With Scottish commercial leases, there are generally two circumstances where the use of lease premises will change: either prior to lease start to change the use for a particular tenant (usually as a condition of the letting); or during the lease term at the tenant's instigation. In either of these situations there are a number of factors for landlords to consider when considering a change of use.
Note that Scotland has different use classes to England, but there is some similarity in terms of the categorisation of uses. The Scottish use classes have recently undergone some reform, including the introduction of a new use class (Class 1A for shops, and financial professional and other services). Our recent blog discusses this further.
One also needs to consider if planning permission from the local authority is required for the change.
Change of use prior to lease start
We often see agreements for lease preceding the grant of the lease being conditional on the landlord or tenant obtaining planning permission for the change of use so that the premisses can be used for the incoming tenant's intended use. As with all agreement for lease conditions, there is an element of risk for both parties as the application may not be granted, resulting in either party being able to terminate the agreement for lease and walking away from the letting.
Conditionality within agreements for lease will usually be subject to a longstop date to enable both parties to terminate if the change of use cannot be achieved. The timescale for that should be suitable in the circumstances – being long enough to process the application and for the local authority to deal with it, but not so long as to tie in the parties beyond what is necessary. Parties should also consider including enough time in the long stop date for any appeal if the planning application is refused. In addition, timescales for the application to be submitted are prudent, to ensure that the application is actively progressed.
Consideration should also be given as to whether the landlord or the tenant deals with the application. There is no hard and fast rule here. Some tenants prefer to deal if it is part of a wider roll out of leases and they have a standard template for their application. On the other hand, some landlords prefer to deal to retain control and to ensure that the application is suitable not just for the tenant but also for future use of the unit.
Drafting the permitted use and change of use clause
The permitted use and change of use clauses should be carefully considered when negotiating the lease, as they will set out the parameters for the period of the lease. This is particularly if the landlord:
- is aware of existing planning controls over its entire property e.g. planning requirements for the amount of overall area to be used for clothing / homeware retail vs food retail;
- is aware of any title conditions affecting use. If so, consider whether it is appropriate to address those separately. This is a complex area but worth considering for landlords;
- needs to ensure any tenant exclusivities are appropriately protected e.g. if another tenant has an exclusivity for white goods, the change of use clause needs to ensure landlord's consent to such a use is discretionary;
- has additional considerations specific to the property that it may want to introduce on change of use, for example where it seeks to be able to apply a 'suitable tenant mix' test. Be aware that anti-competition laws do apply to real estate, so any such provisions should be carefully considered and suitably drafted to ensure that neither the landlord nor tenant are seeking to restrict competition. This is a technical area of the law and can rest on each set of circumstances so we do not address it here, but specialist advice should be taken on this. This does not just apply to title conditions / land banking, but could apply to lease exclusivity provisions too.
Tenant application during lease term
During the term of the lease, change of use would occur at the tenant's instigation. The parameters for that will be set out in the lease. Usually, changing the use within the same use class does not need consent from the landlord, or if it does, landlord's consent cannot be unreasonably withheld or delayed. Consent for changing the use to a different use class may also be subject to a reasonableness test, or it may be at the landlord's absolute discretion. The landlord should ensure it's clear what the lease parameters are when it considers the tenant's application.
As with all tenant applications under leases, the specific clause sets out the tests for landlord's consent. Where consent to change of use is subject to a reasonableness test, the landlord should proceed accordingly. We do not go into the specific application of the reasonableness test here, but our recent blog on landlord consent to assignation addresses similar points.
Key take-aways
Permitted use and change of use provisions are very much bespoke to the property and tenant in question. That said, the landlord should consider future use (as the permitted use consent will run with the property after lease expiry) and its overall approach to its property. Careful consideration should be given at lease start; and the provisions of the lease then complied with when it comes to change of use consent.
