The strongest negotiating position exists before the paperwork is signed

by Stacy Campbell of MCM Solicitors

In a previous article for SLTN, my colleague Marc Waters highlighted the importance of dilapidations and the potentially significant costs that can arise when a tenant reaches the end of a lease. 

While dilapidations remain one of the most common areas of dispute between landlords and tenants, they are far from the only provisions capable of creating unexpected liabilities for businesses.

Given the number of leisure and hospitality businesses operating from leased premises across Scotland, understanding the wider terms of a lease is just as important as negotiating the rent. Too often, operators are focused on securing the right location and opening their doors, only to discover later that the lease contains obligations which are more onerous than they anticipated.

Repairing Obligations

Dilapidations stem from repairing obligations, but it is worth considering those obligations at the outset rather than only at lease expiry.

Many commercial leases in Scotland are drafted on a “full repairing and insuring” basis. In practical terms, this can mean that a tenant is responsible not only for keeping the premises in repair but, in some circumstances, for putting them into a better condition than they were in when the lease began.

Care should be taken for all properties but particular attention is merited where the premises are older buildings, which is often the case in the licensed trade. A thorough building survey before signing the lease can be invaluable. Where issues are identified, tenants should seek to ensure these are excluded from their obligations through a schedule of condition.

Service Charge

Where premises form part of a larger development, shopping centre or mixed-use building, the landlord will typically recover maintenance and management costs through a service charge.

Many tenants focus on the base rent but overlook the potential scale of service charge liabilities. These charges can cover a wide range of expenditure, including repairs to common areas, landscaping, security, insurance administration and management fees.

Operators should understand precisely what costs can be recovered, whether any caps apply, and whether they will have visibility of supporting invoices and expenditure records. Seemingly modest charges can become substantial over the course of a lengthy lease.

Rent Review Clauses

A lease may look attractive on day one, but the financial picture can change significantly once rent review provisions take effect.

Some reviews are linked to open market rental value, while others are tied to fixed increases or inflation-based mechanisms. Almost all reviews will be in an ‘upward only direction’ which means even during challenging trading conditions, certain review clauses can result in rent rising.

Understanding when reviews occur and how the reviewed rent will be calculated is essential to long-term business planning. A rent level that is affordable today may become problematic years into the term.

Permitted Use Restrictions

Hospitality businesses frequently evolve. A restaurant may introduce takeaway services, a bar may diversify into food, or a café may look to offer evening events.

However, many leases contain tightly drafted user clauses restricting how the premises can be used. If a business wishes to expand or adapt to market conditions, the lease may require landlord consent or even formal lease variation.

Tenants should ensure the permitted use is sufficiently flexible to accommodate future business plans rather than simply reflecting the current trading model.

Alterations and Fit-Out Works

Few hospitality operators occupy premises without carrying out substantial fit-out works. What is often overlooked is that the landlord’s consent may be required not only for structural alterations but also for internal changes, signage, extraction systems, outdoor seating areas and specialist plant and equipment.

Just as importantly, tenants should consider what will happen to those alterations when the lease ends. Many leases allow landlords to require reinstatement at the tenant’s expense. The cost of removing bespoke hospitality fit-outs and restoring premises to their original condition can be considerable.

Assignation and Subletting

Markets change and businesses can need flexibility.

Whether due to a sale of the business, restructuring or changing trading circumstances, the ability to assign a lease or sublet premises can become extremely important.

Tenants should understand what conditions apply before a landlord will consent to a transfer. Some leases impose financial tests, guarantor requirements or other restrictions that can make disposal of the lease more difficult than anticipated.

Insurance and Uninsured Risks

Most commercial leases require the landlord to insure the building and recover the premium from the tenant. The detail behind those provisions, however, deserves careful scrutiny.

Businesses should understand what happens if the premises are damaged by an insured risk and, equally importantly, by an uninsured risk. Questions such as whether rent is suspended while repairs are carried out and whether either party can terminate following serious damage should be considered from the outset.

Licensing-Specific Obligations

Licensed premises often have additional lease provisions relating to alcohol licences and regulatory compliance.

These clauses can require tenants to maintain licences, comply with licence conditions, obtain approvals for alterations affecting licensing plans and co-operate with landlords in relation to licence transfers at lease expiry. Breaches can have consequences beyond the licensing regime and may place a tenant in breach of its lease.

For businesses where a premises licence is fundamental to trading, these provisions should never be treated as boilerplate wording and specialist advice should be taken.

Break Options

A break option can provide valuable flexibility, particularly in a rapidly changing hospitality market.

However, Scottish courts have consistently shown that break clauses must be complied with precisely. Failure to serve notice correctly or meet all specified conditions can result in a tenant remaining tied into a lease for years longer than anticipated.

If a lease contains a break option, tenants should understand exactly what must be done and when and diarise ahead of time.

Taking Advice Early

A commercial lease is often one of the most significant commitments a hospitality business will make. While dilapidations rightly attract attention, they are only one piece of a much larger picture.

The strongest negotiating position exists before the lease is signed. Once a tenant has entered into the lease, changing its terms can be difficult, costly and sometimes impossible.

A careful review at the outset can identify risks, clarify liabilities and ensure that the lease supports the business rather than constraining it. In a sector where margins are often under pressure, understanding exactly what you are signing up to could make a meaningful difference to profitability and long-term success.

Stacy Campbell is Managing Director of McKee Campbell Morrison Solicitors and advises hospitality, leisure and licensed trade businesses across Scotland on commercial property and leasing matters.