Understanding commercial leases in Scotland is important for any business owner considering new premises. These terms can significantly affect your financial strength, adaptability, and long-term growth.
At Watermans, we provide professional advice tailored to your specific needs. Our commercial lease solicitors simplify the process, so your lease supports your business operations as a legally binding contract.
Watermans breaks down legal descriptions into straightforward language. Make informed decisions with confidence.
What is a Commercial Lease?
A commercial lease is a written agreement between a commercial landlord and a tenant. It grants the tenant the right to occupy a commercial property for business or commercial activity. The property types include offices, retail units and warehouses. Unlike residential leases, a commercial lease agreement in Scotland is governed by different regulations, offering greater flexibility in negotiations.
How Does a Commercial Lease Work?
Lease agreements define rent payments, lease terms, and responsibilities for maintenance and repairs, as well as property taxes and building insurance. Responsibilities vary based on the lease type:
Gross Rent Lease
The tenant pays a fixed rate, while the landlord pays all operating expenses, including property taxes, insurance and maintenance. This simplicity comes with a higher base rent to account for the landlord’s expenses.
Full Repairing & Insuring (FRI) Lease
Common in Scotland, a FRI lease requires the tenant to handle all property repair, maintenance and insurance costs. This includes both internal and external aspects of the property. Tenants should obtain a Schedule of Condition before signing to document the property’s current state and potentially limit future liabilities.
Net Lease
The tenant pays a base rent plus some or all of the property expenses. Variations include:
- Single Net Lease (N): Covers base rent and property taxes
- Double Net Lease (NN): Includes base rent, property taxes and insurance premiums.
- Triple Net Lease (NNN): The tenant pays rent, property taxes, insurance premiums, and maintenance costs. This lease type places the majority of responsibilities on the tenant.
Absolute Net Lease
Similar to a triple net lease but with additional obligations, such as structural repairs. Tenants bear all risks and costs associated with the property.
Modified Gross Lease
A hybrid between gross and net leases. Both the landlord and the tenant share operating costs, with specifics outlined in the commercial lease agreement. This offers flexibility to meet the needs of both parties.
Percentage Lease
In retail, the tenant pays a base rent plus a percentage of gross sales. This aligns the landlord’s income with the tenant’s business performance. Once tenants reach a breakeven point, which is the number of sales they need to generate for the month, they must pay percentage rent. This is a flat percentage charged to the tenants if they’ve exceeded their break-even point.
Protect your business interests against unexpected costs. Schedule a consultation with our solicitors for expert commercial lease legal advice.
Key Terms in Commercial Property Lease
Commercial leases can differ depending on the type of property, the nature of the business, and the agreement between the landlord and tenant. Here are essential commercial lease terms to consider:
- Base rent: The initial agreed-upon amount the tenant pays to use the premises.
- Security deposit: Often equivalent to one month’s rent, held in case of unpaid rent or damage.
- Lease term: The duration of a lease’s validity. This can be a fixed period (e.g. five or ten years) or a rolling agreement that renews periodically.
- Break clause: A clause that allows the tenant or landlord to terminate the lease early under specific conditions
- Lease renewal: Terms outlining how and when the lease can be extended.
- Service charge: Costs for shared services, such as cleaning and security, are often passed to the tenant.
- Turnover rent: An additional rent based on the tenants’ revenue.
Commercial and Residential Leases: What’s the Difference?
The primary difference between commercial and residential leases lies in their regulations and intended purposes. Residential leases are for properties intended as living spaces and offer more protections to tenants under the Tenant Act.
In contrast, commercial leases are typically used for business activities and offer more flexibility during initial negotiations. Business tenants often need to pay rent, taxes, and cover maintenance, especially in a triple-net lease.
The Lease Process in Scotland
Navigating the leasing process can be complicated, especially for first-time buyers. Understanding each step can help you make confident decisions and secure the right property for your operations.
Initial Negotiations
Outline your needs, such as size, location and budget. You must clarify your business’s specific requirements and understand which type of lease best suits your operations. Landlords may request business plans and references, especially for first-time business owners.
Head of Terms
A non-binding document that summarises the key aspects of the lease. It can include rent amount, lease term, break clauses and repair obligations. This sets expectations before legal drafting begins.
Drafting the Contract
A commercial lease solicitor will prepare or review the draft lease. The document should clearly define terms, including rent, permitted use, service charges and responsibilities for maintenance and insurance.
Landlords Consent
If you plan to alter the property, such as installing signage or fitting out the space to suit your commercial needs, the landlord’s written consent is required. Ensure these terms are agreed upon early to avoid any complexities down the line.
Signing the Lease
Once both parties agree to the commercial real estate lease terms, the lease is signed, and the agreement becomes legally binding. You may also be asked to provide a guarantor or a rent deposit.
Occupancy & Handover
After signing, you’ll receive the keys and can move in to begin operations. Ensure you understand any obligations from the outset, such as insurance or registering the lease, depending on its duration.
Costs to Consider
Signing a commercial lease agreement involves costs beyond rent:
- Legal fees: Covering the drafting and reviewing of legal paperwork.
- Service charges & utility bills: Depending on the lease, the tenant is responsible for these.
- Property tax & insurance: Varies depending on whether it’s a net or gross rent lease.
- Maintenance & repairs: Costs may be covered by the landlord or the tenant, depending on the lease type.
Ending or Exiting a Commercial Lease
When you need to leave your business premises before the lease ends, it’s important to understand the implications. Termination clauses, which can include agreed notice periods and mutual break rights, outline how either party can legally end the lease early.
Outgoing tenants might need to reinstate the property to its original condition, including removing fit-out works or signage. Additionally, any unpaid rent must be resolved to avoid legal disputes or financial penalties.
Not sure if a fixed-term lease is right for you? Get in touch with our team for straightforward legal advice.
FAQs
What is alienation?
This refers to the tenant’s ability to transfer their lease to another party. This can include assigning the lease, subletting the premises, or sharing occupation. Most commercial leases include alienation clauses that outline the conditions for transfers. Typically, tenants must obtain the landlord’s consent, which cannot be unreasonably withheld but may be subject to specific requirements.
What is reasonableness?
In Scottish commercial leasing law, reasonableness refers to the landlord’s duty when considering a tenant’s request for a lease. A “reasonable” response does not mean the landlord must agree to the request, but they must have valid and objective grounds for refusing it. It ensures that one part does not exercise discretion arbitrarily or overly restrictively.
Watermans: Commercial Lease Solicitors You Can Trust
At Watermans, our team provides expert commercial lease advice for landlords and tenants across Scotland. Whether you want to know your tenant’s rights or need advice on it, we ensure your lease protects your interests and supports your goals.
With offices in Edinburgh, Glasgow and Dundee, we deliver clear, cost-effective advice for every stage of your commercial lease journey.
Beyond leasing, we also offer a range of legal services, including:
- Personal injury claims
- Transfer of title
- Power of attorney
- Properties for sale
- Remortgaging
- Property Conveyancing
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- Inheritance tax planning
Get straightforward commercial property lease advice from expert solicitors. Contact Watermans today.