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Property Practice II > Alienation > Flashcards

Alienation Flashcards

1
Q

What is alienation

A

Simply means a disposal of all or part of the tenant’s interest in the lease. Assignment is one form of alienation.

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2
Q

What is assignment

A

Just as a freehold interest may be sold or transferred to a new owner, a leaseholder interest may be sold or transferred.

Lease is ASSIGNED by existing tenant to the new tenant.

As with a freehold, the assignee may pay for the leasehold interest or the consideration may simply be the assignee agreeing to pay the rent and perform the other obligations of a tenant under the lease.

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3
Q

What happens after assignment?

A

The landlord becomes the landlord of the assignee.

New tenant is now entitled to exclusive possession of the premises and is obliged to pay the rent and perform the other tenant covenants.

Assignor is no longer entitled to use the premises and generally need not pay the rent or perform other tenant covenants (however may still have liability for them).

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4
Q

Why might a tenant assign?

A

May assign where the tenant no longer needs the premises or cannot afford to keep paying the rent.

If the premises are right for the assignee, conversely they may be only too happy to take the lease.

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5
Q

What if the lease is silent as to assignment?

A

If the lease is silent, the tenant is free to assign.

In practice, a commercial lease will likely require that before assignment, the tenant apply to the landlord for consent. The landlord will want to be able to vet potential assignees.

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6
Q

Covenant’s against assignment

A
  • absolute
  • qualified
  • fully qualified

Usually will contain an absolute covenant against an assignment of part of the premises as landlord will not want a letting split into parts.

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7
Q

Qualified covenants against assignment

A
  • covenant against assignment of the whole may be qualified, meaning that assignment is only allowed with the landlord’s consent

However, s19(1)(b) LTA 1927 coverts it to a fully qualified covenant so the landlord must act reasonably in giving consent - this restricts the landlord’s discretion.

Must also give decision within a reasonable time - 28 days Dong Bang Minerva case

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8
Q

When is it reasonable to withhold consent (case law)

A
  • assignees proposed use does not fit with landlord’s policy (eg shopping centre)
  • justifiable concerns about the assignee’s ability to pay rent e.g. no references or newly incorporated and cannot produce accounts

CANNOT WITHHOLD:
- grounds not related to landlord/tenant relationship such as personal dislike
- discrimination e.g. sex, race, or disability

If the landlord does not act reasonably in withholding or delaying consent then the tenant may be able to claim damages

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9
Q

Assignment: circumstances and concerns

A

Can agree in the lease circumstances and conditions for assignment and will provide the landlord with specific grounds on which consent may be reasonably withheld.

Circumstances: the parties agree these are reasonable grounds for withholding consent

Conditions: these are imposed on assignment (assignment is subject to)

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10
Q

Privity of contract and estate

A

Contract:
The ability of the original parties to a contract to enforce the obligations against each other even after the contract has been assigned.

Estate:
Ability of the landlord and tenant for the time to enforce the provisions of a lease against each other. Not all obligations are enforceable under privity of estate.

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11
Q

Old leases (date)

A

Before 1 January 1996

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12
Q

New leases

A

On or after 1 January 1996

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13
Q

Old leases: assignment

A

Despite assignment, the original tenant remained liable to the landlord to pay the rent and perform other obligations under privity of contract.

Very few obligations passed under privity of estate and the new tenant would have to covenant directly with the landlord to observe all the tenant’s covenants in the lease.

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14
Q

New leases

A

Changed by Landlord and Tenant Act 1995.

When a new lease is assigned the original tenant is released from liability and all of the tenant covenants are passed to the new tenant.

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15
Q

Authorised Guarantee agreement

A

Document where the original tenant agrees to guarantee the obligations of the incoming tenant. This means should the new tenant fail in obligation (e.g. miss rent payment) then can pursue original tenant.

Only guarantees the incoming tenant so if the lease is assigned again, then the liability under the AGA ends.

Many commercial leases make it a condition of assignment that the outgoing tenant enters into an authorised guarantee agreement.

