This is the first in a series of articles looking – from an occupiers' perspective – at some of the key clauses which need to be considered when taking a lease to occupy commercial space. In future articles we intend to consider those parts of a lease dealing with e.g. repair; potential dealings with the lease; rent review, service charge and termination,
However, it's probably most appropriate to start with a look at the key fundamentals which are necessary to ensure that a lease – as opposed to a mere contract, or licence, to occupy - has taken effect. This is important for a number of reasons. Firstly, a tenant under a lease has automatic protection in the event that the owner sells or otherwise disposes of its interest. The tenant is allowed to remain in possession on the same terms and conditions and has all the rights which it had against the original landlord. Under a personal licence, the occupier has no such rights – it would no doubt have a claim against the original owner for breach of contract, but depending on the substance of that owner, that may be worthless.
Secondly, there are some important effects of a lease, as opposed to a mere licence, in Scottish law. For example, there is an implied obligation on a landlord to ensure that the property is fit for purpose and wind and watertight. And "tacit relocation" by which a period of occupation automatically renews – most often on a year to year basis – applies only where a lease is in place.
So what is necessary to establish a lease? Agreement on four cardinal elements is required: (1) the Parties; (2) the Premises; (3) the Rent; and (4) the Duration. And this applies regardless of whether the agreement says that it is to be a lease or licence.
Point (1) may sound obvious, but one thing to watch out for is how the Agreement treats successors. It's common to state that the lease can transmit to future tenants. However, careless wording runs the risk that the original Tenant remains bound "jointly and severally" with its successors even after it has disposed of its interest – with the unwelcome result that a landlord can pursue any previous tenant if a successor falls into arrears or fails to maintain the property. It's important to ensure that any successors will be "in substitution" for the original tenant.
Please see our separate blog in relation to point (2) - Premises or Demise.
(3) "Rent" means an ascertained and periodical payment – so beware that a lease won't be established if only a single upfront payment is made (e.g. for a relatively short term arrangement). Most commonly payments will be quarterly in advance but it's becoming far more common nowadays to see rents paid only monthly in advance (especially in the field of retail leases). Landlords have begun to accept that a tenant should not be expected to make an advance payment up to three months in advance.
On (4) Duration, the law is a little unclear, but the position seems to be that a one year term will be inferred if there is agreement on the other matters.
Note that a Lease need not be in writing. However, if unwritten, a term of one year only will be implied. This can give rise to some potentially unfair consequences – as covered in my colleague's recent blog here.
Lastly, note that the Landlord and Tenant Acts do not apply in Scotland. So not only is talk of a lease being "inside or outside the Act" meaningless north of the border, but tenants have none of the implied protections (e.g. obligation on landlord to act reasonably in certain cases; provision for authorised guarantee agreements; right of relief for subtenants) which exist under the Acts.
Instead a Scottish lease "says what it means and means what it says" – which emphasises the importance of obtaining good quality legal advice whenever looking to negotiate an agreement to occupy commercial property.
We will continue this series of breaking down a lease in the coming months. If you have any queries on this, please speak to Laurence Douglas or your usual Brodies contact.