Alienation Flashcards
What is alienation?
A disposal of all or part of the tenant’s interest in the lease
What interest does the grant of a lease create?
A leasehold interest
Can be sold/transferred to a new owner just like a freehold can
What is assignment? Will this be paid for?
Essentially selling (transferring) leasehold - assignee may pay for leasehold interest or simply agree to pay rent and perform other obligations of tenant under lease
What happens in the process of assignment?
To 1) the landlord 2) assignee 3) assignor
- Landlord becomes the landlord of the assignee
- New tenant entitled to exclusive possession and obliged to pay rent/perform other tenant covenants
- Assignor is no longer entitled to use premises and (generally) need not pay rent/perform other tenant covenants
Why would an assignment happen?
Tenant may no longer need premise for purposes of business or cannot afford to keep paying rent
Assignee may be happy to take the lease!
What is the rule on assignment if a lease is silent?
The tenant is free to assign
In practice, what needs to be obtained before the tenant can assign?
In a commercial lease
Consent of the landlord
How might the covenant against assignment be drafted?
Absolute, qualified or fully qualified
Will usually have an absolute covenant re assignment of part - landlord will not want a letting split into parts (creates various problems)
Does an absolute covenant against alienation mean the tenant cannot ask for consent?
No, the tenant can ask for consent, but the landlord is not obliged to consider it
What happens to qualified covenants against assignment?
And all types of alienation!!
They are converted by statute into a fully qualified covenant
By law, when must a landlord give decision on consent to assign by?
Within a reasonable time (usually 28 days)
When might it be reasonable to withhold consent?
- Justifiable concerns about the assignee’s ability to pay the rent
- Proposed use* of premises (e.g. policy on mixing different types of shop)
- Use here meaning what it will be used for not in the legal sense. If use class was different the tenant would need to submit application for change of use as well as permission to assign
Can the landlord withhold consent on grounds such as a personal dislike or discriminate?
No - grounds must be related to the landlord/tenant relationship
If the landlord does not act reaosonably in withholding/delaying consent, what may the tenant be entitled to?
Damages (including costs for agents and solicitors)
What will the landlord and tenant agree to contractually that will be automatically reasonable?
- Circumstances that will be reasonable grounds for withholding consent (e.g. behind on rent)
- Conditions that may be imposed on assignment
What is the difference between privity of contract and privity of estate?
- Privity of contract = ability of original parties to contract to enforce obligations against each other
- Privity of estate = ability of landlord and tenant to enforce provisions of a lease against each other
What is the rule on assignor and assignee’s liabilities after assignment for old leases?
Leases granted before 1 Jan 1996
- The original tenant remained liable to landlord (rent and obligations) under privity of contract.
- Limited obligations passed to new tenant under privity of estate - new tenant would have to covenant with landlord directly
Old tenant is effectively a guarantor
What is the rule on assignor and assignee’s liabilities after assignment for new leases?
On or after 1 Jan 1996
Original tenant is released from liability and all of the tenant covenants pass to the new tenant
How can original tenant agree to guarantee the obligations of an incoming tenant?
An Authorised Guarantee Agreement (AGA)
When/why will a tenant enter into an AGA?
- When it is a condition of assignment
- If lease silent = when reasonable to do so
What is the effect of an AGA?
How long does it last?
The outgoing tenant guarantees the next tenant only
Subsequent assignment (byassignee) ends outgoing tenant’s AGA liability
What are the stages of an assignment procedure?
VERY SIMILAR TO FREEHOLD TRANSACTION
- Pre-exchange
- Exchange (if applicable)
- Pre-completion
- Post-completion
Similar to freehold transaction
What does the landlord’s solicitor do at pre-exchange?
Confirms receipt of application, sets out requirements, and draft licence to assign
What does the tenant’s solicitor do at pre-exchange?
- Apply for consent
- Prepare draft contract (for exchange if applicable)
- Deduce title
- Forward licence to assign to assignee’s solicitor
- Answer pre-contract enquiries
- Engross contract, obtain tenant’s signature and send engrossment to assignee’s solicitor (once agreed)
What does an assignee’s solicitor do at pre-exchange?
- Assist tenant’s solicitor with consent (if needed)
- Review draft contract
- Investigate title
- Review and report on lease
- Review licence to assign
- Raise pre-contract enquiries and searches
- Arrange for assignee to sign contract
What will tenant’s solicitor typically do first?
