7. Commercial Leases Flashcards
What are prescribed clause leases
Leases granted out of registered land, compulsorily registrable after 19 June 2006
A prescribed form of lease
When will a lease be exempt from being considered a prescribed clause lease
If it arises out of a variation of a lease which is deemed a surrender and re-grant, or if it is granted in a form expressly required by
a) an agreement entered into before 19 June 2006
b) a court order
c) an enactment and
d) a necessary consent or licence for the grant of the lease given before 19 june 2006
What must be issued if an applicant claims a lease is not a prescribed clauses lease
conveyancers certificate/other evidence must be supplied with registration application
when is the date of grant inserted
left blank and inserted on actual completion
What will landlords typically charge on long leases of residential property
a premium
what are covenants
promises to perform various obligations
what must be certain in respect of the description of the premises
precise extent of what is to be transferred
what should be considered in relation to car parking
is it an easement, merely giving a right to use the car park or is it to be included in the property let to tenatn
what is the norm for rent increases in the case of flats
rent increases to be agreed in advance and set out in the lease
VAT on residential leases
0
VAT on commercial leases
exempt subject to landlord right to opt to tax - lease must contain a provision permitting this
what is an absolute prohibition on alteration
no alterations are permitted
statutory exceptions to absolution probitions on alterations
a) s3 LTA 1927
b) equality act
s3 LTA 192
Where tenant wants to carry out improvements, it can serve a notice on the landlord detailing proposals.
landlord has 3 months within which to object
if landlord objects, t can apply to court for authorisation to carry out the improvements
when will a court be likely to authrorise a T to make alterations
if they add to the letting value of the property, are reasonable and suitable to the character of the property and do not diminish the value
what if a landlord does not want a tenant to carry out their own improvements under s3
landlord can offer to carry out works itself in return for a reasonable increase in rent s3(1)
tenant is under no obligation to accept, and may withdraw notice- if tenant rejects the offer the court cannot give authority for them to carry out the works themselves Norfolk Capital v Cadogan
what does the equality act say in relation to alterations
reasonable adjustments are implied to meet the needs of those with disabilities
what is a qualified covenant against alteration
prohibition on alterations without landlords prior consent
what does s19(2) LTA 1927 imply into a qualified covenant against making improvements
landlord cannot unreasonably withhold consent against imrpvements- term cannot be excluded
What is an improvement Lambert v FW Woolworth
whether alteration amounts to improvement must be looked at from tenants POV. if the works increase value/usefulness of premises to T they constitute an improvement, even if they reduce value of landlords reversionary interest
what can a tenant claim under part 1 LTA 1927 of business premises
compensation for improvements at the end of term that add to the letting value of the holding. s3 statutory procedure must have been followed
commonly adopted method in lettings of part re insurance
L insures whole block via mgmt co with cost passing on to T via service charge/insurance rent
which following matters are to be checked re insurance
- risks insured against
- amount of cover
- application of policy monies
how much should insurance cover
the property should be insured to its full reinstatement value
full reinstatement value includes
cost of demolition and site clearance
professional fees (architect, surveyor)
allowance for inflation
what is recommended when calculating insurance cover
professional valuation of reinstatement
annual index linked increase of reinstatement value
what happens if there is no express term stipulating what happens where property is rendered unusable
rent continues to be payable/ t to ensure lease provides for rent suspension during any period the property cannot be occupied
what happens if the building is totally destroyed
doctrine of frustration only applicable in extreme circumstances National carries v Panalpina
what can a user clause have an effect on
a wide clause tends to increase the rent, restrictive clause reduces the rent
what can be used to define user
making use of categories set out in use classes order
Who is usually obligated for all repairing obligations when t leases the whole building
tenant
Who is usually obligated for all repairing obligations when t leases part of the building
divided between l and t (non-structural to t and structural L)
what must repair obligations do
specifit extent of reapirs (eg to maintain, to decorate etc)
an essential proviso for a fixed term lease
provisor for re entry or forfeiture
what is a forfeiture clause
allows landlord to terminate the lease following tenant breach of covenant
can landlord forfeit for breaches other than non payment of rent
no, unless they have served a s146 notice
what is necessary for repossession
court order
what should a lease ensure where the lease is of part of a building
easements granted so t has access to necessary facilities
how is service charge divided up
total expenditure divided between various tenants
to what extent must tenants pay sc
only for matters which have been agreed in the lease
optional services
establishing a reserve
renewals of plant and equipment
improvements
entry phone system
resident caretaker
security staff
method of apportioning sc
proportionate to rateable value (larger premises pay larger share)
proportionate to floor area
equally between all tenants
fair proportionwh
why would a landlord set up a sinking fund
to cover anticipated major expenses (outside building requires painting, lifts replacing)
what should be done regarding sinking fund
express provisions declaring the sinking funds as being held on trust
draft a clause dealing with skining fund
how is SC paid
