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.

New Year Resolutions

The beginning of January is usually the time when people full of New Year optimism, resolve to make changes to their lives – for example, by stopping smoking, going to the gym or starting a diet.  Most people, though, are not particularly good at keeping to these promises. A major reason for this is that whilst we are good at identifying what we want to change in our lives, we are less good at focusing on how to achieve this.

One way to help improve the chances of achieve their aims is to make use of so-called “nudge” techniques to create incentives, as the following table shows.

 

resolution nudge
Erecting signs saying ‘no littering’ and warning of fines. Improving the availability and visibility of litter bins.
Joining a gym. Using the stairs.
Counting calories. Smaller plate.
Weekly food shop budgeting. Use a basket instead of a trolley.

Nudge techniques can be used in many different ways, some quite novel.  For example, it has been suggested that a person wanting to give up smoking should open a bank account. For six months she deposits the amount of money she would otherwise spend on cigarettes into the account. After six months she takes a test that determines whether she has been smoking. If she hasn’t, she gets to keep the money in the account; if she has, the account is closed and the money is donated to charity. There is evidence that participating in this bank program increases the chance of quitting smoking by over 50% over many other cessation efforts.

Why, you might think, is CCW explaining all of this? Well, in our experience, many business managers are only too human and, likewise, fail to live up to their resolutions.  It is often only after businesses have experienced a serious legal problem that they realise they could have, without too much effort, done something to avoid the problem in the first place – e.g. by having a robust set of business terms and conditions or by having in place a proper lease with their landlords or a shareholder agreement with other company members. Sadly, despite promises to perform such tasks, many will remain undone.

We would like to help our clients help to resolve long-running but neglected issues.  Below, for each of our major client service areas, we have listed ways in which we think we can help incentivise you into fixing any such issues.

From all at CCW we wish you a very happy and prosperous New Year.

resolution nudge
We need to make the time to speak to our solicitor about legal matters that concern us. We aim to make ourselves accessible to speak to. You can contact us not just by e-mail or phone but also by text messages or by video-call (e.g. Skype or FaceTime).

 

We are used to meeting or speaking to clients outside normal business hours.

We need to put in place proper terms and conditions for business for orders. CCW is experienced in dealing with a wide variety of commercial agreements. If you can give us a good outline of what you want, we can often produce good first drafts of documents. You can then check these at your leisure.
We now have more shareholders in our company and need to have more categories of rights We can tailor your shareholder requirements by drafting a shareholders’ agreement or amending your company’s articles of association
We need to bring our company books up to date. Our Company Secretarial services provided by CCW cost £170+VAT per year and give the peace of mind of knowing that all of those things and more are dealt with.
The title deeds to our properties are in a complete mess and need sorting Often we can obtain copies of any missing title deeds ourselves, so long as we have either a plan and/or property address.

 

It is now possible to simplify older title deeds by registering a new title in the Land Register

We must renew our lease If you give us a copy of your lease, we can advise you of the end date of the lease. If you wish, we can speak direct to your landlords or their agents to negotiate a lease extension.
As landlords we need to replace word-of-mouth leases with written leases. We can draft leases for you. It is realistic to expect to have written leases in place within twelve months from the date when you instruct us.

 

GIVING THANKS, KNOWING YOUR RIGHTS

Thanksgiving can be traced back to 1621, when the first settlers of the eastern coast of what is now the USA celebrated the fruits of the land and gave thanks for the harvest. What isn’t so readily discussed is that the settlers, in order to reap the benefits of the harvest, appropriated the land from the indigenous peoples of the region.  Whilst the Thanksgiving season is a long established and celebrated part of American life, this original act of appropriation is not without its cultural sensitivities.

Compulsory appropriation of land by public authorities in Scotland is a similarly sensitive matter and not without difficulty.  In order to develop a piece of land for public benefit, it is often the case that someone’s land or property must be taken over.  A recent example would be the area of North Queensferry and Rosyth where the public interest in building the new Queensferry Bridge requires the Scottish Government to acquire land from local residents through the use of Compulsory Purchase Orders (“CPO”s).

Who can apply for a CPO?

  • A local authority
  • The Scottish Government
  • A utility company, or
  • A railway company

Examples of reasons for applying for a CPO:

  • Widening or building a road,
  • Building a public building,
  • Regenerating a public community
  • Build a new railway line
  • Extend an airport
  • Build a windfarm,
  • Lay pipes, or erect pylons

How does the process work?

CPOs must be approved by the Scottish Government. The Scottish ministers weigh up the public benefit to the damage and detriment caused, before coming to a decision. If the benefit outweighs the damage, then a CPO can be obtained.

How can you object?

The authority must notify all the individuals and businesses affected by the CPO, in order to give them a right to object, they also must put a notice in a local newspaper for 2 weeks. You will have a certain time limit to respond (this must be at least 21 days), and the Scottish Ministers receive the objections and comments. An enquiry may be held by an independent reporter. The Scottish ministers will weigh up the findings and come to a decision. If the CPO is approved, all the affected parties will receive a notice. You have 6 weeks to appeal the decision from the date of the notice.

