Comm prop and the Holy Grail

Based on the England & Wales Model Commercial Lease, the Property Standardisation Group has launched the first of a suite of standard forms of lease for commercial property in Scotland

12th December 2016 | Property Standardisation Group

Property Standardisation Group

A standard form of lease has always been the Holy Grail for Scottish commercial property practitioners: a lease which has all the “whistles and bells” an institutional landlord would expect to see but which is nonetheless pitched evenly between the parties and capable of being tabled as a fair starting point for most commercial letting transactions, allowing both parties the opportunity to agree terms in an expedited and cost-effective manner.

Readers of a certain age may recall that the Law Society of Scotland’s Committee for Styles published in the May 1980 Journal “Workshop” section a template FRI lease for use where a free-standing property was being leased as a whole to a single tenant.

The template was 10 or so pages long and was well received and widely adopted at the time. The document was intended by the committee “to be a reasonable balance between the terms which a landlord might seek to impose and those which a tenant might be willing to concede”.

The aspiration for such a document still holds true today, almost four decades later!

Carrying the baton

With this in mind, the Property Standardisation Group has been monitoring the increasing popularity in England & Wales of the Model Commercial Lease (“MCL”) suite of commercial leases, originally commissioned several years ago by the British Property Federation and taken forward by Model Commercial Lease (www.modelcommerciallease.com), involving various prominent law firms, clients, landlord representatives and trade organisations. The MCL is intended as a reasonably balanced document for routine letting transactions having a term longer than (say) five years; the template also readily lends itself to customisation to reflect the intended transaction. The MCL shares the same vision as the PSG in producing documents that are intended to avoid unnecessary negotiation of routine content while attaining institutional acceptance.

The MCL comprises a family of templates for commercial leases and associated documents, available for offices, shops, shopping centre units and industrial/logistics units (see box below).

The PSG has collaborated with the MCL and our consultees amongst Scottish conveyancing practitioners to “kilt” one of the MCL leases. We have started with the lease of part of an office building, though it is the PSG’s intention over time to produce “kilted” versions of the other types of lease too.

MCL – Office – 02: Lease of Part of Building (Office) has therefore now been uploaded to the PSG website (www.psglegal.co.uk) along with its accompanying guidance notes.

It is worth noting that a “kilted” version of the MCL is being used in all of the lettings for Edinburgh St James, currently being redeveloped and due to reopen in 2020-21.

Approach taken by the PSG

The PSG has adopted the same approach that we took to “kilting” the City of London Law Society certificate of title, in that we have not tried to innovate on the MCL and have limited our amendments to where there are differences in law that need to be addressed. In the guidance notes, we have highlighted where the MCL has taken a different approach to that adopted by other organisations. For example, the MCL approach to uninsured risks is more balanced between the parties than the CLLS approach, which is more landlord friendly.

The draft lease should be read in conjunction with the guidance notes, which derive from its English counterpart, contain an overview and are intended to help practitioners to review, use and amend the MCL.

Introducing the MCL

As a modern institutional lease, the MCL contains all the essential elements practitioners would expect to see, but couched in plain English and encapsulated in bite-sized clauses. It is up to date in addressing current issues such as electronic communications, energy efficiency, the carbon reduction commitment, EPCs and sustainability. It also includes singular Scottish requirements such as the imposition of a full repairing liability in order to displace the landlord’s contingent common law obligations, and the contracting out of rei interitus so that the lease does not automatically terminate in the event of damage or destruction.

The MCL also contains extensive footnotes which will often explain why something has been done in a particular way or a particular compromise or “concession” has been adopted. They will also explain square brackets and serve as prompts to delete definitions that may not be needed.

However, there are a number of specific features with which practitioners will need to be familiar:

Interpretation clause. There are some innovative provisions: for example, the working assumption is that consent is always subject to reasonableness, except where the lease states that a party has absolute discretion. Scottish practitioners may otherwise be accustomed to the opposite “default” scenario where it is assumed that a party – invariably the landlord – enjoys absolute discretion.

Similarly, a landlord requires to act reasonably when exercising rights or imposing requirements under the MCL, except where the lease states that the landlord has absolute discretion.

There is a general provision that if one party has to pay money to the other, the costs must be reasonably and properly incurred.

Repairs. There is an optional schedule of condition clause, bearing in mind how popular these are now; also the repairing and redecorating obligations exclude damage by insured and uninsured risks.

