Taking a lease of property in Scotland throws up different considerations when compared to leasing in England because the Landlord and Tenant Acts do not apply. We regularly advise occupiers taking new leases about how to avoid the pitfalls that can trap the unwary.
There's no security of tenure
In England, (unless the parties have agreed to "contract-out") Landlord and Tenant legislation protects tenants at the end of a Lease – allowing them to "hold over" or remain in possession and even demand a renewal lease. No such protection exists for Scottish tenants – provided the Landlord serves a "Notice to Quit", the tenant must vacate the property at the end of the term.
Subtenants need protection
Sub-tenants must also vacate at the end of the term but can also be required to vacate earlier if the head lease between their landlord (the head tenant) and the head landlord is terminated. Unlike in England, where Landlord and Tenant legislation provides a potential to claim relief from forfeiture (termination on breach), if a head lease ends due to some breach by the head tenant, the sublease automatically ends – and the subtenant loses the right to remain in possession of their premises. An agreement with the head landlord can be put in place to protect the right of the sub-tenant to remain in the premises.
Termination doesn't just happen
A Scottish lease does not come to an end automatically at the expiry date. Either the landlord or the tenant must serve a "Notice to Quit" to terminate the lease. This has to be served within a specific number of days (usually 40 clear days – but not always) before the end date in the lease.
If neither the landlord nor the tenant serves the required notice on time, the Lease will continue (known as "tacit relocation") usually on a year to year basis on the same terms and conditions with the potential to trigger another rent review if the lease allows. This can come as a nasty surprise to either party.
Transferring the lease may be more difficult than you think
There is no implied obligation on the Landlord to act reasonably, when deciding whether to consent to a tenant's application to assign the lease or to sub-let. Instead the position is governed by the wording of the lease itself.
Leases will normally require that a proposed assignee is "of sound financial standing and demonstrably capable of fulfilling the tenants' obligations under the lease". As a very rough rule of thumb, this often requires at least three consecutive years of net profits at least three times the annual rent. Proposed sub-tenants are also sometimes subjected to such a covenant test even though the head tenant will remain on the hook for the lease obligations. Passing this test does not guarantee landlord's consent will be given, but the offer of a third party guarantee or substantial rent deposit may make a proposed assignee or sub-tenant more palatable to a landlord.
Beware of repair
Most commercial leases require a tenant to keep the premises in good and tenantable condition – regardless of the length of the lease. So a tenant could find themselves liable to pay for extensive repairs even if they are only in occupation under a short term lease.
A tenant concerned about the condition of the premises should look to limit their responsibilities to carry out repairs and if taking new premises demand warranties from the design and construction team. However, this won't automatically require the Landlord to carry out any remedial works.
Dilapidations are different
English law provides protection for outgoing tenants – which can limit the amount which Landlords claim for dilapidations.
The position in Scotland is purely regulated by the terms of the lease. Tenants should beware of clauses requiring the tenant to pay a sum equivalent to the estimated cost of repair. Even if the cost is expressed to be "reasonable", the landlord stands to pocket the full amount, even where it has no intention of actually carrying out any works (and even if it has the premises earmarked for wholesale redevelopment/demolition).
LBTT not SDLT
In Scotland SDLT was replaced by Land and Buildings Transaction Tax in 2015. The rates on new leases are (currently) broadly equivalent. However, tenants must submit a fresh LBTT return (to Revenue Scotland) every three years – and if the rent has increased in the interim, further tax is due, if the rent has been reduced for any reason or the lease has ended earlier than expected, – tax rebates are available.
Brodies have a track record in helping occupiers avoid these pitfalls. Please contact Laurence Douglas (laurence.douglas@brodies.com) or your usual Brodies contact for more information.
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