If the lease is silent then the landlord can only insist on an AGA if it reasonable to do so.

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16
Q

Assignment: pre-exchange - landlord’s solicitor

A
  • Take instructions
  • Confirm receipt of application set out any requirements
  • if client wishes to proceed in principle, draft licence to assign and send to tenant’s solicitor
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17
Q

Assignment: pre-exchange - tenant’s solicitor

A
  • take instructions
  • apply for consent
  • deduce title
  • send draft contract if applicable
  • send licence to assign (from landlord’s solicitor) to assignee’s solicitor
  • Answer pre-contract enquiries
  • engross contract, obtain tenant’s signature and send engrossment to assignee’s solicitor
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18
Q

Assignee’s solicitor

A
  • take instructions
  • assist tenant’s solicitor if anything needed for consent
  • review draft contract (if applicable) and investigate title
  • review and report on lease
  • review the licence to assign
  • raise pre-contract enquiries
  • arrange for assignee to sign contract
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19
Q

Consent application

A

Tenant’s solicitor will usually apply to the landlord for consent early on in the transaction as the whole transaction hinges on this being successful.

Landlord’s solicitor will ask the tenant’s solicitor to give an undertaking for costs (so make sure have funds for the client)

Undertaking will cover:
- landlord’s solicitor’s costs
- surveyor’s costs
- can be capped

Once the undertaking has been provided the landlord’s solicitor will draft a licence to assign.

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20
Q

Undertaking for costs

A

Promise by a solicitor to pay costs. Breach of the undertaking may lead to disciplinary action by the SRA and as a solicitor is an officer of the court, their undertaking is also enforceable in the courts.

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21
Q

Draft contract and lease

A

Tenant’s solicitor will draft a contract if it is intended to exchange.

Tenant’s solicitor deduces title by providing official copies for the leasehold title or if not a registered interest then the landlord’s title. In either case, a copy of the lease will be provided to the assignee’s solicitor.

The assignee’s solicitor will review the draft contract and amend if they feel appropriate in the assignee’s interests. The landlord is not normally party to this contract.

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22
Q

Deed of variation

A

When assigning the assignee generally takes the lease as it.

Only in rare instances might the landlord agree to vary the lease.

Varying the lease would require a deed of variation.

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23
Q

Exchange on contract for assignment

A
  • Law society B
  • no deposit (unless long lease the 10%)
  • contract may set a fixed completion date or specify that completion is condition (eg landlord’s consent)
23
Q

Investigation of title, searches and enquiries

A

Tenant’s solicitor will deduce their leasehold title and the assignee’s solicitor should investigate it.

Raise CPSE1 and CPSE4 (specific to assigning).

Should raise the same searches.

Same with leasehold, assignee may agree the lease is too should or there are limited repair obligations and full searches may not be required.

24
Q

Pre-completion - assignment: landlord’s solicitor

A

Engross licence to assign three times, arrange for landlord to execute one copy

25
Q

Pre-completion - assignment: tenant’s solicitor

A
  • arrange for tenant to execute one copy of the licence to assign
  • prepare and send a completion statement detailing the money due on completion
  • respond to requisitions on title
  • approve deed of assignment and arrange for tenant to execute
26
Q

Pre-completion - assignment: assignee’s solicitor

A
  • arrange for assignee to execute one copy of the licence to assign
  • obtain funds from the assignee needed to complete as per completion statement
  • raise requisitions on title
  • raise pre-completion searches
  • draft deed of assignment
27
Q

Pre-completion steps

A
  • what proportion of the rents due under the lease are attributable to the tenant and the assignee.
  • pre-completion searches (OS1 - as whole lease is being assigned)
  • landlord will prepare the licence to assign in triplicate and all parties will assign
  • assignee will draft the deed of assignment. If it is a registered lease this will be in form TR1 as for the registered freehold. If the tenant’s solicitor is happy with the draft the they will arrange for the tenant to execute it. (landlord is not involved in this)
28
Q

Completion!

