MAKE OR BREAK… FOR TENANTS WHO WISH TO END LEASES EARLY

Tenant break options are nowadays popular and for good reason – most businesses value flexibility and they want to avoid long-term commitments to stay in commercial leases. Whilst leases of 10 years or longer are not uncommon, the majority of those will include tenant only break options at the end of either 3 or 5 years.

There are, though, a host of traps for the unwary tenants wanting to exercise break options. Some of these we have written about before on our website, often giving our readers goosebumps by citing the grim consequences for those businesses unable to exercise the option. These traps include:

• the importance of serving notices in the correct manner; a letter written to the local landlord manager is unlikely to be sufficient

• ensuring that the notice is sent to the correct landlord; this may not be the person named in the rental invoices or as described in the original lease

• ensuring the correct amount of rent has been paid as at the tenant break option date; any underpayment and the tenant risks losing the ability to exercise the break option

A recent court case of the High Court in England, Goldman Sachs International v (1) Procession House Trustee Ltd on 3 May this year, has highlighted a further potential trap. In this decision the court had to decide whether a tenant should be allowed the benefit of its break option where the tenant had left the property but failed to remove tenant fit-out works. The landlord promptly claimed the tenant break option to be invalid because although the tenant had paid all rent to date and given up occupation, it had failed to comply with a condition attached to exercise of the break option, namely the removal of the fit-out works.

Fortunately for the tenant, on this occasion the court decided to “give them a break” by interpreting the specific wording in the lease in their favour. It was, though, a very close call for the tenants and the landlord has been given leave to appeal.

The all important lesson for tenants wanting to exercise break clauses is clear: not only should they make sure the tenant break notice is served properly but they must ensure that they comply with the terms of the lease. Giving up possession of premises can sometimes mean more than just leaving. In some leases tenants may require to remove fit-out works and alterations such as internal partitioning, reception desks, lifting equipment in industrial units or disabled access ramps. In other leases, however, the tenants may be prohibited from removing fit-out works or alterations unless the landlord specifically directs them to do so. Each lease varies and needs to be read carefully. It pays to do so review the lease carefully rather than to risk an expensive dispute with landlords.
If you would like advice in this area please get in touch either myself (michael.dewar@ccwlegal.co.uk) or one of our other solicitors in our property team.

Michael Dewar, Partner

Beware end of Lease Repairs!

Tenants wanting to avoid prolonged and costly disputes at the end of their leases should deal with any issues well in advance.  A good rule of thumb is to start thinking about potential issues at least 6 months before the date of expiry.

The first issue is to ensure that the lease will definitely end on an agreed date.  No matter what your lease says about when it ends you will in addition require to serve written notice on the landlord to end the lease well before the actual expiry date. This is a complex area of law, with specific rules and time limits. If you get the notice wrong the lease could automatically continue for an extra year, with rent continuing to be payable.

Once you are sure of the expiry date you should have a look at a copy of your lease to see what obligations you owe the landlord. If your lease is long or complex you may wish to ask your solicitor to do this on your behalf. Once you have established what you are legally required to do it is worth discussing with your landlord what he expects in practice. Taking the time to talk to your landlord at an early stage is likely to reduce the scope for dispute at a later date.

The lease is likely to require you to return the property to the landlord in a specific condition. There may be photos available which show what this condition is. Your lease may allow the landlord to serve a schedule of dilapidations specifying what repairs are required. If you know your landlord is likely to serve such a schedule it is a good idea to ask your landlord to prepare this as early as possible so that you have sufficient opportunity to get these organised.

It is usually in your interests to carry out any repair and maintenance to the property in the months leading up to the date of expiry as this leaves you in control of costs. Remember if you don’t do what is required under the lease the landlords can carry out any works themselves and recover this cost from you, employing third parties if they so wish.

A loss of control of the extent of works, when works are carried out and by whom is likely to lead you to incur much greater costs. Replacing cracked window panes yourself may only cost £75 per pane but landlords, safe in the knowledge that their costs will be met by you, may quite happily instruct a contractor to carry out the same work at £300 per pane plus VAT.

If you would like advice in this area please get in touch either myself or my partner, Michael Dewar (michael.dewar@ccwlegal.co.uk), in our property team.

 

Kieran Reilly, Solicitor (kieran.reilly@ccwlegal.co.uk)

Tenants need to be alert to new Scottish property tax returns due after 1 April

Tenants need to be alert to new Scottish property tax returns due after 1 April

LBTT, the Scottish tax on property transactions, is not everyone’s cup of tea.  Land and Buildings Transaction Tax, to give it its full name, is the near-equivalent to Stamp Duty Land Tax paid in England and Wales.  Whilst in many ways it simply replicates SDLT, there are some important differences.

One of those concerns tax returns for commercial leases, specifically the number of returns a tax payer must file with Revenue Scotland.