lease states who is to prepare the accounts and certify amount due from each tenant
s21 LTA 1985
residential tenant is entitled to request a written summary of costs incurred
how can landlords anticipate cost of sc
using previous years expenditure
fixed sum
estimate of probable expenditure
what happens if l overestimates sc
provision for final balance to be paid when actual costs are known. underpayment paid as a lump sum. overpayment to be repaid or credited to next years account
normal computation of review dates
anniversaries of term commencement date
ways in which a rent may be varied during commercial lease term
fixed increase
index linked clause (requiring rent to be periodically reassessed)
turnover rent (geared to turnover of tenants business)
open market revaluation
open market revaluation
requires rent to be revised in accordance with changes in the property market. rent review clause provides that at every rent review date, parties seek to agree to a figure equating to current open market rent for a letting of t premises
what does it mean by upwards only basis for open market revaluations
rent will be higher of the rent currently being paid
what must be considered when assessing OMR
physical premises
geographical location
length of term for which premises are let
terms of the lease
an interest in the premises
how are prejudices associated with an OMR overcome
valuer instructed to ascertain OMRV of a hypothetical interest in the property
how does the valuer come up with OMR
uses comparables between evidence of rents currently being paid by tenants of comparable buildings in comparable circumstances & Terms
Hypothetical letting assumed within open market by a willing landlord to a willing tenant
assumption of vacant possession
improvements disregarded
what will the review clause state
hypothetical letting to be granted on the same terms as the actual lease save as to the rent amount
what are the 2 ways in which rent review can be conducted
negotiations between the parties
service of trigger and counter notices to agree the revised rent
what is a trigger notice
requires parties to follow a timetable for servicing notices
trigger notice specifies proposal for reviewed rent to which other party serves a counter notice
clause might provide for l to implement review by service on the tenant of a trigger notice which t can dispute within a certain time of being issued the notice
who can acts as an independent third party
Royal institution of chartered surveyors to appoint a surveyor, determining revised rent
what is security of tenure?
The right for the tenant to stay in the premises after expiry of the contractual term and to apply for a new tenancy, which can only be denied on certain limited statutory grounds.
who is security of tenure applicable to
Act gives security of tenure to tenants occupying for business purposes.
s23(1)
This act applies to any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purpose of a business carried on by him or for those and other purposes
definition of a tenancy s23(1)
- Person claiming SOT must occupy under the terms of a tenancy (lease)
- Definition includes an agreement for a lease/underlease
- DOES NOT APPLY TO LICENCES
- Typically, a lease is found where the occupier has been given exclusive possession of the property for a fixed period of time and is paying a rent.
Premises must be occupied by the tenant
- Occupation can be by the tenant personally, through an agent, or by a co owned by tenant
- If sub-tenant is in occupation of the whole, head-tenant will not benefit from SOT
- Sub-tenant enjoys SOT in this case
What constitutes a business? to be eligible for security of tenure
- includes a ‘trade, profession or employment and in the case of a body of persons’ any activity carried on by them
- Any activity means it is not restricted to commercial activity (running a tennis club has amounted to a business use)
when is a SOT inapplicable
SOT inapplicable where business use is in breach of a term of the tenancy, unless L has consented to or acquiesed in the breach
excluded tenancies from SOT
Tenancies at will
Fixed term not exceeding 6 months
Contracted-out tenancies
what is a tenancy at will
A tenancy that can be terminated by either L or T at any time
can a landlord contract out of SOT
- Generally, contracting out of the act is forbidden
- S38 allows parties to agree that SOT should not apply to a given tenancy (only in fixed term lettings)
- Prior to 1 June 04, court approval needed to contract out
- Leases granted after 04 no longer requires consent, rather a notice is to be given
methods of terminating a commercial lease
- Service of landlord’s notice under s25
- Service of tenant’s request for new tenancy under s26
- Forfeiture
- Surrender
- Notice to quit (for periodic tenancies)
- 3 months’ written notice on landlord under s27 (for fixed term leases)
- For fixed term leases, T ceasing to be in occupation for business purposes at the end of the lease s27(1)(a)
- Breach of covenant
what is a competent landlord?
Lease from freehold → competent landlord = freeholder
What if T remains in occupation in part, but has sub let part of the building to S?
- T’s right to apply for a new tenancy is restricted to the part T occupies
- If no steps have been taken to terminate T’s lease, T is S’s new landlord, even if T’s contractual term has 14 months or less to run
- Once s25/s26 notice to terminate is served, T’s lease terminates within 14 months → T ceases to be S’s competent landlord (instead, it will be F)
what is a s25 notice?
notice by l terminating a lease
s25 notice formalities
- Notice must be in the prescribed form
- Must be given not less than 6 months, but no more than 12 months (prior to the date of termination specified in it)
- Date of termination cannot be before contractual termination date
What must the s25 notice include?
Whether or not L will oppose an application by T (to court) for a new tenancy, if so, on which statutory grounds they will rely
how can a L oppose to renewing a tenancy under s25
L can oppose the application on one of the 7 grounds set out in s30
What if L indicates in s25 notice that they do not oppose grant of a new tenanct?