A
  • Assignee’s solicitor sends the tenant’s solicitor the completion monies
  • landlords solicitor, tenant’s solicitor and assignee’s solicitor agree over the telephone to complete and date the licence to assign
  • tenant’s solicitor and assignee’s solicitor agree over the telephone to complete and date the deed of assignment
29
Q

Post-completion steps: assignee’s solicitor

A
  • arrange to submit SDLT or LTT and pay appropriate amount
  • register assignment if necessary
  • send formal notice of assignment to the landlord
30
Q

What is underletting?

A

A form of alienation. Tenant does not pass leasehold interest on but grants an underlease to an undertenant.

Underlease must be shorter than the lease itself even if it just for a day.

Following an underletting tenant remains tenant of landlord and must pay them rent and ensure their obligations. Tenant however receives a rent from the undertenant which the tenant may use to pay the rent under its own lease.

31
Q

Why an underletting?

A

Tenant may want to underlet the premises if:

  • not using all of the premises and impossible to underlet the part they are not using
  • they do not need the premises at the moment but may need them in the future
  • cannot find a willing assignee but can fins a willing undertenant
32
Q

What if the lease is silent as to underletting?

A

If the lease is silent then the tenant is free to underlet.

However, a commercial lease will impose a requirement of consent and will want to vet prospective undertenants. Underlettings of part may be permitted if it is practical to separate the premises.

33
Q

Qualified covenants against underletting

A
  • Tenant’s covenant against underletting of whole may be qualified, meaning only allowed with the landlord’s consent.
  • A qualified covenant against underletting is automatically upgraded to a fully qualified covenant and the decision must be within a reasonable time (28 days)
34
Q

Withholding consent for underletting: typical commercial provisions

A
  • May contain an absolute covenant against underletting of part, except for a permitted part (e.g. floor of a building) and a fully qualified covenant against underlettings of the whole or a permitted part
  • considerations are similar to that of assignment
  • however there are not conditions or circumstances but rather certain ‘restrictions’
35
Q

Typical underletting restrictions

A

Prevent tenant from underletting the premises:

  • with property that does not belong to the landlord
  • on payment of a lump sum
  • with rent free period beyond market standard
  • rent is no lower than that in the tenant’s lease
  • contains covenant’s which are no less onerous
36
Q

Privity of contract and estate

A

Neither privity of contract nor estate will exist between and landlord and an undertenant.

Means landlord is unable to enforce covenants against the undertenant directly. Therefore will want a direct covenant - licence to underlet.

37
Q

Licence to underlet

A

Document which allows the undertenant to directly covenant with the landlord. This means the landlord can enforce directly against the undertenant for breaches.

38
Q

Pre-exchange: underletting - landlord’s solicitor

A
  • take instructions
  • consider application to underlet
  • If landlord is happy in principle, request undertaking for costs and issue draft licence to underlet to tenant’s solicitor
39
Q

Pre-exchange: underletting - tenant’s solicitor

A
  • take instructions
  • apply for consent to underlet
  • prepare draft underlease and if relevant agreement for underlease. Review draft licenee to underlet and send copy to undertenant
  • deduce title and respond to any queries on title
  • answer pre-contract enquiries
  • once agreed, engross agreement for underlease, obtain tenant’s signature and send counterpart to undertenant’s solicitor
40
Q

Pre-exchange: underletting - undertenant’s solicitor

A
  • take instructions
  • review draft underlease and agreement for underlease adn amend as required
  • review draft licence to underlet
  • investigate title and raise any queries on title
  • raise pre-contract enquiries and searches
  • arrange for undertenant to sign counterpart underlease
41
Q

Drafting underlease

A

Tenant’s solicitor will draft the underlease

  • provisions are generally limited as obligations generally have to be no less onerous than the tenant’s
  • may be full form lease or lease by reference
  • term must be less than the tenant’s term
42
Q