In England and Wales tenants generally need to submit a single tax return at the start of an SDLT qualifying commercial lease with additional returns only if there is (broadly) a change in the amount of rent being paid.

In Scotland a multitude of tax returns are required for an LBTT qualifying commercial lease: on the extension of a lease, on the transfer of a tenant’s interest in a lease or upon the end of a lease.  The fines for not remembering to file tax returns are substantial: an automatic £100 if the tax is one day late, rising to £1,000 if the return is six months late.  Oh, and interest too.

The tax return most likely to catch tenants out, though, is the one that must be submitted on every third anniversary of the start date of the lease.  Since LBTT was introduced on 1 April 2015, this means that some tenants will very soon have to start filing tax returns.  If they don’t, the above penalties apply (plus interest on late payment of tax).

It is not immediately obvious why the Scottish Government planned the administration of the tax in this way.  No doubt, demanding tenants to file extra tax returns helps Revenue Scotland know when additional LBTT is due.  It does seem, though, an unnecessary burden to impose on tax payers, particularly for small and medium size businesses which may not have the resources to keep track of when these three yearly tax returns are due.  Whilst Revenue Scotland have said they will remind tenants when to file these returns, they will do so for a limited period only.

In any event, the practical steps tenants of commercial properties in Scotland need to take are:

  • check if your lease started after 1 April 2015
  • if so, check if you have already paid any LBTT on it
  • if so (and if you have not yet done so), make a note of every third anniversary of the start date of the lease (usually referred to as the “date of entry” in the lease)
  • download the relevant form from Revenue Scotland here and submit your return

For our clients we can upon request prepare the relevant tax returns on their behalf – please e-mail me or my colleague, Michael Dewar (michael.dewar@ccwlegal.co.uk), if you would like us to do this for you.

 

Kieran Reilly, Solicitor (kieran.reilly@ccwlegal.co.uk)

Owners with Blurry Boundaries and Fuzzy Titles Should Read This

It is sometimes unfathomably difficult to identify who owns areas of land or parts of buildings:

  • the land may lie between two properties and it is unclear who owns it
  • the land may be unfenced or unoccupied
  • fences or walls may have been built in the wrong locations
  • neighbouring property owners may be possessing or encroaching on land not theirs

Ownership records of land and buildings in Scotland are kept in two national registers of ownership: an older deed-based public register (Register of Sasines) and a newer map-based Land Register. The Registers’ staff are currently transferring ownership records out of the Register of Sasines and into the Land Register through a process called Keeper-Induced Registration. This takes place without the involvement or knowledge of the owners of the land or buildings in question. The aim by 2024 is to allow anyone easily to check ownership records on the map-based Land Register. Whilst this is certainly good news, it does cause potential problems for owners with poorly defined title deeds. The risks are:

  • the Land Register staff may not have enough information to plot difficult boundaries to properties in the correct locations
  • two or more owners sometimes have titles which can include the same area of land – e.g. an unfenced area of ground in an old industrial area, the ownership of which may be obscure; the Land Register staff may have incomplete information to decide who gets a registered title to this land
  • owners may often have additional information not available to the Land Register staff; e.g. knowledge of possession of the site or of the existence of the correct legal boundary. This information won’t be reflected in the task of transferring the property to the new register.

The best course of action is often for owners of such land to apply for voluntary registration of their property in the Land Register rather than let the Keeper’s staff deal with it. By making a voluntary registration:

  • owners can provide the Land Register with their own plans of what they think their land includes
  • owners can avoid the need to take potentially expensive action to rectify inadvertent errors made by the Land Register staff
  • owners will for a period of time benefit from reduced registration fees

If you would like to discuss the possibilities of voluntary registration or, indeed, any other property matters, please get in touch with one of CCW’s commercial property solicitors, Michael Dewar or Kieran Reilly.

 

 

Commercial leases: the Case of the Careless Tenant and the Very Expensive Repair Bill

Much like trouble a lease of business premises is easy to get into but hard to get out of. Many landlords will offer rent inducements and rent frees to get tenants in to the property but at the end of a lease will expect tenants to carry out necessary and usually expensive repairs.

It is for this reason that one of the most important clauses in a standard commercial lease is always the repairing clause. The obligation to maintain and repair the subjects of a standard lease will usually be passed on to the tenant, with the tenant being responsible for maintaining the property in the same condition that it is in at the start of lease. This will usually mean a repair bill at the end of the lease but it is important for tenants to ensure that they are not held liable to restore the property beyond the condition that it is in upon taking entry of the property in question. This is where schedules of condition come in. A schedule of condition is basically an annexation to the lease itself, consisting of a series of photographs of the property at the start date of the lease. The idea is to have an easily referenceable means of evidencing the degree to which the tenant must pay for repair to the subjects of the lease, come the date that the lease terminates.