Alterations. There are various classifications of alteration the tenant might make which can be selected as appropriate:

tenant’s business alterations, i.e. works that require fixing to structural elements that are not part of the demise, such as the installation of service media (which would normally be prohibited as they involve structural alterations);
external works, for example installation of apparatus, aerials and plant;
if the landlord and the tenant decide it is appropriate, the lease contains a streamlined protocol for the landlord to grant consent to “permitted works” (i.e. any works that the tenant can carry out without consent, for example, internal non-structural works, and also to tenant’s business alterations or external works). It contains “good housekeeping” clauses with which any reasonably minded tenant would comply in any event. It can be used for more complicated works, but it is most likely to be used for run-of-the-mill works that a tenant wants to get on with quickly (and which are often done at the tenant’s risk simply because the process of licensing them takes too long).

Reinstatement. The lease contains a mechanism relating to reinstatement at lease expiry, enabling the tenant, by service of a notice, to prompt the landlord to specify which alterations are to be removed and unless the landlord responds, the objection to remove will not apply. This principle may help both parties to avoid the brinkmanship that typically occurs towards the end of a lease.

Alienation. The MCL automatically allows group sharing and (optionally) sharing with a catering, cleaning or other outsourced service; subletting is catered for in a separate schedule which defines an “approved sub-lease” and who will qualify as an “approved sub-tenant”. If subletting is prohibited the provisions can be readily removed.

Common parts. While the landlord enjoys the right to designate specific common parts for the tenant’s use, it must include those common parts reasonably required for the use and enjoyment of the premises. If no designation is made, the tenant has the right to use all common parts required for the use and enjoyment of the premises.

EPCs, action plans and sustainability. The PSG has tried, where possible, to follow the MCL’s lead on provisions in respect of energy performance and, more broadly, sustainability. However, as Scotland has opted to take an alternative route towards enhancing performance of its building stock, some divergence has been necessary. Drafting which takes into account the provisions of the Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 2016 (“AEP Regulations”) is the most notable addition in this respect.

As drafted, the MCL envisages the landlord being able to carry out any necessary works to comply with the provisions of an applicable action plan under the AEP Regulations and recover associated costs from the tenant; there are corresponding rights of entry for the landlord.

A fairly light touch schedule on “sustainability” has been included, designed to facilitate meaningful discussions between the parties and the sharing of data on such issues rather than impose onerous obligations on either.

Break clause. The MCL contains an optional break clause, coupled with a refund of rent obligation. The clause caters for a range of possibilities, such as the break being personal to the initial tenant and/or conditional on a rent penalty being paid.

Rent review. The valuation guidelines are drafted “neutrally”, not intending to achieve a headline rent. There is a choice on whether the rent review surveyor will act as an expert or arbitrator. If the latter is opted for, practitioners should carefully consider whether any of the non-mandatory Arbitration (Scotland) Act 2010 rules should be disapplied.

Service charge. This is split into four sections: administrative, landlord’s obligations, actual services, and service charge exclusions. While there is no obligation to comply with the RICS Service Charge Code of Practice, where it is sensible to do so, the landlord must take into consideration its administrative, accounting, procurement management and operational provisions. The MCL distinguishes between “core” services that must be provided and “discretionary” services that may be provided.

Insurance. The list of insured risks has been “modernised” using feedback from the BPF Insurance Committee; the landlord must insure against terrorism (assuming such cover is available). As part of good housekeeping, the landlord must tell the tenant of any material variations to the policy and give the tenant a summary of its main terms on the tenant’s request; insurance premiums must be reasonable and proper in amount and reasonably and properly incurred; and, on uninsured risks, the MCL gives the tenant all the benefits it would have if damage were caused by an insured risk except that the landlord has a choice (exercisable within 12 months of the damage) as to whether to reinstate.

Next steps

The PSG:

will similarly over time convert the other leases in the MCL stable;
continues to work with the MCL on future iterations of the family of templates;
will reflect on whether any of the other PSG templates need to be aligned with the MCL – it is certainly intended to singularise the defined terms “Landlords” and “Tenants” in the PSG lease management suite of documents;
encourages practitioners to road-test the MCL, though it is appreciated that individual firms may decide they have to amend certain aspects on a transaction by transaction basis.

At the very least the MCL provides a very useful starting point, and possibly renders unnecessary the first round of parties’ amendments. To quote again from the Journal “Workshop” section of May 1980: “it is not necessary that the style be ‘swallowed whole’; it may also, or indeed mainly be useful as a quarry from which individual clauses can be selected… or as a basis from which the parties can start to bargain”. In these times of change it is strongly reassuring that a mantra from yesteryear still holds true!