Alienation Flashcards
What is alienation?
Grant of a lease creates a leasehold interest, - this may be sold or transferred.
- Lease is assigned by existing tenant to a new assignee.
Alienation – disposal of all or part of a tenant’s interests in the lease.
What is assignment?
Assignment is one form of alienation.
- New tenant entitled to exclusive possession of premises.
Why an assignment?
May no longer need premises for purposes, or cannot afford.
If lease is silent – tenant is free to assign. In commercial leases likely that tenant will need to apply to landlord for consent.
Qualified covenants against assignment?
- May be qualified, so assignment only allowed with landlord’s consent.
- S191(a) turns a qualified into a fully qualified – so landlord must act reasonably. And with reasonable delay.
- S1 Landlord and tenant act 1988 – states that landlord must give decision on consent within a reasonable time.
Law in alienation is heavily in favour of tenant.
When is it reasonable to withhold consent?
- Cannot withhold on grounds not related to landlord/tenant relationship, such as a personal dislike.
- Inability to pay rent –
- If landlord does not act reasonably then tenant may be able to claim damages.
- Commercial lease pre-emptively will have circumstances of assignment and conditions attached.
- Unsatisfactory of covenant strength
- Mixed-use policy
- Proposed use would breach the lease
Assignors and assignees liabilities after assignment?
Privity of contract – Original parties can enforce obligations against each other even after contract has been assigned.
Privity of estate – ability of landlord and tenant for time to enforce the provisions of lease against each other. However not all obligations are enforceable under privity of estate.
Old leases
- Common law position was original tenant remained liable to landlord to pay rent and perform other obligations under privity of contract.
New leases
- Changed liability of assignor and assignee to reflect better the commercial reality of the situation.
- Original tenant released from liability and all of tenant covenants passed to new tenant.
Authorised guarantee agreement
- Landlords of old leases were used to being able to rely on privity of contract to treat original tenant as effective guarantor. This has stopped.
- But statute provides a way for original tenant to agree to guarantee obligations of incoming tenant. This can be done by authorised guarantee agreement. If they then assign to new tenant then original tenant cannot be liable.
Procedure for assignment? Pre-exchange?
Landlords’ solicitor
- Take instructions
- Confirm receipts of application set out any requirements
- If client wishes to proceed, draftee license to assign and send to tenants’ solicitor
o Once undertaking has been provided to landlord’s solicitor– landlords solicitor will draft a license to assign.
Tenants’ solicitor
- Take instructions
- Apply for consent
o Apply early on – the landlord’s solicitor will ask tenants solicitor to give an undertaking for costs. The undertaking will cover the landlord’s solicitor and surveyors’ costs. It will be usually capped at certain amount.
- Prepare draft contract and deduce title – forward to assignees solicitor
o Tenants’ solicitor deduces title by providing official copies of leasehold title, or if it’s not a registered interest then the landlords title to assignees solicitor.
o They will deduce title and assignees solicitor should investigate it.
- Answer pre-contract enquiries
- Once agreed, engross the contract and send engrossment to assignees solicitor.
Assignees solicitor
- Take instruction
- Review draft contract
o Amend if they feel appropriate. Landlord is not normally a party to the contract.
- Review and report on lease
- Review the license to assign
- Raise pre-contract enquires and searches
o Assignees solicitor will raise CPSEI1 enquires but also CPSE4 – specific to assignment of lease.
o Raise the same searches as If it was a freehold.
- Arrange for assignee to sign contract
Assignment procedure - Pre-completion?
Landlord solicitor
- Engross license to assign in titplicate-3 copies- arrange for landlord to execute one copy
Tenants’ solicitor
- Arrange for tenant to execute one copy of license to assign
- Prepare and send a completion statement
- Response to requisitions on title
- Approve deed of assignment and arrange for tenant to execute.
Assignees solicitor
- Arrange for assignee to execute one copy of the license to assign
- Obtain funds
- Raise requisitions on title
- Raise pre-completion searches - OS1
- Draft deed of assignment – TR1
Completion of assignment?
Completion
- Assignees solicitor sends tenants solicitor completion monies
- All 3 solicitors agree over telephone the license to assign
- Tenants and assignees solicitor agree over telephone to complete the deed of assignment
Underletting?
It’s another form of alienation – tenant does not pass its leasehold interest on entirely but instead grants an underlease to an undertenant. – must be shorter than the lease itself.