So, the recent case from the Outer House of the Court of Session of Dem-Master Demolition Limited v Healthcare Environmental Services Limited comes as a useful reminder to tenants that, although it means incurring a small cost up front at the start of your lease, it is beneficial to instruct a schedule of condition to be prepared (and properly attached) as it could mean saving thousands of pounds in dilapidation costs at expiry. The case swung on the question of the repairing standard that should be imposed where a schedule of condition had not been annexed to the lease: the landlord of course took the view that this meant that the tenant was on the hook to repair the property to a very high standard. The court however took a different view and held that the absence of a schedule of condition only affected the question of evidencing the state of the property at the start of the lease. The tenant remained liable to repair the property to the standard that it was in at the start and both parties were invited to present evidence to that effect. That, clearly, was a costly affair for the both parties and reminds us of the importance of preparing schedules of condition when the lease agreement is being drawn up. It was also an expensive reminder of the importance of not losing a copy of the schedule of condition.

If you have any questions on commercial leases please contact Michael Dewar or Kieran Reilly in our property team.

Growing plans

The Scottish Ministers recently published a consultation paper on proposals to strengthen the Scottish Planning System to help support sustainable economic growth.
The Ministers had previously appointed an independent panel and in May of last year that panel published its report: the recent paper is part of the response and ongoing consultation.
The proposals are wide-ranging, but specific aspects of the existing system have been identified as requiring reform, including removing the “strategic development plans” and making significant changes to the local development plans. A major focus is on putting measures in place to increase community involvement in proposed developments, while trying to impose as much of the cost of this as possible on to the development companies.
There are also suggestions to councils of ways to speed up development to meet demand, including making more publicly owned land available for development.
In line with other legislative changes, another major element of the proposals is to increase transparency when it come to infrastructure funding. There is a general proposal to allow for an infrastructure tax for Scotland, with income collected at the local authority level.
There is also focus on the costs involved in the planning system itself, with the Ministers indicating that the goal should be to make the system self sustainable, with mechanisms in place to allow it to recover its own costs.  This will be achieved by allowing for higher fees for applications, charging for appeals and allowing for fast-tracked applications in exchange for higher fees.
The consultation paper is at this stage quite high-concept, and vague on the detail of how the goals will be arrived at.  However, developers and other stakeholders will need to be aware of the proposals and the ongoing consultation process which will inevitably flesh things out.

 

Update for Landlords and Tenant: Lease Dilapidations

Recent case-law on dilapidations has stirred up Scottish lease law, as the courts had favoured a new trend to re-write ambiguous cases, on the basis that the tenants had entered into a bad bargain. It appears that the dust has settled in this respect as the courts found in Dolby Medical Home V Respiratory Care Ltd V Mortara Dolby UK [2016] CSOH 74 that in order to restrict or limit their repair liability under the lease, tenants will have to make sure that clear wording is used.

Facts

This case is also interesting for mid-landlords recovering from sub-tenants.

  • In the case of Dolby Medical, Dolby was the tenant under the head-lease; they granted a licence of a large proportion of the property to their subsidiary company Mortara Dolby UK.
  • Under the head-lease, Dolby served a notice to quit half way through the lease, and the head-landlords served a schedule of dilapidations on them.
  • Dolby invited Mortara to join in the negotiations with the head-landlord, but they declined. Eventually, Dolby reached a settlement with the head- landlord, but the costs were not apportioned to individual elements in the schedule.
  • The licence provided that the licensee (Mortara) was liable for 75% for the cost of maintaining and repairing the common parts. Although the common parts were undefined in the agreement, the court held that it was clear what these meant, and it was decided that this wording was clear and unqualified.
  • Finally, since there was no schedule of condition to prove what the present state of the property was in, Mortara’s wording restricting their liability to maintain the property in its current repair was not clear enough.

The case was decided by the Outer House of the Court of Session, so watch this space for any appeal decisions!

Lessons to Learn

  • When negotiating the repair clause in your lease, think about 1) the current repair of the building and 2) your bargaining power that you might have with the landlord.
  • If you want to limit your repair liability as a tenant, clear wording must be used so there is no doubt to the meaning of the clause.
  • You will not be able to rely on ambiguous wording in court.
  • Limit your liability by incorporating a schedule of condition in your lease, but remember that this doesn’t include inherent and latent defects in the property.
  • A bad bargain isn’t enough to justify re-writing the contract.

Smile! We’re at the Scottish Dental Show in May. . .

The team at CCW Business Lawyers are eagerly preparing for the Scottish Dental Show at Braehead Arena in Glasgow on 13th and 14th of May.

As specialists in the legal support of dental practices across Scotland, we are looking forward to seeing our current clients and meeting new faces at our shiny new stand. We support our dentistry clients from our offices in Fife and Edinburgh and advise on everything from partnership planning including arrivals and departures to commercial property purchase, sale or lease negotiations, employment law, contractual agreements and incorporation or business exit.