Apply to landlord for consent
Transaction hinges on this
What will the landlord’s solicitor ask the tenant’s solicitor to give?
An undertaking for costs
Cover landlord’s solicitor’s and surveyor’s costs
Will be capped
Who drafts and amends the licence to assign?
Landlord’s solicitor drafts it, all three parties will want to amend it and agree on final form
The Landlord will draft the Licence to assign
How does the tenant’s solicitor deduce title?
Provides official copies for leasehold title (or landlord’s title if it is not a registered lease (7 years or less and not registered!))
Copy of lease provided in any event
Who will be a party to the draft contract of assignment?
NB draft contract only if intend to exchange (e.g. parties anxious to bind themselves to the assignment subject to landlord’s consent)
Assignor and assignee
Not the landlord
Will a tenant have the opportunity to negotiate the lease?
Not usually - will often take the lease as it is
Only in rare instances might landlord agree through deed of variation
How will the assignee’s solicitor investigate title once solicitor has deduced if lease is a) registered b) unregistered?
a) Can rely on leasehold official copies
b) Will investigate landlord’s title
What pre-contract enquiries are raised by an assignee’s solicitor?
- CSPE 1 (as in a commercial freehold transaction)
- CSPE 4 (specific to assignment of lease)
Will ideally exercise same care as if they were buying freehold
CSPE 4 = CSPE A = Assignment
Will assignee’s solicitors always carry out full investigations?
May agree with assignee that not justified for a very short lease with limited obligations
Here - should be advised of risks!
What happens on exchange of contracts? What will it specify?
If there is exchange
- Exchange like a freehold (Law Society B)
- No deposit usually payable for assignment (10% for long residential)
- Contract may set a fixed completion date or set condition
What will the landlord’s solicitor do at pre-completion?
- Engross licence to assign in triplicate (3 copies) - arrange for landlord to execute one copy
What will the tenant’s solicitor do at pre-completion?
- Arrange for tenant to execute one copy of licence to assign
- Prepare and send completion statement detailing money due on completion (apportioned annual rent, service charge, insurance rent)
- Respond to requisitions on title
- Approve deed of assignment and arrange for tenant to execute
What does the assignee’s solicitor do at pre-completion?
- Arrange for assignee to execute one copy of licence to assign
- Obtain funds from assignee needed to complete as per completion statement
- Raise requisitions on title
- Raise pre-completion searches
- Draft deed of assignment
Who drafts the completion statement and what will it contain?
- Drafted by tenant’s solicitor
- Will calculate proportion of rents due under lease (attributable to tenant and assignee)
E.g. lease assigned halfway through current quarter and has paid full quarter in advance - completion statement requires assignee to pay half of quarter to tenant
What pre-completion search is carried out?
If lease is registered
OS1 search for whole of tenant’s leasehold title
Why does it not matter if the lease is part or whole (of landlord’s freehold title)?
Is not the landlord’s title being searched
Why does the landlord prepare the licence to assign in triplicate?
All 3 parties will want a signed copy on completion
What form will the assignee draft the deed of assignment in?
TR1 (as for a registered freehold)
Who drafts the deed of assignment? Who is not involved?
Assignee drafts and sends to tenant solicitor to execute
Landlord not involved
What 3 things happen on completion?
- Assignee’s solicitor sends tenant’s solicitor the completion monies
- The landlord’s solicitor, tenant’s solicitor and assignee’s solicitor agree over telephone to complete/date licence to assign
- The tenant’s solicitor and assignee’s solicitor agree over the telephone to complete/date deed of assignment
What happes at post-completion?
Assignee’s solicitor:
- Arranges to submit SDLT/LTT return and pay
- Registers assignment if necessary
- Sends formal notice of assignment to landlord’s solicitor
How does underletting differ from assignment?
Subletting, sublease, subtenant = underletting, underlease, undertenant
Landlord, tenant, undertenant = headlandlord, landlord, tenant
Tenant does not pass leasehold interest on entirely but grants an underlease to an undertenant for a period shorter than the lease itself
Could be only a day shorter
Following an underletting, who pays rent to the landlord and ensures obligations are performed?
