We are often asked by clients to prepare a Lease or to review a Lease. This may be either for a new business or an existing business. It may be for a client who has had a Lease before or a client who has never had a Lease.

We, as lawyers understand why it is important to have a Lease in place and the pitfalls for both Landlords and tenants contained within a Lease. In Scotland, there is no legislation that covers the style of Lease between a Landlord and Tenant, what this means is that the Lease itself is a personal Contract between the two parties and all it must contain to constitute a Lease is a date of entry, a date of expiry and a rental figure.

Most Leases will be in writing, however, in Scots Law there is also a concept of a Common Law Lease which may be unwritten. The obvious pitfall of an unwritten Lease is that there is no certainty as to the terms and what has actually been agreed between the parties and therefore no written evidence to provide to a Court in the event of any disputes.

In a written lease one of the main areas which often causes a dispute between landlords and tenants is the repairing clause and flowing from that the Tenant’s obligations on expiry of the lease.

Generally, we recommend to clients that a survey is carried out to establish the actual condition of the premises to identify any wants of repair which the Tenant can ask the Landlord to carry out before signing up to the lease. A survey detailing the condition of the premises, with reference to photographs, can be used by both parties to establish the actual condition of the premises at the date of entry and amend the wording which sets the standard of condition in which the premises must be on expiry of the lease (a Schedule of Condition).

Repairing Clauses

When a Lease is entered into, the Lease itself will set out, in writing, that the Tenant is accepting the condition of the premises which is linked to a standard. This is usually in terms such as “good and substantial condition” or “good and tenantable condition”. This is generally irrespective of the actual condition of the premises. The effect of this wording is that, on expiry of the Lease, when a Tenant hands back the premises, that is the standard by which the condition of the premises will be judged. The implications for the Tenant may be serious if the premises are of a poor standard at the outset.

The repairing obligation will impose obligations on the Tenant such as an obligation to keep the premises in good and substantial condition. Alternatively, if the Tenant has prepared a Schedule of Condition showing the standard of the premises at the outset, and the Landlord has accepted that Schedule, then the standard of “good and tenantable condition” may become a less onerous obligation by reference to the Schedule of Condition showing the actual condition of the premises at the date of entry. In the latter case the premises must be returned to the landlord in no worse condition than shown in the Schedule of Condition.

You may be asking why is this important. There are two reasons why it is important. The first is, without having any point of reference as to the actual condition of the premises at the date of entry, the Tenant will fail in an argument with the Landlord if asked to carry out works which, in the Tenant’s view, may put the premises in a better condition than it was at the date of entry.

The repairing obligations in a Lease imposes obligations on the Tenant to keep the premises in “good and substantial condition” or in “good and tenantable condition” and this standard is often much higher than the actual state and condition of the premises at the outset. This is a pitfall that many Tenants fall into when entering into a Lease, which has the ultimate result of them being obliged to do more to the premises than they may have had to do had they spoken to a surveyor or a lawyer prior to entering into the Lease.

It is something that can be avoided in that timeously taken advice can provide a number of options as to how a repairing obligation can be limited. Examples include: excluding certain parts of the building from the Tenant’s repairing obligation; limiting the amount a Tenant will have to pay on expiry in respect of repairs; and limiting the actual repairing obligation itself. This involves some careful drafting within the Lease. Ultimately, the Landlord is looking for the Tenant to step into its shoes for the duration of the Lease and that would include doing everything to the premises that is required throughout the duration. Often, over a long period, a Landlord may wish to carry out largescale maintenance and repair works which improve the premises and, as such, the repairing standard within the Lease is vitally important when the Tenant takes over that role. If that standard can be lowered it is very much to a Tenant’s advantage.

On expiry of a Lease there are quite onerous obligations depending on what the Lease actually says in respect of the condition of the premises. Generally, we find that a Lease will require the Tenant to remove its alterations and/or additions made to the premises and personal effects. What this means is that the Tenant may have to employ contractors and spend substantial sums removing works (even those may improve the premises) in order to give the premises back to the Landlord in the condition envisaged by the standard set in the Lease. There is on occasion a provision in a Lease which allows the Landlord some discretion as to what works it will require the Tenant to remove. It is, therefore, very important from a Tenant’s perspective to consider well in advance of a termination date what works the Landlord may wish them to leave in situ or may wish them to remove prior to expiry. Speaking to your Landlord about this, perhaps, a year in advance of the date of termination, is the prudent way to look at it. Failure to remove your works and leave the premises in the condition as envisaged by the Lease could result in the Landlord being able to raise a claim against the Tenant for the cost of doing what the Tenant ought to have done before expiry. More often now, we see clauses permitting the Landlord to charge the Tenant for the rent for the period it takes for the Landlord to carry out the works to put the premises in the condition it ought to have been in before the Tenant left. These sums can sometime be substantial - not only would the departing Tenant be responsible for the cost of the works but also for the rent after the lease has expired. Again, we as you lawyers will be able to advise you as to how this can be limited and to how your exposure to such claims can be reduced.

Terminating a lease

Most Tenants are unaware that a commercial Lease in Scotland requires to be terminated by written Notice. If the Lease is not terminated within the time period required, the Lease automatically continues for a further year on the same terms, under a unique doctrine under Scots Law called “tacit relocation”. Tenants whose Leases are coming up to expiry, and they have failed to terminate it correctly, end up in a situation whereby the Lease has automatically continued for a further year. The implications of this can be expensive for a Tenant who no longer wants the use of the premises. The only way out, if this happens, is to negotiate an early termination which usually means the Tenant paying something to the Landlord and picking up the Landlord’s legal costs also.

This concept is unusual and, in fact, unexpected and little known amongst small business owners and those who have not entered into Leases previously. If a Tenant is looking for a short-term Lease for a specific purpose (3 - 5 years), then it is important that the Lease is terminated on the termination date. Again, terminating the Lease is something that careful drafting by a lawyer will assist in. The Notices to the Landlord must be precise and set out exactly what the Tenant is looking to say. The Notices must use specific wording, terminating the Lease, and must be served on the Landlord at least 40 days before the termination date. They must be served on the parties and in the manner prescribed in the Lease. It is not sufficient to send an email to the Landlord saying you intend to vacate the premises.

The effect of not serving a Notice correctly, or on time, is that the Lease will continue under the doctrine of tacit relocation and that may have financial implications for the Tenant. Please note that a Landlord may also serve a Notice terminating the Lease on the termination date but very few do.

If you are thinking about taking on a commercial lease or your lease is coming to an end please call us and we will do our best to assist you.

Contact our Commercial Lease Lawyers at The McKinstry Company

If you have any queries for our commercial property lawyers please do not hesitate to get in touch.