Choosing a rental agreement
Commercial property in Scotland can generally be let out under a lease or a licence. When deciding what type of rental agreement will be most appropriate for your situation, there are a range of relevant considerations. You might want to think about:
the type of property you're letting
how you want the property to be used
the length of time that you are willing to let the property out for
the needs of your prospective tenants
Different types of rental agreements will give your commercial tenants different sets of rights. Taking time to identify the best kind of rental agreement for you will avoid giving your tenant more rights in the property than intended.
A commercial lease is a contract between a landlord and a business tenant. It gives the tenant the right to use the property for a commercial purpose over a set period for an agreed rent. Commercial leases will often be for a period of between 3 and 25 years; recent trends have suggested that the average length of a commercial lease is around 8 years. A lease will outline the rights and responsibilities of the landlord and the tenant during this period. Rent will often be paid quarterly in advance, although you can negotiate a different agreement with your tenant if you wish.
The benefits of commercial leases
The key benefit of a commercial lease is that it offers security for both landlord and tenant. Agreeing a rental contract that lasts for several years means that the landlord can rely on regular income from the property for many years, while the tenant gets long-term stability in terms of running their business.
A licence (eg a licence to occupy) granted in relation to commercial property gives an occupier the right to use a property for a short period. It is common for a licence to be used rather than a lease when an occupier needs premises to solve a short-term property requirement (eg to carry out a one-off job or to trade at an event). Licences will typically last for a period of up to one year.
Benefits of commercial licences
A licence affords both parties a higher degree of flexibility than a lease as neither is tied into a long-term contract.
Landlords often do not need to serve notice on their tenant at the end of a licence’s specified term. Whether or not notice is required during or at the end of a licence’s duration should be set out in the licence. If it is not, the parties should give reasonable notice if they want to end the licence. The notice period required to end a licence will often be shorter than that for a lease and the formalities required fewer. Once a licence ends, the occupier has to leave the property.
Potential problems when using a licence
The creation of a valid lease in Scotland has 4 criteria:
identification of the property to be leased
identification of the parties to the lease
specification of the rent to be paid, and
an agreed term (ie duration) of the lease - although this may sometimes be implied by the courts (ie a one-year term imposed) if the 3 criteria above are met
Whether a right to occupy is a lease or a licence depends on the above, as well as other influential but non-conclusive factors (eg whether the occupier has exclusive possession of the premises, ie whether only they have a right to occupy it).
The 4 criteria required for a lease will often be present if you grant what you intend to be a licence. However, calling a right to occupy premises a ‘licence’ is non-conclusive and a court may decide that a lease is in place instead of a licence based on the reality of the situation. This will mean that your occupier has more rights in the property than intended.
When using a licence to rent your property, it is prudent to get advice from a commercial property solicitor to ensure you create a valid licence.