Scotland has become an increasingly attractive location for international brands seeking to expand their store presence. Over the last twelve months alone we have seen several international retailers entering the Scottish market – some customers may have seen the likes of Charlotte Tilbury and Sostrene Grene popping up in Glasgow city centre, while others may have noticed Mango making an appearance at Silverburn shopping centre.
Against this backdrop, this blog provides an overview of the key leasing considerations for international retailers wishing to embark upon expansion in Scotland.
Understanding the Scottish legal system
In Scotland, the contract between a landlord and tenant is usually constituted by an exchange of legal letters known as "missives". Upon conclusion of missives, the lease documents will be legally binding on and enforceable against both parties, notwithstanding that the documents themselves are yet to be signed. On a practical level this can be advantageous, as it means that the documents will be effective immediately on conclusion of missives rather than requiring time to facilitate the practicalities of signing before the documents can take effect. This can be particularly beneficial for international retailers whose signatories may be based abroad, as often Scottish lease documents require "wet ink" signatures, particularly when the documents require to be registered in the Land Register of Scotland.
Navigating commercial leases in Scotland
Repairs
It is common for Scottish leases to be granted on a full repairing and insuring basis, save where the property is part of a wider building where responsibility for the maintenance of the structural and shared elements of the building rest with the landlord at the tenant's cost.
A full repairing lease will commonly oblige the tenant to put and keep the property in "good and substantial repair and condition". This applies irrespective of the condition of the property at the time the lease is entered into and requires the tenant to shoulder responsibility for any necessary repairs or maintenance of the property on an ongoing basis.
As responsibility for all elements of the property is passed onto the tenant in such circumstances, it is important for tenants to ensure that they assess the condition of the property before concluding missives for a commercial lease. Arranging a survey of a property enables potential issues to be identified and gives tenants an indication of any works which may be required in future which may be costly.
If the survey identifies outstanding or anticipated repairs, the tenant can request that the landlord completes such works prior to entry being taken, or the parties can agree that the tenant's repairing obligation will be limited to a Schedule of Condition. A Schedule of Condition documents the condition of the property using both photographs and verbal descriptions. This allows the repairing obligation in the lease to be limited so that the tenant is not required to put the property into any better state of repair and condition than as evidenced in the Schedule of Condition.
Alienation
One important difference between commercial leases in Scotland and those in other jurisdictions are the provisions governing a tenant's right to assign a lease to another party. A tenant's ability to assign a lease is often an important consideration for new entrants into the market who may wish to have flexibility when exploring a new market.
In Scotland, the market standard position is that a tenant is entitled to assign the whole of its interest in a lease with Landlord consent, which is not to be unreasonably withheld or delayed if the prospective tenant is of sound financial standing and demonstrably capable of fulfilling the Tenant's obligation in the Lease. Unlike in England, there is no Scottish equivalent of an Authorised Guarantee Agreement and instead an assignee is discharged of all liabilities under a Lease from the point of intimation of the assignation on the Landlord. To protect the landlord's interests, a financial covenant test is therefore often applied to ensure that the incoming tenant is capable of meeting the tenant's responsibilities going forward.
Terminating Scottish leases
Another "quirk" of the Scottish system that all tenants should be alert to is the position on expiry of a commercial lease. There is no security of tenure in Scotland. At present, the default position is that either the landlord or the tenant must give the other party not less than 40 clear days' notice in advance of its contractual expiry date in order to bring the lease to an end. Failure to do so will result in the lease automatically continuing for a further year on the same terms. This is known as "tacit relocation". This aspect of the law is currently under review, with the Leases (Automatic Continuation etc) (Scotland) Bill on the agenda for the Scottish Government in its programme for 2024-2025, and tenants are therefore advised to take early advice if considering terminating a lease in Scotland.
Planning and change of use
Before taking on a new lease, tenants should ensure that they confirm that the property benefits from the necessary planning permission. The Town and Country Planning (Use Classes) (Scotland) Order 1997 (as amended) categorises different types of property and land into use classes. Prospective tenants should always review the current permitted use of a property to determine whether it accords with their intended use, and should seek specialist advice if there are any concerns as to the position. If a property does not benefit from the necessary planning permission, the tenant may be required to submit a planning application to the local authority for the change of use.
LBTT
Finally, tenants taking on a new lease in Scotland should be aware that Land and Buildings Transaction Tax (LBTT) may be payable. LBTT is a tax on the acquisition of rights over land in Scotland and is payable by tenants of certain commercial leases. The majority of commercial leases in Scotland will be notifiable for LBTT purposes, meaning that an LBTT return must be submitted to Revenue Scotland within 30 days of the effective date of the transaction (whether or not LBTT is actually payable). The filing requirements do not end when the initial return is submitted. Instead, further returns must be submitted: (i) on a three yearly basis throughout the term; (ii) on assignation; and (iii) on expiry or termination. Failure to submit LBTT Returns timeously or to make payment of any sums due can result in penalties being applied.
Conclusion
Navigating the complexities and terminology of Scottish commercial leases can be challenging and international retailers should ensure that professional advice is sought at the outset of a commercial leasing transaction.
Please contact Danny George, Emma Barnett or Angela Walker in our retail and leisure team if you would like to discuss in more detail.
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