Points to Consider:

Should a CPO be approved that involves your land, you should make sure that: 1) you meet with the local authority as soon as possible to find out the extent of their plans, 2) you get a valuation for the land affected, 3) the public authority provides you with compensation for any disturbance and loss of property, and pay your legal fees (it is up to you to keep records and provide any invoices for professional fees), and 4) you have all the necessary rights of access in order to be able to access your property and land, as well as to be able to lead services and access any existing ones.

If you need any advice in relation to a CPO, give the Commercial Property Team a call.

 

You reap what you sow….

Taste your own terms before serving them up to consumers.

The latest guidance from the CMA, (the Competition and Markets Authority – who replaced the Office of Fair Trading) has advised businesses when dealing with consumers – not to use terms that the businesses wouldn’t like to sign up to themselves.

To see the short guide from the CMA click here.

A lot of the guidance from the CMA will sound familiar – for example that unfair terms and notices are not binding on consumers. A list of top tips is set out in the guidance as well as mention of certain terms that are considered “blacklisted” – to see the list click here.

The CMA has issued the guidance ahead of the Consumer Rights Act 2015 coming into force on 1 October 2015. This aim behind the 2015 Act is to consolidate much of the consumer law in the UK.

If your business deals with consumers and you’d like further advice on your terms of business or the effects of the 2015 Act, please get in touch.

Emma Arcari is an experienced corporate & commercial solicitor advising businesses on contract law, transactions, procurement & disputes.

Bringing in the harvest: are boom times back for property?

With headlines in the press like “Property boom for Scotland as prices soar” and “Commercial property boom yields deals”, much is being made of the recent growth of property prices and yields across the UK and Scotland.  Office net rents for offices have recently risen by 11% with Edinburgh seeing some of the strongest growth http://www.gva.co.uk/research/Thebignineq22015/.

Retail is faring well, with projected 2.3% annual rent increase forecasts http://pdf.euro.savills.co.uk/uk/commercial-retail-uk/spotlight-retail-myths-2015.pdf.

Industrial property demand increased sharply in the Central Belt post-Referendum and vacancy rates are falling [http://www.ryden.co.uk/sites/default/files/spr/76thScottishPropertyReview.pdf].

Overall, the volume of commercial property transactions has increased, both in the UK and Europe more generally – up 36% within a year according to a recent Savills property report.  The housing market, in particular, has seen substantial growth in volume of sales [http://www.heraldscotland.com/news/13739215.House_sales_jump_by_record_amount/], with projected house price increases over the next 5 years of 19.3% in the UK as a whole and 17.6% in Scotland [http://www.savills.co.uk/research_articles/141285/192265-0].

Mortgage lending volume has also recovered from the depths of 2008-9 [http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/11824892/Scotland-and-Wales-lead-mortgage-boom-as-London-housing-market-cools.html].   Of course, there remains substantial variation from one region to another or between different neighbourhood in towns and cities, but all the signs are encouraging.

Or are they?  Most of us well remember the difficult years of 2008-9 with falling property prices, yields and contraction of the UK economy. Our theme this month is harvest time – and it is perhaps relevant to note that whilst farming communities in the past would mark abundant harvests with festivities (Lammas, the festival for wheat and the Harvest Moon for taking in crops in the light of the Equinox full moon), this was tempered by caution and local superstitions for the next year’s harvest.

We should do well to remember this note of caution.  Clearly, there is no telling the future and in terms of property prices and trends surveyors, not solicitors, are best to comment.  Yet, whilst the winds in the overall economy might rise and fall, a property investor, a business wanting to buy or a tenant wanting to enter into a lease can take some simple steps to ensure shelter when difficult times come:

you reap what you sow: if you don’t take care when you buy, you may make nothing when you come to sell. So, when buying, make sure that you investigate thoroughly the property.  Make sure you get not just a valuation survey but also a building survey for older properties and a full set of construction warranties and guarantees for newer ones.  Get your solicitor to check the titles carefully to ensure that when you come to sell, you have a marketable title that a purchaser will readily accept.  Ask your solicitor to check the relevant public regulations that apply to the property – for instance, compliance with the planning and building permissions and more detailed regulations such as control of asbestos . A similar point applies to tenants about to enter into leases: make sure you negotiate sensible repair obligations, check the detail in the use restriction clauses and in restrictions on being able to sub-let or assign.

don’t just follow the trends but think ahead to the future: valuation survey reports are important but they cannot predict everything in the future. You should think carefully yourself about the exact location and characteristics of your property – what future changes or new regulations might affect them?  There are many planned energy efficiency regulations relevant to commercial premises; changes to rules on flood insurance policies; continuing changes to building regulations that may make future alterations non-viable and a host of technological changes that might affect properties (we will write about impact of drones on properties in a forthcoming article).  You can do much to minimise risk by thinking through these points now and by asking for the input from your property advisers on these points.

So, as a final thought, it is good to celebrate the recovery in the property market but only sensible to take care and plan ahead for the future.

Michael Dewar, Commercial Property Partner