Commercial Property Leases

Although every lease has its own specific matters that need to be considered, below we give a brief overview of some of the common features found in commercial leases in Scotland.

General contract law regulates leases of commercial property and, as such, all necessary safeguards must be implemented within the commercial lease. There are no automatic safeguards for a Scottish commercial tenant, except in a limited number of retail cases. However, Scots common law implies various obligations on the landlord in relation to repairs and keeping the property wind and water tight, provisions that are normally displaced in an adequately worded lease that is legally acceptable to both landlord and tenant.

Commercial Property Use and Restrictions

Amongst other things, a commercial lease will specify the permitted use of the premises and contain restrictions on its change of purpose. In Scotland, there is no implied term that the landlord’s consent to change of use will not be unreasonably withheld, but it is typical that the lease should provide for the landlord’s express consent to change the use of the property. Discretion for consent must be established through clear, unambiguous wording in the lease.

Generally, all improvements, which cannot be removed without substantial damage to the premises, become the landlord’s property after installation. For example, structural improvements to the roof become the landlord’s property while a retail unit’s till system does not.

‘Keep Open’ clauses

‘Keep Open’ clauses are another feature often found within Scots law leases in the retail sector. These provisions seek to require the tenant to continue to trade at the property. These may be enforced through a court order, provided the clause is sufficiently precise, would not cause undue hardship and there are no other compelling reasons for the clause not to apply. Alternatively, the landlord may claim damages for breach of contract.

Repair/Yielding up/Dilapidations

Where a tenant fails to maintain the property to the standard as required per the lease, a landlord may seek to enforce the repairing (and at lease expiry) yielding up provisions in the lease. The landlords rights of recourse will be determined largely by the terms of the lease. In the event that the lease is silent in terms of landlord’s remedial rights at expiry of the lease and the tenant fails to perform its repairing obligations under the lease at expiry, a landlord can seek to raise an action for damages. Put simply, for a claim of damages to be successful, there has to be loss. Each lease and what losses may or may not be incurred will vary depending on the circumstances.

Rei Interitus

In Scotland, under common law, in the event that the commercial property, which is the subject of the lease, is destroyed or damaged, the lease is automatically terminated. However, an institutional lease favoured by banks, pension funds and other large investor landlords, typically contain a provision that, regardless of this destruction, the lease continues with detailed provisions relating to the rebuilding of the premises (usually by the landlord) and abatement of rent and service charge pending the property being rendered fit for occupation and use.

Renewing a Commercial Property Lease

In terms of renewing the lease, if the parties take no actions to the contrary (and the occupier remains in occupation and pays the rent), the law assumes that both parties wish for the lease to continue beyond its expiry date. If this is the case, the lease will automatically renew for (in most cases) an additional year under the same terms so it is important to serve the appropriate notice to bring the lease to an end.

Notice Period

If the lease is not to continue, the common law is that one party must give the other at least the appropriate notice period (normally 40 clear days) prior to the natural expiry of the lease.

The law on expiry of commercial property leases is currently under review by the Scottish Law Commission and changes to the current law are anticipated. It is important to contact a solicitor well in advance of any expiry dates to ensure adequate notice can be served formally to protect the position in relation to bring the lease to an end.

Subletting

A tenant will normally not be permitted to sublet the property without the landlord’s prior written consent. Institutional style leases will include standard caveats which usually provide that the landlord’s consent cannot not being unreasonably withheld (or delayed) in the case of a proposed assignee (incoming tenant) who is demonstrably capable of fulfilling the tenant’s lease obligations and is respectable and responsible. Should the tenant receive such consent, then the tenant remains in the letting ‘chain’ and will remain responsible for payment of the rent to the landlord, although will recoup that rent from the sub-tenant and otherwise pass on its obligations under the tenant’s lease to the sub-tenant in the sublease. Ordinarily, the landlord forms no contractual relationship with the sub-tenant. In Scotland, unless otherwise contracted between the parties, a sub-tenant has no security of tenure. Accordingly, if the tenant’s lease comes to an end, the sub-lease automatically terminates (except in very limited, specific circumstances).

Assignation

A typical Scottish lease will permit a tenant to assign its interest in the lease but only with the prior, written consent of the landlord. The same caveats to the landlord’s consent will apply to assignation as they do to subletting. An assignation of the tenant’s interest in the lease, usually affords the existing tenant to ‘walk away’ from the lease obligations - the new tenant simply steps into the shoes of the outgoing tenant. Note that the 1954 Act and AGA’s as they are referred to in England do not form part of Scots law.

Land and Building Transactions Tax

Leases in Scotland over a certain threshold attract Land and Building Transaction Tax (LBTT) in a broadly similar principle as SDLT being applied to English leases. An LBTT return is required to be submitted to Revenue Scotland on qualifying leases at lease commencement and again every 3 years for the duration of the lease. A further return is required at lease termination and upon certain events which amend the lease, such as assignation. Financial penalties are imposed by Revenue Scotland for late filing of returns and/or late payment of any tax due. Please do contact us if you have any queries in relation to LBTT.

Irritancy

The landlord can irritate (seek a court order to terminate) the lease if the tenant fails in their obligations under the lease, for example, failure to pay rent or perform necessary maintenance. Alternatively, the landlord can enforce against the tenant by petitioning the court for payment on the basis of breach of contract.

A lease is an asset to the landlord so irritating the lease is ordinarily a last resort and irritancy notices are to be served in a prescribed form, allowing a period for the tenant to remedy. Please do contact us to discuss options.