- Following which tenant remains the tenant of landlord and must pay rent, but receive the rent from the undertenant.
Why underletting?
- A tenant may wish to if
- They are not using the full property
- The do not need premises at moment but will so in future
- Cannot find a willing assignee but can find a willing undertenant
If lease is silent – free to do so.
Qualified covenants against underletting?
- A qualified covenants against underletting is automatically converted to a fully qualified covenant.
- Act reasonably – it applies whether you say no or yes.
o 1. Refusing consent grounds must be reasonable
o 2. Granting consent – conditions must be reasonable. - A commercial lease may contain an absolute covenant against underletting of part except for a permitted part
- Typically, the landlord will prevent lease from being underlet when
- Together with property that does not belong to landlord.
- On a payment of a lump sum
- With a rent-free period
Liability in underletting?
Privity of contract and privity of estate
- Exists between landlord and tenant
- Also exists between tenant and undertenant – BUT NOT THE LANDLORD AND UNDERTENANT
As such they will have:
Direct covenant
- Landlord is not able to enforce covenants against the undertenant
- Landlord will therefore usually want the undertenant to covenant directly with landlord.
- A direct covenant can be given by the undertenant to landlord in the license to underlet
Underletting procedure? Pre-exchange?
Pre-exchange
Landlords’ solicitor
- Take instructions
- Consider application to underlet
- If landlord is happy, request undertaking for costs and issue draft license to underlet to tenant’s solicitor
Tenants’ solicitor
- Take instructions
- Apply for consent to underlet
o Like assignment – landlords’ solicitor will ask for undertaking for costs.
- Prepare draft lease and agreement for underlease
o A tenant granting an underlease is usually very limited in what provisions they can offer.
o May be a lease by reference – which incorporates sections of tenant’s own lease.
o Agreement for underlease – not always necessary to have exchange at all - if it does take place, then tenants’ solicitor will draft an agreement for underlease. – may set completion date.
- Tenants title is deduced -and respond to any queries on title
- Answer pre-contract enquires
- Once agreed, engross the agreement for underlease.
Undertenants solicitor
- Take instructions
- Review draft lease and agreement for lease and review draft license to underlet
- Investigate title and raise any queries on title
o Same searches and enquires as tenant’s solicitor in grant of lease.
o ONE DIFFERENCE IS – RATHER THAN LANDLORD DEDUCING ITS FREEHOLD TITLE, THE TENANT WILL NEED TO DEDUCE ITS LEASEHOLD TITLE AS FOLLOWS:
o If lease is >7 years then tenant need only provide an official copy of its registered leasehold title
o If <7 years then tenant will need to provide and official copy of landlord’s freehold title together with a copy of lease.
- Raise pre-contract enquires and searches
- Arrange for undertenant to sign counterpart lease
Underletting procedure - pre-completion?
Landlords’ solicitor
- Engross agreed form of license to underlet and circulate for execution, and obtain landlord execution to license to underlet
Tenants’ solicitor
- Prepare original and counterpart underlease, obtain tenants signature to original and send counterpart to undertenant for signature.
- Prepare and send a completion statement
- Obtain tenants execution to license to underlet
Undertenants solicitor
- Arrange to sign counterpart underlease
- Obtain funds from client needed to complete
- Raise pre-completion searches
- Obtains undertenants execution to license to underlet.
Underlease?
Underlease will likely require a sum from undertenant for service charge and increase rent to cover corresponding obligations of tenant.
If it’s an underletting of the whole of tenant’s interest than OS1 carries out, and os2 if its underletting of part of tenant’s interest -
Where underlease is not registerable an os3 can be carried out.
30- working days priority period conferred from os1 and os2 – need to make application to register
0s3 – unregistered – updates official copies and does not give you a priority period – if you don’t have to register anything
- Do it if your own interest is ess than 7 years so unregistered
- Or if landlords’ interest is unregistered
License to assign and underlet?
The deed that gives consent is the license to assign or licence to underlet.
Will usually contain a time limit on consent, so avoids uncertainty on part of landlord.
Unlike a license for alterations – few obligations in a license to assign or underlet.
Need a licence to ensure landlord can enforce obligations (terms of lease) on undertenant. License to underlet will also contain a covenant on tenant to ensure landlords costs are covered.
If it’s for an old lease – license will contain a direct covenant by assignee or undertenant to landlord to comply with tenants’ covenants in tenant’s lease.