The original tenant - receives rent from undertenant (used to pay rent under own lease) and can enforce undertenant’s covenants (to ensure they do not fall foul of their own)
Why would a tenant want to underlet their premises?
- Not using all of premises (can underlet part)
- Do not need premises atm but will in future
- They cannot find a willing assignee but can find willing undertenant
Can the tenant underlet if the lease is silent?
Yes
Commercial lease will impose requirement of consent + want to vet prospective tenants
Is an underletting of part permitted?
Presuming lease is silent
If practical to separate the premises
Are qualified covenants against underletting also automatically converted to a fully qualified covenant? Must decisions also be made within a reasonable time?
As with assignment
Yes!
Considerations re withholding consent reasonably also the same
Commercial lease may contain:
* Absolute covenant against underlettings of part, except for permitted part
* Fully qualified covenant against underlettings of whole or permitted part
Will lease covenants regulating underletting also specify conditions and circumstances on which consent may be reasonably withheld?
No - transaction less risky for landlord as tenant remains primarily liable
But landlord will normally still restrict underletting in commercial lease - concerned with what would happen if undertenant became direct tenant
In what ways will the lease typically prevent the tenant from underletting?
Cannot underlet:
- Together with property that does not belong to landlord
- On payment of a lump sum (likely means tenant not paying market rent)
- With a rent free period beyond what is normal in that market
What will the lease likely require re rent and covenants of the underletting?
- Rent is no lower than in tenant’s lease
- Contains covenants no less onerous than in tenant’s lease
What are the implications for privity of contract and privity of estate in an underletting?
Both types of privity exist between landlord/tenant and tenant/undertenant
As they cannot enforce covenants against undertenant, how will a landlord protect themselves?
Will covenant directly with undertenant (usually in licence to underlet)
Is there an AGA equivalent in underletting?
No - the tenants remain liable to the landlord in any case
Is the process of underletting a grant of lease transaction?
Yes
NB EXCHANGE FOR AGREEMENT FOR UNDERLEASE MAY BE SKIPPED AND PRE-EXCHANGE AND PRE-COMPLETION WOULD BE MERGED
What does the landlord’s solicitor do at pre-exchange?
- Consider application to underlet
- Request undertaking for costs and issue draft licence to underlet to tenant’s solicitor
What does the tenant’s solicitor do at pre-exchange?
- Apply for consent to underlet
- Prepare draft underlease (and agreement for underlease if there is to be an exchange)
- Review draft licence to underlet and send copy to undertenant
- Deduce title and response to queries on title
- Answer pre-contract enquiries
- Once agreed, engross agreement for underlease, obtain tenant’s signature and send counterpart to undertenant’s solicitor
What does the undertenant’s solicitor do at pre-exchange?
- Review draft underlease (and agreement for underlease) and amend as required
- Review draft licence to underlet
- Investigate title and raise queries on title
- Raise pre-contract enquiries and searches
- Arrange for undertenant to sign counterpart lease
What will the landlord’s solicitor do after they give consent and secure an undertaking for costs from tenant’s solicitor?
Draft the licence to underlet and want to see draft underlease
Why will a landord want to see the draft underlease?
To ensure it will comply with tenant’s obligations under lease
Who drafts the underlease?
The tenant’s solicitor
Can the tenant granting the underlease be broad in the provisions they can offer?
No - very limited as will usually require the underlease to contain obligations no less onerous than the tenant’s
E.g. full repairing covenant in lease = same in underlease
How long must the term granted by the underlease be?
Less than the remaining term of the tenant’s lease
What 2 forms may the underlease take?
- Full form lease (similar to tenant’s own lease)
- Lease by reference (incorporates sections of the tenant’s lease by reference)
If there is an agreement for lease, what will this set?
Completion date or conditions
What is the difference between granting a lease and granting an underlease in deducing title?
The tenant needs to deduce its leasehold title (rather than landlord deducing freehold title)
What does the tenant need to provide if the lease is
1. Over 7 years
2. 7 years or under
- Official copy of registered leasehold title
- Official copy of landlord’s freehold title together with copy of lease
Rmb - only registrable if over 7 years!! There would be no official copies of leasehold if under so would have to show freehold title
What happens on exchange of an underlease?
- Exchange in similar manner to freehold contract (Law Society B)
- No deposit usually payable
- Draft of agreed underlease usually annexed
What does the landlord’s solicitor do at pre-completion?
