Subletting a commercial property in Scotland can be a complex process with various legal implications. Understanding these legalities is crucial for tenants looking to sublet, as well as potential subtenants.

A commercial sublease is a stand-alone agreement between an existing tenant who already holds a lease to a commercial property and another party who wants to occupy part, or all, of that commercial property. The tenant (or sublessor) may be looking to sublet to raise extra revenue, save on rent, or fill up space in the property that has suddenly become available.

Although this can be a useful means of reducing costs and increasing cash flow, commercial tenants looking to sublet a property must first check the terms of the lease (also referred to as the ‘head lease’), plus they will usually also need the landlord’s permission.

Checking the lease agreement

Most commercial leases contain a clause that specifies whether subletting is allowed and, if so, under what conditions. Typically, the landlord’s written consent is required – although they cannot unreasonably withhold consent if the lease allows for subletting with their approval. (Note: what constitutes “reasonable” can vary and may depend upon the subtenant’s financial standing, the proposed use of the property, and other factors.)

However, if the proposed subtenant is reputable, of sound financial standing and does not intend to do anything in the property against the terms of the lease (such as use an office for a nightclub!) subtenancy is usually agreed, subject to meeting the landlord’s costs and any additional security.

With the landlord’s permission, a tenant can sublet a property for the full unexpired period of the lease. Should the lease be terminated before its expiry date, the sublease will automatically end. Furthermore, in most cases, the new tenant will not have a direct relationship with the landlord, instead answering to the sublessor should they breach any terms of the lease.

Legal and regulatory compliance

In Scotland, the registration requirements for a commercial sublease depend on the length of the lease, as well as the specific terms of the agreement. When the sublease is for longer than one year, it must be registered in the Land Register of Scotland. When a lease has a term of more than 20 years, it must be registered to be valid against third parties; when for over a year but less than 20, it does not have to be valid between parties, but registering the lease can still provide legal protections. It also provides a public record of interest in the property.

Similarly, the subtenant’s intended use for the property must comply with local planning regulations, while the premises must also adhere to all relevant health and safety standards.

Sublease agreement

It is important a sublessor provides the subtenant with a written sublease agreement, clearly outlining all the terms and conditions. Although there is not an explicit statutory requirement for this, it is best practice to have an agreement in place, as it clearly outlines the rights and obligations of both parties, thereby reducing the potential for misunderstandings. Should any disagreements or legal issues then arise, the written agreement can be used as evidence.

The sublease also has to comply with the terms of the main lease, so providing a written agreement to the subtenant ensures they are aware of these. Plus, certain terms may be required to be included in the lease agreement by law; these can include rent reviews, maintenance responsibilities, and any termination clauses.

Bear in mind that the original tenant remains liable to the landlord for the obligations under the original lease, even after subletting. This includes payment of rent and maintenance of the property.

Legal advice

Before signing a lease, a tenant should take legal advice as, once the deal is binding, the tenancy can only operate under the agreed rules. The lease must be reviewed to determine what is permitted, and under what conditions. After all, if the tenant wants to leave, bring in a subtenant or share with another company, it is all down to the terms of the lease. In addition, legal advice can help identify any restrictions or obligations in the head lease that needs to be mirrored in the sublease in order to avoid any breaches.

It is also advisable to consult a solicitor when considering subletting a commercial property. In addition to ensuring all legal requirements are met, they can help draft a robust sublease agreement. This should include all the necessary terms and conditions, covering factors such as rent, duration, responsibilities for repair and maintenance, insurance, and any other relevant clauses. A solicitor will also make sure the sublease complies with Scottish law, as well as any specific regulatory requirements.

Commercial considerations

Finally, it is wise to assess the commercial property market to determine if subletting is viable and beneficial. For instance, if there are lots of vacant premises in the surrounding area, it may be harder to find a subtenant. It may also be worth investigating recent leasing activity and researching if any businesses nearby are expanding or contracting.

When a potential subtenant does present themself, they should be carefully vetted to ensure they are reliable, and will be capable of fulfilling their obligations under the sublease agreement. Check their needs and preferences against the property that’s available to them, while considering their financial stability, so as to minimise the risk of defaults

By addressing these legalities, all parties can rest assured that the subletting arrangement is legally sound, minimises risks, and clearly defines everyone’s rights and responsibilities. Of course, it is highly recommended to consult with a solicitor who specialises in commercial property law in Scotland for complete guidance throughout the process, ensuring compliance with all the necessary legal requirements.

John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.