Consent application

A
  • Tenant’s solicitor will usually apply to the landlord for consent early on in the transaction
  • req tenant’s solicitor to give an undertaking for costs
  • once in place, landlord’s solicitor will prepare the draft licence to underlet
  • Landlord’s solicitor will also want to see the draft underlease to ensure that it will comply with the tenant’s obligations under the lease
43
Q

Agreement for underlease

A
  • not always necessary
  • may set completion date int he future or make completion conditional on various matters
44
Q

underletting - investigation of title, searches and enquiries

A
  • same searches (if short term and/or limited obligations may not need full scale)
  • over 7 years: tenant only needs to provide official copies
  • 7 years or under: lease and official copies of the landlord’s title
45
Q

What happens on exchange

A
  • tenant’s solicitor and undertenant’s solicitor exchange Law Society B
  • no deposit is usually payable
  • agreement for lease may set fixed date for completion but more likely has conditions which need to be satisfied
  • agreement for the underlease will usually have a draft of the agreed form of the underlease annexed to it so it can only be exchanged once the terms of the underlease have been agreed.
46
Q

pre-completion - underletting: landlord

A

Engross agreed form of licence to underlet and circulate for execution and obtain landlord’s execution to licence to underlet

47
Q

pre-completion - underletting: tenant

A
  • prepare original and counterpart udnerlease, obtain tenant’s signature to original and send counterpart to undertenant for signature
  • prepare and send a completion statement, detailing the money due on completion
  • obtain tenant’s execution to licence to underlet
48
Q

Undertenant’s solicitor

A

Arrange for undertenant to sign counterpart underlease

Obtain funds from client needed to complete as per completion statement

Raise pre-completion searches

Obtain undertenant’s execution to licence to underlet

49
Q

Pre-completion steps

A
  • pre completion statement is prepared
  • underlease will require an appropriate sum from the undertenant for service charge and insurance rent to cover the corresponding obligations of the tenant
  • if underletting of a whole of the tenant’s interest, then an OS1 search is carried out. If underletting part: OS2 search is carried out against the appropriate part of the tenant’s registered leasehold

If underlease is not registrable: OS3

50
Q

Underletting: completion

A
  • parties’ solicitors agree to date and complete the licence to underlet
  • undertenant’s solicitors sends tenant the completion monies
  • tenant’s solicitor and undertenant solicitor agree over the telephone to complete and date the executed leases they are holding
  • tenant’s solicitor send the completed original and counterpart underleases to each other
51
Q

underletting: post - completion

A

Tenant’s solicitor:
- send notice of underlease to landlord

Undertenant’s solicitor:
- arrange to pay SDLT
- register underlease if necessary

52
Q

Licences

A

Assignment or underletting will require landlord’s consent.

Commercial lease typically requires consent is by deed.

Deed that gives consent to assign or underlet is the licence for assignment or the licence for underletting.

Format of deed ensures that the tenant’s covenants and any variations to the lease are given the requisite formality.

Licence usually contains a time limit on consent - avoids uncertainty on the part of the landlord.

53
Q

Content of licence for assign and underlet

A
  • fewer provisions than in a licence for alterations (which has numerous obligations about the work that is to be carried out
  • If for OLD lease should contain direct covenant by assignee to the landlord to comply with the tenant covenants in the tenant’s lease - normally for remainder of the term.
  • New lease: direct covenant is not always strictly necessary but landlord may want it anyway

If outgoing tenant is giving an AGA this may be in licence to assign or separate document.

Note: for underletting landlord will require a direct covenant from the undertenant

54
Q

Notice of dealing

A

following an assignment, the assignee (assignment) or tenant (underletting) will be required to give the landlord formal notice within a month that the transaction has been completed.

Usually there will be a fee for landlord’s solicitors receipting this notice.

For long lease: usually font need landlord’s consent but still usually requirement to give notice of dealing for assignments of the lease

54
Q

Code for leasing business premises: licences

A
  • should allow tenants to assign or underlet the whole of the premises with the 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

Property Practice II (12 decks)

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