- If L indicates in s25 notice that they do not oppose grant of a new tenancy, parties will now negotiate for the grant of a new lease
- T must apply to court prior to the expiry of the s25 notice, otherwise they will lose their rights under the act
- Typically made to county court
- Time limit can be extended following agreement between the parties
- If L opposes granting a new tenancy:
- T must apply to court within the time limits
- L can pre-empt this by applying to terminate the lease on the grounds stated in the s25 notice
what is a s26 request
T can serve a request for a new tenancy under s 26
to whom is a s25 notice unavailable to
Unavailable to periodic tenants / those for a fixed term of one year or less
formalities for s25 request
- Must be in a prescribed form
- Must be given not less than 6 months, or more than 12 months prior to start date stated in the notice
- Must also state the proposed terms of the new tenancy
- Must be given not less than 6 months, or more than 12 months prior to start date stated in the notice
what if l does not want to accept s25 request
- Opposition to new tenancy must be done via a counter-notice on T within 2 months of the s26 request
- L must state s30 ground(s) of opposition
- T must ensure they apply to court for a new lease, or they will lose their rights under the act
- T must make this application prior to commencement date of new tenancy specified by them in s26 request (unless L agrees to an extension of the time limit)
- L cna pre-empt this by applying for an order to terminate the lease on grounds stated in their counter notice
what if l does not oppose regranting a tenancy under s25 request
- Parties to renegotiate the terms of the new lease
- If negotiations drag on, application to court to be made before commencement date of the new tenancy specified by them in the s26 request (or lose their rights under the act)
Grounds for opposition under s30
Ground A - Tenant’s failure to repair
Ground B - Persistent delay in paying rent
Ground C - Substantial breaches of other obligations
Ground D - Alternative accommodation
Ground E - Sub-
letting of part where higher rent can be obtained by single letting of the whole property
Ground F - Landlord intends to demolish or reconstruct and could not reasonably do so without obtaining possession
1. There must be a firm and settled intention to carry out the relevant work (strong case if they obtained the necessary planning permission and financial arrangements are in position 2. They intend to demolish or reconstruct the premises (or a substantial part of them) or carry out substantial works of construction on the holding/part of it 3. They cannot reasonably carry out the work without obtaining possession
Ground G -
Landlord’s intention to occupy the holding for their own business or as a residence
- L must have a firm and settled intention
- L must demonstrate that they have considered and taken practical steps to occupy the premises
- L must have a reasonable prospect of achieving their intention
- L cannot rely on it if their interest was purchased or created within 5 years before the ending of the current tenancy
does current tenancy end on expiry of the s25 notice/request
When T applies to court for a new tenancy, the current tenancy does not end on expiry of the s25 notice/s26 request
how much is interim rent during proceedings (s25/s26)
Continues at the same rent, until 3 months after the conclusion of the proceedings
Interim rent = rent payable under the new lease
What If L is opposing grant of a new tenancy, terms of new lease are substantially different from the old one or rental values have changed significantly in the period before grant of the new lease:
- Interim rent set as market rent for yearly tenancy of the premises ‘having regard’ to the rent under the old lease
- Results in a lower rent being assessed
what will the terms of the new lease be?
Tenant is only entitled to a tenancy of the ‘holding’
Duration
holding
Property comprised in the current tenancy, excluding any part not occupied by the tenant (those parts which the tenant has sub-let)
duration
- Such as is reasonable in the circumstances
- Cannot exceed 15 years
Rent
- Open market rent having regard to the other terms of the tenancy
- Court must disregard
- That the tenant and their predecessors have been in occupation
- Any goodwill attached to the holding
- Any effect on rent on any improvements voluntarily carried out by the tenant during tenancy
- In the case of licenced premises, any addition in value due to tenants licence
Other terms
- Absence of agreement → terms fixed by the court
- Terms must have regard to current tenancy terms and all other relevant circumstances
- Likely that the new terms will be the same as the old
what if current party wishes to change current lease terms?
City of London Real Property Co v O’May establishes that it is for the party wanting a change to justify the change
change must be fair and reasonable
when do new leases commence
- New leases ordered by the court will not commence until 3 months after the proceedings are ‘finally disposed of’
- Time limit for appeal will have elapsed (four weeks after the order)
- New lease thus commences 3 months & 4 weeks after the order
- If T finds the terms of the new lease ordered by the court ‘unacceptable’ they may apply to have the order revoked
what happens if t does not obtain a new lease
they may be entitled to compensation
when is t entitled to compensation where they are not granted a new lease
- Where landlord’s s25 notice or counter-notice to a s26 request specifies only one or more of grounds e,f,g or;
- Where L has specified one or more of grounds e,f,g along with other grounds and court refuses to grant a new tenancy solely on one or more of grounds e,f,g (i.e. the no fault grounds)
how is compensation for failure to obtain a new lease calculated
Compensation equivalent to the rateable value of holding (unless tenant and predecessors in same business have been in occupation for at least 14 years → twice rateable value)
can a landlord contract out of compensating for failure to obtain a new lease
- Agreements restricting/ excluding compensation is void. if tenant or predecessors in the same business have been in occupation for 5 years +
- Clause commonly found in leases contracting out of the obligation to pay compensation is only enforceable where T has been in occupation for less than 5 years
