expiry date unless either the tenant or the landlord has served an appropriate notice to quit on the other party. 

A notice to quit must be served within a particular timeframe. This is either stated within the lease or the position defaults to the 40 day notice period accepted by the common law and stated in the Sheriff Courts (Scotland) Act 1907. The exception to the conditions contained in the 1907 Act is that where the land exceeds two acres in size the notice period must be at least one year.

Failure by one or other of the parties to serve a notice to quit within the required time period is recognised to result in a lease continuing for a further year on the same terms as previously agreed under the doctrine of tacit relocation. That doctrine being a gift to the Scottish legal system from our Roman predecessors.

In practice, this often means that a landlord may choose to use the impending deadline for service of a notice to quit as means of pressing the tenant in negotiations where the tenant is seeking to renew a lease on more favourable terms. Tenants have also been known to use this situation to their own advantage where they wish to remain in the property on the same terms. 

The recent decision of Lord Clark, sitting in the Commercial Court of the Court of Session, in Rockford Trilogy Limited v NCR Limited [2021] CSOH 49, brings into question how parties to a lease should conduct themselves in these negotiations. The decision has highlighted that such discussions may demonstrate the intentions of the parties. The law will allow one of them to found on what has been said in the event of a dispute over what constitutes "notice" to exclude the operation of tacit relocation.

Rockford Trilogy Limited ('Rockford') were the landlord of a commercial property that had been let to NCR Limited ('NCR') under a commercial lease. Rockford commenced proceedings against NCR arguing that the lease had not terminated on the termination date but that it had continued for a further year on the same terms under tacit relocation. Rockford argued that NCR were therefore liable to make payment of rent and other charges due under the terms of the lease for a further year. NCR contended that the lease had come to an end and that sufficient notice had been given to Rockford to allow this to happen.

Rockford argued that neither party had served a notice to quit that would terminate the lease. There was no clause in the lease stating that a particular period of notice was required to be given. The default 40 day period applied. Rockford stated that the failure to serve a notice with a minimum period of 40 days in advance of 26 March 2020 meant that the Lease would continue on the same terms until 26 March 2021. 

The parties engaged in negotiations via their agents. These discussions began in June 2019. The email exchanges refer to various proposals that were considered. All of them envisaged NCR continuing on as tenant in the property, albeit under different terms. 

A month before the contractual termination date of the lease the landlord's solicitor wrote to NCR. The letter stated that Rockford had not received a notice to quit from NCR stating that the lease was to be brought to an end on 26 March 2020. The lease would therefore continue on the existing terms for a period of one year from 27 March 2020. Payment of rent for the next quarter, which fell due to be paid on 28 February 2020, was also demanded in this letter. 

NCR responded and argued that the terms of the regular communications between its agent and the agent for the landlord constituted the provision of notice through the course of discussions. In particular, NCR's agent had stated in an email of 21 January 2020 to Rockford's agent that "the only way they [NCR] would consider remaining at the building is if the dilapidations are capped at £300k together with the nil rent proposed for 12 months". They also noted that the Rockford and NCR had been negotiating heads of terms for a new lease. The final draft of the heads of terms had been sent to NCR's agent at the beginning of February.

The parties maintained their respective positions going into the court action. In his submissions Senior Counsel for Rockford stated that at no point in the correspondence between parties' agents was it ever stated on NCR's behalf that the existing lease was to come to an end on 26 March 2020. The negotiations took place between the parties, via their agents, and the exchange of draft heads of terms were of no consequence. The absence of an express statement from Rockford that they would be holding NCR to the terms of the existing lease, under tacit relocation, was of no consequence.

Senior Counsel went on to argue that even if acceptance of the heads of terms had amounted to the agreement of a new lease by Rockford, it could not have done so since the date by which a notice to quit should have been served had already passed. The terms of the correspondence from NCR's agent did not commit to any particular position until late on in the course of the exchanges. Senior Counsel for Rockford sought to make clear that the parties were engaged in negotiations only and that both had the freedom to walk away from those negotiations. The default position would always be that service of a notice to quit was required to end the existing Lease. Senior Counsel for Rockford stated that a "new negotiation regarding new terms was not sufficient to amount to the giving of Notice to Quit". 

Senior Counsel for NCR submitted that the concept of the operation of the tacit relocation: 'rested on a presumption and, as such, can be displaced by evidence to the contrary'. This referred to the presumption in law that if a party remains silent in such circumstances, then they are taken to have accepted the operation of tacit relocation. 

He went on to say that "because tacit relocation is dependent on applied consent arising from silence, information by one party that they do not consent to continuation suffices to mean that the necessary silence is not present and exclude the implied consent".

