The introduction of the new Scottish Private Residential Tenancy (SPRT) has focussed recent attention on Scotland’s residential tenancy market. Leases for offices, retail space, pubs and restaurants, hairdressers and other commercial units are a very different world far removed from residential leases. Consequently, greater care should be taken before signing up to a commercial lease.
Where money is tight, such as new business start-ups, in many cases a prospective tenant will sign a lease without considering its terms in detail. I would not recommend that anyone follow that course of action. It may save on paying legal costs and appear cheaper in the short term but there are many hidden costs in a commercial lease and our experience with clients is that often it is not the cheaper option in the long run.
In particular, you should be aware of the following:-
1. Without examining the landlord’s title, there is no certainty that the landlord has the necessary rights to validly grant a lease or that there are no restrictions in their title that may be prejudicial to the tenants’ interests. The landlord may have granted a security over the property which prohibits them leasing the property. A tenant may find that after investing funds in the property they are not in fact entitled to remain for the duration of the lease or that the purpose for which they wish to use the property is prohibited in terms of the titles.
2. A prospective tenant should consider instructing a survey over the property. This would allow them to be satisfied that the property is in good repair which is particularly important given the lease may require that they put the property into good and tenantable condition regardless of its present state. This could be expensive. An appropriate survey would also give you an indication as to whether the rent demanded is reasonable.
Under a standard commercial lease, the tenant could be held liable to carry out remedial works to clean up any substances contaminating the land which is let under the lease whether or not the tenant caused that contamination.
3. There may be Land and Buildings Transaction Tax payable and appropriate returns to be submitted to Revenue Scotland both at the point of entering into the lease and after 3 years or where the initial rent has been increased. It is the tenants’ responsibility to submit the appropriate returns and there are penalties for failure to do so timeously.
4. If the lease is for a period in excess of 5 years then it is likely that the rent will be reviewed upwards every 3 or 5 years.
5. It may not be possible to dispose of your interest as tenant which may become a significant liability if the lease is for a long duration.
6. The landlord is unlikely to give any warranties in respect of planning permission and a ingoing tenant should satisfy themselves that the property benefits from having appropriate planning permission for their proposed use.
7. Tenants may be liable for the landlord’s legal costs and other outlays incurred by them.
8. In addition to the rent, tenants may have to pay VAT chargeable on the rent and are also likely to have to pay rates, all costs incurred for public utilities and the landlord’s insurance premium. There may be an additional charge payable for the maintenance and/or use of common parts or services.
Landlords are sometimes willing to negotiate less onerous terms reducing a tenant’s exposure to the risk of unforeseen future costs.
For further advice or information on commercial leases whether from a landlord’s or a tenant’s perspective, please visit: