A tenant’s guide to leasing commercial property in Scotland

For anyone seeking the right space for their business, understanding the commercial leasing process in Scotland is key to avoiding costly mistakes.

This guide walks you through the essentials — explaining key terms, important dates, and legal obligations — so you can make informed decisions and manage risks effectively before you take on new premises.

Essential information about leasing commercial property in Scotland

A commercial lease is a legally binding agreement. To protect your interests, it’s important to understand what’s included.

Rent and term
Negotiating the rent and lease length is just the start. Keep an eye on provisions for rent reviews as well as any VAT implications.

Key considerations include —

• Rent review - Most leases in Scotland include provisions for rent review, which may take effect annually, every five years, or at other intervals. A rent review is a process where the rent amount is adjusted based on factors like market value or inflation.

  Reviews are typically “upwards only” and linked to open market valuations or inflation indices like the Consumer Price Index (CPI), which tracks changes in the cost of goods and services.

  Inflation-linked reviews were generally acceptable for tenants in recent years when inflation was essentially stagnant; however, recent inflation spikes have led to significant rent increases. It’s crucial therefore, from a tenant’s perspective, to ensure there are caps on these reviews to help mitigate risk.

  Open market reviews depend on local rental comparisons, which may favour tenants in sluggish markets, but can be subjective and lead to disputes.

• VAT on rent — VAT is not automatically chargeable on rent. Check if your landlord has opted to waive the tax exemption (known as option to tax), if they have you will have to pay an additional 20% VAT charge.
• Additional costs — You’ll need to budget for additional expenses like service charges, which are common in multi-let properties. These charges can cover communal maintenance, cleaning, and even security services. Ensure you’re clear about what these are for and what’s necessary. For example, if you’re a tenant on a ground floor unit, you wouldn’t expect to pay a contribution for elevator repairs. A cap on costs like this is a common tenant request.

Repairing Obligations
Most Scottish leases are on a full repairing and insuring (FRI) basis, meaning tenants are responsible for maintaining the property to an “as new” condition. This is a high bar for any tenant and is something you should consider opposing, particularly if the unit is not in such good condition.

Key points to consider —

• Schedule of condition — Limit your liability by agreeing on a photographic record of the property’s state at the start of the lease.
• Operational readiness — Ensure critical systems like heating and air conditioning are in good working order before you take on the lease. A schedule of condition doesn’t absolve you of liability for defects that hinder your business operations.
• Dilapidations — At the end of the lease, tenants usually need to restore the property to its original state. Plan ahead to manage these costs and understand your repairing obligations.
• Surveyor – It’s a good idea to consider taking advice from a surveyor on the condition of the premises and common parts

Assignation and sub-letting
Scottish commercial leases often include restrictions on the tenant assigning their interest or sub-letting the property.

Assigning a lease involves transferring all rights and obligations under the lease to a new tenant. Afterwards, the original tenant is no longer legally responsible for the lease, unless otherwise agreed.

Sub-letting allows the original tenant to grant a new lease to another party while retaining their own obligations under the original lease with the landlord.

Before discussions with a new occupant, you need to ensure you understand —

• Conditions — Landlords may impose stringent criteria on assigning or sub-letting. For example, partial assignations or sub-lettings are typically prohibited.
• Flexibility — For multi-floor premises, it’s often wise to negotiate the right to sub-let individual floors or sections.

There is usually a higher bar for assigning a tenant’s interest in the lease and the landlord will be entitled to refuse where the incoming tenant is deemed “less desirable”.

Key dates: staying on top of your obligations
Missing an important deadline can lead to penalties, disputes, or missed opportunities. Key dates to monitor include —

• Rent reviews — Understand when and how these reviews take place. Note that landlords can often trigger rent reviews even after the specified review date, meaning adjustments could come months or years later.
• Break notices — If your lease includes a break clause, ensure you meet the conditions and serve notice correctly.
• Lease expiry — Landlords and tenants should plan ahead to renegotiate a lease or prepare for the property handover. In Scotland, leases often automatically renew — usually for a year — under tacit relocation unless, or until, formally terminated. This can have operational and financial implications for tenants, so plan well in advance and adhere to notice periods (typically no less than 40 days) and the lease provisions.

A well-organised calendar can help you manage these critical dates.

How termination and break clauses work in commercial leases
Tenants exercising a break clause in their lease often face conditions the landlord sets. Two common conditions are —

• Outstanding rent — Tenants may need to ensure that all rent payments and any other financial obligations are fully settled.
• Property condition — The tenant might need to return the property in a specified condition, such as repairing any damage or restoring the premises to its original state.

Landlords may include a condition requiring the tenant to comply with “all lease obligations” to exercise the break clause. You should negotiate to remove or limit such conditions as they create significant risk because —

• Even minor breaches of the lease (e.g., a missed repair or a minor delay in rent payment) could technically render the tenant non-compliant.
• Non-compliance with any obligation, no matter how trivial, gives the landlord grounds to deny the tenant’s request to break the lease.

Also ensure you follow the lease’s exact requirements for notice periods and formats. Failing to do so could result in losing your right to exercise the break clause.

Understanding irritancy provisions in Scottish commercial leases
In Scotland, irritancy provisions allow landlords to end a lease if the tenant breaches their terms, such as failing to pay rent.

The Process
Before ending a lease, landlords must —

• Serve a formal notice of irritancy.
• Allow tenants a specified timeframe to rectify the breach. If the breach remains unresolved, landlords can proceed with eviction.

To minimise risk, you should respond promptly to notices and seek advice to avoid escalation.

What tenants need to know about Land and Buildings Transaction Tax (LBTT) for commercial leases in Scotland
If you’re leasing commercial property in Scotland, you may need to pay LBTT. This tax is calculated on the net present value (NPV) of the lease, which includes rent over the full term and any premium paid.

Bear in mind too that if VAT is charged on rent, then you’ll need to include it in the LBTT calculation too.

There are strict LBTT exemption requirements — such as charities relief or group company relief — so it’s important to check if these apply to your organisation. Even then, you’ll likely still need to lodge a tax return.

Tenants must submit an LBTT return —

• At the start of the lease
• Every three years
• On assignation to a new tenant
• At the lease’s end (or early termination)

Incorrect or late submissions can lead to fines.

As LBTT is based on the rent over the duration of the lease, you could consider reducing your upfront tax liability through strategies such as shorter leases with extension options, which mean the tax is calculated based on a shorter period.

Conclusion — common pitfalls leasing commercial property and how to avoid them
With careful planning and attention to detail, you can navigate the commercial leasing process confidently: minimising risk, protecting your interests and avoiding costly mistakes.

Key takeaways include —

• Familiarise yourself with all relevant costs — Repair obligations and service charges can escalate quickly. Negotiate terms carefully.
• Keep track of deadlines — These include rent reviews, break notices, and lease expiry dates. Doing so will help you avoid penalties or unwanted automatic renewals.
• Understand assignation and sub-letting restrictions — Clarify your rights before committing to a lease.
• Avoid unclear lease terms that can easily lead to disputes over responsibilities

Need expert advice? For more guidance on leasing commercial property in Scotland, explore our commercial property services or contact our team.