There are many similarities between commercial leasing in Scotland and England, but there are also some key differences. Here are 12 to watch out for.
1. The Landlord and Tenant Acts and the Law of Property Acts do not apply in Scotland; the Standard Commercial Property Conditions and the Commercial Property Standard Enquiries used in England are not used in Scotland.
2. Stamp duty land tax (“SDLT”) does not apply in Scotland. The Scottish equivalent is land and buildings transaction tax (“LBTT”). LBTT on rent under commercial leases is currently payable at the same rate as for SDLT on rent (although this could change in the future). LBTT on capital consideration in lease transactions is (like SDLT) payable at the rates applicable to purchases, but these rates are different in Scotland. In general terms LBTT on capital consideration will be less than SDLT for consideration up to £2M, but will be more than SDLT above that. The administrative burden under LBTT in relation to leases is greater than under SDLT. For example, under LBTT (unlike under SDLT) tenants are required to submit LBTT returns every 3 years, with LBTT liability being recalculated at that time (as a result of which additional tax may be payable).
The Agreement for Lease
2. In Scotland the agreement for lease is normally constituted by an exchange of solicitors’ “missives” rather than an exchange of contracts signed by the parties themselves. Typically, the missives will comprise an Offer to Lease (incorporating the agreed form of lease) issued by the landlord’s solicitors on behalf of the landlord, and an acceptance (or “concluding letter”) issued by the tenant’s solicitors on behalf of the tenant.
3. It is important to be aware that, in Scotland, the terms of the lease will generally become legally binding on both parties without either of them having signed any documentation themselves. The legal effect of concluding solicitors’ missives is that (subject only to any conditions precedent set out in the offer being satisfied, and upon the date of entry occurring) the terms of the negotiated lease are treated as being in full force and effect, notwithstanding that no documentation will be signed by them until a later date.
4. In Scotland the LBTT return in relation to the lease (like an SDLT return) must be submitted (but to Revenue Scotland rather than HMRC) within 30 days after the “effective date” (usually the date of entry). Unlike SDLT, however, LBTT must be paid at the same time as the return is submitted (i.e. early submission triggers immediate liability to pay).
5. In Scotland the law of commercial leases is based largely on common law rather than statute. A Scottish commercial lease will normally look quite like an English one (because forms of lease have tended to be shaped by the requirements of London-based institutional investors). Where different provision is made this is often to achieve generally the same effect as a corresponding English document (often referred to as “putting a kilt on it”). However, there are important differences to be aware of.
6. In relation to assignment, neither privity of contract nor Authorised Guarantee Agreements apply in Scotland. Following a permitted assignment, the outgoing tenant will be free of any continuing liability under the lease and the incoming tenant will assume sole responsibility for all lease obligations (past and present). It will generally be held to be unreasonable for the landlord to require any guarantee where the incoming tenant is demonstrably capable of paying the rent and fulfilling the tenant’s other obligations under the lease.
7. In Scotland, at common law, substantial destruction of the leased property may result in the lease being terminated automatically. The lease will normally contain an express exclusion of this common law rule, so that the lease will continue (subject to its provisions for reinstatement and cessor of rent).
8. There is effectively no statutory or common law relief from forfeiture in Scotland. Limited statutory protections apply which cannot be contracted out of. The effect of these is that (1) in the case of a monetary breach, the tenant must be given at least 14 clear days (after service of a formal warning notice) to make payment, (2) in the case of a non-monetary breach, (a) the landlord will not be entitled to terminate the lease if, in all the circumstances of the case, a fair and reasonable landlord would not do so, and (b) where the breach is capable of being remedied, the tenant must be given a reasonable period (again after service of a formal warning notice) to remedy the breach. In the absence of contractual provision to the contrary, any sub-lease will fall if the main lease is forfeited.
9. In Scotland, if a lease states simply that assignment or sub-letting is permitted “with the consent of the landlord”, it will not be implied that such consent is not to be unreasonably withheld, and landlord will have absolute discretion. Where landlord’s consent is not to be unreasonably withheld, the onus is on the tenant to demonstrate that the landlord is acting unreasonably. The landlord must give reasons for their decision, and only reasons which are given at the time of refusal are relevant.
10. Subject to very limited exceptions there is no statutory or common law right to renew a Scottish commercial lease so that, provided that valid notice to quit is served, the lease will terminate at the expiry of the contracted term. The required notice period is normally 40 clear days. If no valid notice is served by either party the lease will normally continue for a further year by operation of common law. In limited circumstances it is possible to apply to the court for statutory renewal of certain commercial leases for periods of up to one year, but such applications (being at the discretion of the court and generally unlikely to succeed) are made very rarely.
11. In relation to terminal dilapidations, in Scotland there is no single measure of (or any statutory cap on) the landlord’s loss. The cost of the works will generally be a good guide (at least where there is a reasonable anticipation of the works being carried out) but it is not determinative, and the tenant may argue that loss of capital value (if any), or some other measure, is more appropriate.
12. In the absence of contractual provision to the contrary, the tenant has no right to any compensation for improvements at lease expiry. Such provision is very rare, and any right to such compensation is normally excluded expressly.
This article provides a brief summary of certain key differences which may be of interest to those more familiar with the commercial leasing process in England and looking to place work in Scotland. If you would like to discuss any matters in more detail please contact me using the details provided below.
Partner, Commercial Property
T: 0131 556 2896