Contracts and agreements

Contracts and Agreements

Many asset development projects have acquired assets which are interests in leases in land or buildings. The box below highlights lease provisions which existing projects have identified as having significant impact on the viability and sustainability of their project and their ability to use the assets to benefit their communities.

Based on this experience particular attention should be paid to these issues, with legal advisors in the negotiations on any lease associated with achieving the project objectives.

Lease provisions

Potential Impact

Length of the lease

It is not possible to secure grants or other finance to improve or acquire property on leases that are too short. (A standard security may be granted over the tenant's interest in a lease of over 20 years.) 

Assignation (transfer of a tenant's interest in a lease) and sub-letting (letting by the tenant to a third party)

Conditions may prevent flexible use of the asset to meet project objectives.

VAT provisions

This will need to be considered in relation to the project as whole and in particular its effect on capital and revenue funding requirements.  It will also affect affordability as a cost to any business tenants for land/buildings when plans are made for maintaining and managing the asset.

Obligations for repairs maintenance and insurance (including on termination)

These will have cost implications.

Sale price, rental levels and payment and rent review provisions

These will have capital and revenue cost implications

Irritancy Clauses

The landlord has the right to terminate the lease on non-payment of rent, tenant breach or on insolvency of the tenant. In this situation grant funds may have to be returned if the lease does not run its full term - which can prevent the asset from being used flexibly to meet the project objectives.

Tenant's Obligations

These obligations typically restrict the use of the leased subjects and may limit the use of the asset including as security for borrowing.

These obligations may be particularly relevant to conditions for grant or loan funding for projects.

Obligations on termination of the lease (Dilapidations)

These will have cost implications.

Land and property acquisitions and disposals by the trustees of registered charities must by law act in the best interests of the charity and secure the best possible deal for the charity. It also requires them to use professional advisors and to follow specific procedures when acquiring, disposing or managing the land and property assets of the charity. These procedures are not onerous, and there is free, easily accessed advice for Charity Trustees available from the Office of the Scottish Charities Regulator (OSCR) that can be consulted to help commission professional advice.

Other contracts and agreements with stakeholders

Some of these agreements are covered in the Developing an Asset section relating to construction contractors and professional advisors.

There are other contracts and agreements that are sometimes required when the transfer of ownership takes place in addition to leases/licences which give a right to occupy the land/building.

A management agreement is an agreement between the local authority (or owner) and another organisation to work together in the operation of the building for the benefit of local people. It does not give any rights to occupation, security or legal interest in the building.

A service level agreement is an agreement, for an agreed period, between two partners, setting out the services to be provided in return for resources, usually financial or staffing. Performance requirements and quality standards will be set as part of the agreement as well as procedures for monitoring and review. They are sometimes required in order to enable a peppercorn rent to be justified for a community building, since such an agreement allows a monetary value to be put to services that can be set against the rental income "lost" to a local authority or other public sector owner. Some Local Authorities argue that it would be iniquitous to allow peppercorn rents to all groups who use community buildings given their varying age and condition, as some groups would get a better deal than others.  It is argued that, without other management and service level agreements put in place in return for favourable lease agreements, a benefit for the wider community cannot be guaranteed and the group can just get the benefit of the building without providing community benefits in return.

These transactions, and the legal issues and documentation that arise from them are many and varied.  They will depend on the nature of the project and the assets involved.  They will also be affected by the way the project is being funded, the type of organisation that is implementing it and the type of organisations that agreements are being sought with.

The project is also likely to need additional agreements with funders, and loan providers.  But they will need to meet the specific needs and circumstances of the project and will differ in each case.  As a result, they will need specific professional advice.