The termination of commercial leases — unintended consequences

It’s known as much for its beauty and dramatic landscape as it is for its remoteness and the extraordinary wildlife calling it home, including royal penguins and seals.

Since people began visiting the island, the introduction of new species has had serious consequences for the ecosystem.

European rabbits were first introduced in the 1870s, while ships’ rats and mice were first recorded around 20 years later.

After feral cats were eradicated in 2000, the rabbit and rodent populations boomed, becoming the dominant pest species: causing devastating damage to the island’s native vegetation, wildlife, and geology.

What does this sub-Antarctic island and proposed changes to rules around commercial leases have in common?

A lesson in unintended consequences.

Commercial lease reform in Scotland

A major change in the draft Leases (Automatic Continuation etc) (Scotland) bill, published at the end of last year, is the codification of the law relating to the continuation of a lease that hasn’t been terminated by either party: formerly tacit relocation, now to be known as automatic continuation.

Like eradicating Macquarie Island’s feral feline population, automatic continuation — or more specifically people’s behaviour on or after the termination date — can have unintended consequences.

Many commercial tenants presume when they reach their termination date, the lease ends.

However, this isn’t necessarily the case.

The draft bill sets out the long-known common law principle that leases automatically continue by default and the way landlords or tenants behave can over-ride a termination whether they mean it to or not, including if notice has been served.

As such, landlords or tenants need to take positive action to end a commercial lease.

If they don’t, and because for leases of a year or longer, the statutory continuation period is one year, it’s easy to see why this could give rise to uncertainty and potential disputes about when a lease actually ended.

What action should landlords or tenants take to end a lease?

For a landlord, failing to take steps to remove an over-staying tenant or accepting rent payments could be argued as indicating a lease hasn’t been terminated.

For tenants, this could be continuing to pay rent, or continuing to use all or part of the premises.

Taking steps to follow the required procedure, should this legislation be enacted in its current form, reduces the risk of a dispute about the termination, or not, of a lease.

To demonstrate a ‘clean break’ the parties should make sure they act in a way that’s consistent with termination. For example, a tenant should vacate the property (including removing all of their furniture) before or on the termination date and a landlord — for instance — shouldn’t accept rent after that point.

What next?

The Scottish Law Commission is expected to submit is final bill soon and report to Scottish ministers.

And while this move to clarify and codify the current legal position is welcome, it’s likely to be a year or so before we see any new law come into force.

Even then though, its impact is uncertain.

If people still act in a way that’s inconsistent with lease termination — including the examples I mentioned earlier — disputes will still be common.

We’ll be watching with interest.