Engross agreed form of licence to underlet and circulate for execution and obtain landlord’s execution for licence to underlet
What does the tenant’s solicitor do at pre-completion?
- Prepare original and counterpart underlease, obtain tenant’s signature for original and send counterpart to undertenant
- Prepare and send a completion statement detailing money due
- Obtain tenant’s execution to licence to underlet
What does the undertenant’s solicitor do at pre-completion?
- Arrange for undertenant to sign counterpart lease
- Obtain funds from client needed to complete as per completion statement
- Raise pre-completion searches
- Obtain undertenant’s execution to licence to underlet
Does the completion statement set out the rent under the tenant’s lease?
No - it sets out the underlease rent that is payable. Will likely require appropriate sum for service charge and insurance rent also
When is an OS1 search against the tenant’s registered leasehold title used for an underlease?
When underletting the whole of the tenant’s lease
When is an OS2 search carried out against the appropriate part of the tenant’s registered leasehold title?
When underletting part of tenant’s interest
When may an OS3 search be carried out against the tenant’s interest? What does it check?
Where underlease is not registrable (under 7 years) to check whether any adverse entries have been made since date of last copy of tenant’s title register
Any underlease under 7 years will be an OS3
What do all the parties do on completion of the underlease?
Agree to date and complete the licence to underlet
What do the tenant’s solicitor and undertenant’s solicitor do on completion?
With the underleases!
- Agree over the telephone to complete and date the executed underleases they are holding
- Send the completed original and counterpart underleases to each other
What does the undertenant’s solicitor send to the tenant’s solicitor?
The completion monies
What does the tenant’s solicitor do at post-completion?
Send notice of the underlease to the landlord’s solicitor
What does the undertenant’s solicitor do at post-completion?
Arrange to submit and pay SDLT/LTT if necessary and register underlease if necessary - lease and licence to underlet will also often provide that landlord notified when underlease completes
Reminders
Assignment procedure is similar to a freehold transaction
- Licence to assign (a deed drafted by landlord and signed by landlord, assignor, assignee)
- Deed of assignment (drafted by assignee and signed by assignee and assignor)
Underletting procedure is similar to grant of a lease transaction
- Licence for underletting (a deed drafted by landlord and signed by landlord, tenant and undertenant)
- Underlease (+ counterpart drafted by tenant and signed by tenant and subtenant)
What deeds give consent for assignment or underletting and who signs them?
Licence for assignment or licence for underletting. All 3 parties sign them
Why is the use of a deed safer from the landlord’s point of view?
Lowers the risk that the landlord inadvertently consents to something it doesn’t mean to
What will the licence contain to relieve landlord’s concern of an indefinite process?
A time limit
When will the licence be completed in practice?
Just before completion of transaction itself
Does a licence to assign/underlet contain as many obligations as a licence for alterations?
No - contains much fewer obligations
What will the licence for the assignment of an old lease or an underletting contain?
A direct covenant by the assignee or undertenant to comply with the tenant covenants in the tenant’s lease
Will a direct covenant be necessary in the licence for assignment of a new lease?
No but landlord may want it anyway
What does the outgoing tenant give that can also be contained in the licence to assign or be a standalone deed?
Authorised guarantee agreement
What must the assignee (following assignment) or tenant (following underletting) give the landlord within a month?
Formal notice that the transaction has been completed (will usually be a fee for landlord’s solicitors receipting this notice)
For a long residential lease, what does an assignment or short tenancy underlease not require?
The landlord’s consent - but notice of dealing remains
A charge is another type of alienation. When would this be done by 1. a commercial tenant and 2. a residential leaseholder?
- As part of a floating charge over their business generally (bank wants benefit of lease if business insolvent)
- When taking a mortgage
Share occupation is another type of alienation. Will a commercial lease allow this?
Usually if sharing with group companies (landlord can regard the tenant and group companies as a single entity and enforce covenants against the tenant)
What are the Code’s requirements on alienation?
Re group companies, and charging
- Lease should allow tenants to assign/underlet whole of premises with landlord’s consent not to be unreasonably withheld or delayed
- Leases should allow tenants to share with group companies without consent
- Leases should allow tenants to charge the lease to a bank or reputable lending institution without consent
