Commercial leasing in Scotland: key considerations for occupiers

A commercial lease is usually the second largest financial commitment a small business makes, after its people. It is also the document that business owners are most likely to sign on the strength of a summary, because the heads of terms looked reasonable and the lease itself ran to sixty pages of unfamiliar language.

Scottish commercial leases differ from English ones in ways that materially affect an occupier. The following are the points worth knowing before signing.

There is no right to renew

This is the difference that surprises occupiers most. In England and Wales, business tenants have a statutory right to renew at the end of the term unless it has been contracted out. Scotland has no equivalent regime.

When a Scottish commercial lease ends, it ends, and your right to remain is whatever the lease gives you. Where the premises matter to the business, because of fit-out, footfall, or the cost of moving, that has to be negotiated into the lease at the outset as an option to renew or as an extended term with a break. It cannot be recovered afterwards.

But it may not end when you expect

The counterpart to having no security of tenure is a rule that can extend a lease nobody intended to extend. Under tacit relocation, a lease that has not been properly brought to an end by the required notice continues automatically, on the same terms, for a further period.

For an occupier planning to move, this is the expensive one. A notice given late, given by the wrong party, or served in a manner the lease does not permit can leave a business paying rent on premises it has already vacated. Notice dates should be diarised from the day the lease is signed, with a reminder set well before the deadline.

Irritancy

Irritancy is the Scottish equivalent of forfeiture and is the landlord's right to bring the lease to an end for breach. It is regulated rather than unlimited. Where the breach is a failure to pay, the landlord must first serve a formal notice giving the tenant a period in which to pay before irritancy can proceed. Where the breach is non-monetary, the landlord's decision is tested against what a fair and reasonable landlord would do in the circumstances.

The protection is real but narrow. It is not a general discretion to excuse breaches and an occupier should not treat it as one.

Repairing obligations

Most Scottish commercial leases are drawn on a full repairing and insuring basis, under which the tenant carries the cost of maintaining the premises regardless of their condition at entry, including putting right what was already wrong in an older building.

Two things reduce that exposure. A schedule of condition, prepared and annexed before entry, limits the obligation to the recorded state of the premises. A clear cap or exclusion for inherent defects, for plant beyond a certain age, or for external and structural elements can shift a substantial liability back to the landlord. Both are matters for negotiation and both are considerably harder to argue for once the lease has been signed.

At the end of the term, a landlord's schedule of dilapidations is often the first occasion on which an occupier discovers what the repairing obligation meant in practice.

Rent review and break options

Rent review in Scotland is typically upwards-only at open market value, and the mechanics deserve attention: the review dates, the assumptions and disregards, and what happens if the parties cannot agree. Fixed or index-linked uplifts are easier to budget for and are increasingly common.

A break option is only as good as its conditions. A break conditional on the tenant having complied with all its obligations is in practice very difficult to exercise safely. Conditions should be limited to paying the rent due to the break date and giving vacant possession, and the notice requirements should be checked line by line.

The obligation that arrives years later

Land and Buildings Transaction Tax is payable on the grant of a commercial lease in Scotland, to Revenue Scotland. Less well known is that the obligation does not end there. A further return falls due every three years on the anniversary of the effective date, and again on assignation and on termination, and it must be submitted even where nothing about the lease has changed and no further tax is payable.

Two details catch occupiers out. The three-year cycle runs from the original effective date and does not restart when the lease is assigned, so an incoming tenant inherits a timetable that began before they were involved. And because the trigger is a date and not an event, nothing occurs to remind anyone of it.

Before signing

Establish what happens at the end of the term and what notice you must give. Commission a schedule of condition. Read the break conditions as though you intend to rely on them. Diarise the notice dates and the tax returns. And take advice on the lease before the heads of terms are agreed, because by the time they are, much of the negotiating position has already been given away.