This developed the argument that because it had been stated in negotiations by NCR's agents that they were seeking to negotiate terms on which MCR could continue as a tenant of the property, they had not been silent. Tacit relocation could not therefore apply. Senior Counsel for NCR also stated that "there was no reason why the necessary implication of consent should not be displaced after the period in which a Notice to Quit might have been given. While compliance with the 40 day period may be required where certain remedies are to be sought it is not a requirement to exclude consent and therefore to exclude tacit relocation". 

In short, Senior Counsel for NCR argued that regardless of what the default position in law concerning the service of a notice to quit may be, it was open to the parties to agree to the termination of the lease even after the 40 day notice period and for a new lease to come into effect.

In all Senior Counsel for NCR argued that there had been more than sufficient notice given within the terms of the correspondence between the agents that the tenant did not consent to the continuation of the lease.

Lord Clark provided a useful refresher of the legal authorities in this area. His view was as follows:

1. Tacit relocation is based upon presumed silence of the parties. Consent to continuation of the terms of a lease for a further year is presumed by the law in the event that a landlord and the tenant are silent on that issue. Negotiations between the parties can still take place but if they are silent on this point then tacit relocation will be presumed to apply.
2. Service of a notice to quit is the "classic" method of showing that a party is not silent on this point. Informal notice stating that the lease is not to continue is also a means of breaking the silence but that notice must clearly and overtly show the intention of the party to be that they do not wish the lease to keep going for a further year.
3. 40 days notice of an intention to terminate a lease, unless stated otherwise in a lease, is sufficient to prevent the operation of tacit relocation.
4. In circumstances where a landlord and a tenant have entered into an agreement, for example, for a new lease, that will prevent the operation of tacit relocation. None of the legal authorities point to that agreement having to be finalised before the last date for service of a notice to quit.
5. In this case, there was no formal notice to quit served by the landlord or tenant. The question was whether NCR were correct in arguing that informal notice has been given. Referring to the email from NCR's agent dated 21 January 2020 quoted above, Lord Clark said that "The clear message, which I regard as distinct and definite, is that unless the alternative arrangement is agreed to, [NCR] will not remain as occupier of the premises."
6. His Lordship went on to say that "it is, in my view, clear that [Rockford], through its agent, knew that the defender was going to leave unless that new arrangement could be agreed. In any event, viewed objectively, [Rockford] or its agent should have withdrawn that conclusion from the email of 21 January 2020." 
7. In the view of Lord Clark the email of 21 January 2020 gave "sufficient notice, or overt intimation" that NCR intended to bring the lease to an end. The legal impact of a tenant stating this to be the case was not diminished by the fact that it was said during negotiations.

At the time of writing, it is unclear whether Rockford intends to appeal this decision. The consequences and effect on industry practice in Scotland must therefore be assessed.

The first question to consider is how landlords, tenants and their agents should now conduct negotiations when a lease is approaching its expiry date. If an express statement to bring the lease to an end is to be taken as informal and effective notice to the other party then there is a real risk of such a statement being relied upon by the party to whom such a statement is made. 

Negotiations could be conducted on a without prejudice basis but this should be made clear from the outset. Solicitors often exchange correspondence on this basis during negotiations. Statements made by one party to the other should not then be relied upon either as an informal notice of a particular position. 

The decision should not be interpreted as having an impact on how negotiations are conducted generally. The intention of the court was that the judgement should be focused on the operation of tacit relocation.

Two considerations are absent from the judgement. This is likely because they did not feature in the pleadings for Rockford or NCR. The first is the continued occupation of the property by the tenant. The second is whether the terms of the lease would provide clarity as to how the parties should have conducted themselves.

It is noted early in the judgement by Lord Clark that NCR remained in possession of the property after 26 March 2020 but neither they nor Rockford sought to rely on this point in court case as a basis for which to argue that the existing lease was to continue. The impact of this point might well be deserving of a separate article. Whilst it is not clear why the landlord or tenant chose not to construct an argument on this point, it could conceivably have been used to show that NCR had behaved in such a way as to demonstrate that the lease was to continue under tacit relocation.

There is also little detail about the terms of the existing lease. We are told that a notice to quit with a period of notice of at least 40 days would have been sufficient to bring the lease to an end. There is no mention of provision within the lease for how notices should be served. Most modern commercial leases will require all notices to be in writing and, for example, that a tenant serving notice on a landlord which is a limited company must do so at the landlord's registered office. If such a clause had been relevant in this case it stands to reason that it may have led to a difference outcome.

The immediate and future impact of the decision aside, this is the latest decision from the Scottish courts to challenge the conventional understanding of how tacit relocation comes in to operation. It will no doubt feed into the ongoing conversations about reform of this area of Scots law, which is currently under review by the Scottish Law Commission. In the meantime, if either party to a lease wishes to exclude the operation of tacit relocation they would be wise to serve any notice to quit in writing.