Leasing commercial property involves a complex interplay of responsibilities and rights. In this blog, we highlight some of the key provisions in commercial leases which tenants should consider carefully when entering into a commercial lease. A common misconception is that, like residential leases, there is a statutory legal framework to protect commercial tenants if they get into difficulties. However, this is not the case, and the terms of the lease itself are all important when it comes to commercial premises.
Maintenance Responsibilities
While tenants can, understandably, focus on the rent when negotiating a lease, it can often be the unglamorous maintenance provisions hidden in the depths of the lease document which can prove to be the source of a tenant’s most significant liability – particularly in shorter term leases of lower value properties. It is, therefore, crucial to consider these provisions carefully. Most commercial leases will be prepared on a “full repairing and insuring” basis. This places potentially onerous obligations on a tenant and provides, in essence, that the tenant is taking on premises in “blemish-free” condition and will be obliged to return the premises to the Landlord in that condition at the end of the lease term. That will apply regardless of the age and condition of the premises at the start of the lease term, whether or not a tenant has evidence of that condition, and regardless of any improvements a tenant may have carried out.
While it usually won’t be possible to eliminate entirely a tenant’s potential for dilapidations liability at the end of a lease, there are ways the drafting may be adjusted to reduce liability. This can include, for example, limiting the repairing obligation so far as structural parts of premises are concerned, agreeing on a Schedule of Conditions to be referred to and attached to a lease and considering a monetary cap on certain repairs.
Failing to consider repairing obligations carefully can undo a lot of good work in negotiating a favourable rent or a good rent free period!
Deposits
Deposits are quite standard in Scottish commercial leases. They provide financial protection to the landlord against damages or unpaid rent. However, unlike residential leases, there is no legal requirement for a Landlord to lodge these with an approved scheme. It is therefore worth ensuring there is clear agreement on how a deposit is to be managed by a Landlord, and how and when it is to be returned to the tenant at the end of a lease – or earlier if that can be negotiated.
Rent Review
Rent review clauses are particularly relevant in commercial leases. These clauses outline how and when the rent can be increased. In Scotland, rent reviews are usually upward only, meaning the rent will not decrease. It is important for a tenant to clearly understand potential increases in rent over the course of their lease so these can be taken into account in a tenant’s business plan.
Break Clauses and Rent Free Periods
Taking on a commercial lease represents a significant financial commitment – often equivalent to buying a property. It is therefore not to be entered into lightly.
There are usually steps that can be taken to reduce the financial risk. A good example is seeking to negotiate a break clause, which will give a tenant the opportunity to end the lease at an earlier date if things are perhaps not working out as hoped. It can sometimes also be possible to agree a reduced starting rent or rent free period which can be valuable for a tenant in allowing time to fit out premises or establish their business before full rent kicks in. Early advice on this is recommended.
Subletting and Assignation
Subletting and assignation clauses (often referred to as the “alienation” clauses) set out a tenant’s rights to pass on the benefit of a lease to a third party. As circumstances change as a lease term progresses, these provisions can become very important for a tenant to allow them to sell or pass on their business with as smooth a transition as possible. It is therefore important for a tenant to consider these carefully at the start of the lease. You never know when they might need to be relied upon!
The end of a Lease
A quirk of the law in Scotland is that, although commercial leases will invariably include an “end date”, the lease term will not automatically end on that date. Sounds odd I realise but unless notice is served in advance of the “end date” in accordance with the specific lease terms the lease will usually roll on automatically on the same terms for a further year. While changes to the law in this area are afoot, it is crucial that a tenant is aware of exactly when a lease “ends”, so they are not unexpectedly paying rent for an extra year!
For more information or specific advice, tenants or Landlords contact our solicitors specialising in commercial leasing. Remember, a lease is a legal commitment, and understanding its terms thoroughly is key to a successful tenancy
