Commercial Lease (Scotland)

What is a Commercial Lease?

A commercial lease is a contract between a commercial landlord and a tenant, permitting the tenant to rent premises for business purposes (for example: shops, restaurant, a bar, a convenience store).

A commercial lease specifies the rights and responsibilities of the landlord and the tenant, as well as the contract's duration.

This commercial lease relates to Scotland only. Other documents should be used for England and Wales, and Northern Ireland.

What are the different types of Commercial Leases?

Commercial Leases have different types depending the structure, length and purpose of the lease. Broadly speaking, there are two classes of Commercial Leases, namely Gross Leases and Net Leases.

• Gross Lease: The tenant pays a fixed rent, while the landlord covers most or all operating expenses, including property taxes, insurance and maintenance. The landlord would calculate the fixed rent by incorporating the costs to run the property into a single cost. Gross leases are commonly used for short-term commercial space rentals.
• Net Leases: The tenant is responsible for paying rent along with part or all of the operating expenses of the commercial property, which may include taxes, utilities, and maintenance costs. Net leases are the most common type of commercial lease.

In addition to these two classes of lease, there are also:

• FRI Leases (Full Repair and Insurance): Under this type of lease, the tenant bears responsibility for all repairs and maintenance of the property as well as the building's or premises' insurance costs.
• Ground Leases: This is a long-term lease where the tenant leases the land and is granted the right to develop it. This lease is typically used where the business intends to construct and develop their own building but do not own the land itself.
• Short-Term Lease: This is a flexible lease used for temporary businesses that grants the tenant the right to occupy the premises. This is more like a license and does not impose the long-term commitments of a traditional lease.

What is the difference between a Commercial Lease and a Residential Lease?

The key difference between commercial and residential leases is their purpose: commercial leases are for business premises, while residential leases are for living spaces like houses or flats.

Legally, commercial leases are treated differently, as they involve experienced business parties with fewer statutory protections for tenants. Courts are less likely to intervene if a commercial tenant finds the lease terms unfair, as both parties are expected to negotiate terms more effectively than in residential leases.

For residential leases in Scotland, use the Private Residential Tenancy Agreement. Other documents should be used for England and Wales, and Northern Ireland.

Is it mandatory to have a Commercial Lease?

No, it is not mandatory to have a commercial lease in Scotland, however it is common and highly recommended.

While verbal agreements can be legally binding, having a written lease provides clear terms, protects both parties, and helps manage disputes.

What can the duration of a Commercial Lease be?

In Scotland, commercial leases can have a maximum duration of 175 years. After this period, the lease will automatically expire, even if a longer term is stated in the lease agreement.

In practice, commercial leases tend to be around 1 to 3 years for shorter leases, while longer leases are usually up to 25 years. On average, commercial leases are usually between 8 to 10 years.

Who are the parties to the Commercial Lease?

The parties involved are the lessor and the lessee. The lessor refers to the landlord, who owns the property, while the lessee is the tenant renting the property. Another party that may be involved in a commercial lease is a guarantor.

A guarantor is a third party who guarantees the tenant's obligations, agreeing to fulfil the tenant's responsibilities (e.g., paying rent) if the tenant defaults.

What has to be done once a Commercial Lease is ready?

Both the landlord and tenant must sign the lease agreement and it is advisable to have the signatures witnessed. Afterwards, the tenant typically pays the first installment of any rent or deposit agreed upon.

Leases of over 20 years must be registered with the Registers of Scotland. Registration of leases under 20 years is not compulsory, but registration is advisable as it provides protection by ensuring the lease is enforceable if the property is sold and provides transparency as well as legal certainty.

Registration of a lease means that the lease is formally recorded with the registration authority (i.e. Registers of Scotland) and grants it legal status. The registration of the lease offers more protection for the tenant as the details of the lease are publicly available on the property title.

If the lease includes a premium or the rent is above a certain threshold, the tenant may be liable for Land and Buildings Transaction Tax. The tenant must file an LBTT return and pay any tax due to Revenue Scotland according to the Land and Buildings Transaction Tax (Scotland) Act 2013. This information can be found on the Registers of Scotland.

Lastly, both parties should ensure that the lease complies with relevant laws, and once the lease is signed, rent is paid and formalities are completed, the landlord will typically hand over the premises keys to the tenant.

Is it necessary to register a Commercial Lease?

It is necessary to register commercial leases in the Land Register of Scotland if they are longer than 20 years. Registration establishes clear notice of the lease to all parties involved, creating records of who owns the property and any relevant matters affecting the property.

Registration could also be beneficial to tenants in that they make the lease enforceable (i.e. the tenant can rely on the legal protections in the lease) against any future property owners. That is, if the landlord decides to sell the property, the new owner is legally obligated to honor the terms of the registered lease.

Is it necessary to have witnesses for a Commercial Lease?

Although having a witness is not necessary for leases, it is generally advisable to have the lease witnessed to ensure its enforceability and to prevent potential legal issues in the future.

How should the tenant use the premises?

The tenant is only permitted to use the premises for the purposes specified in the commercial lease agreement.

If a tenant wishes to use the premises for a different purpose than what is stated in the lease, they would need to seek the landlord's consent.

What kind of guarantees can apply to a Commercial Lease?

A commercial lease can be guaranteed in a number of ways, which include:

• Personal Guarantee: This is usually given by a third-party individual who guarantees that the tenant will comply with the obligations of the lease. Where the tenant breaches the obligations (e.g. default on rent) and refuses or is unable to correct it, the guarantor will have to personally correct the breach (e.g paying the rent themselves).
• Guarantee by Deposit: This is where the tenant pays an amount of money at the start of the tenancy to the landlord to serve as security in case the tenant breaches the lease (e.g. damages the property or defaults on rent). The landlord can use the deposit to cover the breach caused by the tenant.
• Corporate Guarantee: This is where a company serves as a guarantor for the lease. This is more common where the guarantor company is the parent company of the tenant.

What must a Commercial Lease include?

A commercial lease should include:

• The parties to the lease;
• The property description (e.g. the address);
• Lease term;
• Rent payable;
• Permited use of the property;
• Responsibilites for repairs and maintenance;
• Dispute resolution, and;
• Termination clauses.

Applicable Law

In Scotland, the law of commercial leases is largely based on common law and not statute and therefore not many Acts of Parliament which are applicable to the regulation and creation of commercial leases.

The Town and Country Planning (Scotland) Act 1997

The Town and Country Planning (Use Classes) (Scotland) Order 1997

The Planning (Hazardous Substances) (Scotland) Act 1997

The Planning (Listed Buildings and Conservation Areas) Act 1997

The Planning (Consequential Provisions) (Scotland) Act 1997

The Building (Scotland) Acts 1959 and 1970

Land and Buildings Transaction Tax (Scotland) Act 2013.

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