Partner Michael Dewar, who specialises in dilapidations negotiations and has a track record of helping dental practices navigate unforeseen bills of up to £500,000, will be there in person. If you have any legal queries or issues, why not book a free initial consultation with Michael while you’re attending the show?

Just email Jennifer.wilson@ccwlegal.co.uk or call 0845 22 33 001 to book a time with Michael Dewar or one of our other Business Lawyers on either the 13th or 14th of May at the Scottish Dental Show.

Or feel free to just drop by for a chat. We’d love to meet you and tell you more about why we are Scotland’s favourite dental practice law firm.

Relocating a Medical Practice to a Health Centre – 3 points to consider

The BBC recently reported that NHS Lothian has announced that it has entered into contracts for construction of three new £27.6 million health centres in Edinburgh and West Lothian.  The centres will provide accommodation for GP practices alongside other health-related services, including podiatrists, therapists and dentists.

You can read the full story here http://www.bbc.co.uk/news/uk-scotland-edinburgh-east-fife-35961007 ]

Completing these contracts is a major achievement for the Scottish Government’s equivalent of Private Finance Initiative, the Scottish Futures Trust (SFT).   A number of these projects had been slow in fruition and there was real concern in the second half of last year that the SFT might breach European accounting rules, causing all of the SFT projects temporarily to be suspended.

The SFT does also give doctors a further method of securing new health centre accommodation and shows the variety of public funding routes available to general practitioners wanting to build, or see built, new surgery premises.  Not long ago the more common model of privately financed health centres was a standard 25 year commercial lease, typically financed by a specialist GP lender with rents reimbursed by the local health board.  Next, specialist health care developers became active, building health care centres directly and entering into leases with GPs.  Now most health boards favour larger multi-practice health centres buttressed by satellite or complimentary services.

Practices wishing to move to new surgeries at least now have some choice over how to finance new health centre premises.  The inevitable difficulty for GPs is, of course, persuading the health board to foot the bill for such premises (health boards will usually reimburse 100% rent to practices) and in minimising their liability for repairs and running costs of potentially expensive new premises.

How you contract for your space can become a minefield for doctors, dentists and medical practices as this is often a ‘once in a lifetime’ negotiation to tackle.

Here are my top tips to consider for any GP practice thinking of moving into a new health centre.  Take account of three points:

  1. Fact find the hidden costs – find out early on the likely running costs of the premises; as new health centres typically include large common areas, service charges and running costs can be significantly higher than for existing premises.
  1. Take stock of liabilities– work out the total exit costs from the practice’s existing premises – if, for example, the practice occupies leased premises, there may be significant repair costs at the end of the lease.
  1. Review the practice agreement – it is essential to review and, if required, update the practice’s partnership agreement before entering into any occupancy agreement.

As a commercial property specialist with a track record in successful contracting and negotiating for healthcare professionals I am happy to respond to queries from individuals and partnerships as well as the media on this topic. You can contact me directly on 0131 220 7605 or email me at michael.dewar@ccwlegal.co.uk. You can also learn more about our services for medical professionals here http://ccwlegal.co.uk/your-needs/medical-profession/

 

Thinking of Purchasing Property? Leap Ahead to 1 April 2016

The 1st April 2016 is an important date to take note of if you are about to purchase a property in Scotland and you already have property to your name. The Scottish tax on property transactions -Land Buildings and Transaction Tax (“LBTT”) was introduced in April last year. The tax, originally seen to encourage first time buyers, and attract commercial buyers now has a sting in its tail: a 3% supplement charge will be added to chargeable second property transactions over £40,000. If you are looking to buy another property, you may want to consider selling the other one first to avoid this extra tax.

The Highlights:

  • The supplement affects not only residential purchases, but also commercial and buy to let purchases
  • The 3% supplement applies to second properties purchased for over £40,000
  • The supplement applies to the whole price, not just the amount over £40,000
  • The tax only applies to property purchased in Scotland, but, your other property doesn’t have to be in Scotland, if you already have a property in or outwith the UK, this will be taken into account
  • The supplement won’t apply if you already concluded missives before 18 December 2015
  • If you purchase a new main residence before you are able to sell your existing main residence, then you will be entitled to a refund of the 3% supplement, so long as the sale takes place within 18 months of the purchase
  • The Government will apply a two-stage test to determine whether the purchase does in fact involve a replacement of a main residence.
  • Even if you are intending to rent the second property, the 3% supplement will still apply
  • Individuals with more than one residence will not be able to choose which is their main residence, the Government will apply a facts based assessment in order to determine this

The property market in Scotland is finally picking up the pace, and there are fears that the buy to let market will be deflated by this supplemental tax.