Chapter 1: The Different Types of Transaction

Question 1

What kinds of leases are most likely to arise in a residential context?

Answer 1

1. Head leases
2. Underleases

Question 2

What are head leases?

Answer 2

Leases granted by a freehold owner to a tenant

Question 3

What are underleases?

Answer 3

Leases granted by the tenant to an undertenant (or subtenant) out of the head lease.

Remember that an underlease cannot be granted for a longer term than the head lease

Question 4

How is a leasehold estate created?

Answer 4

By the granting of a new lease from the freehold owner to the first tenant.

Question 5

What happens if a lease is granted for more than 7 years?

Answer 5

It is registrable at HMLR and a leasehold title is created

Question 6

What is an assignment of a lease?

Answer 6

The transfer of the remaining term of an existing leasehold estate

Question 7

In conveyancing, what two meanings does ‘assignment’ have?

Answer 7

1. The transfer of a leasehold estate from 1 party to another, and
2. The name of the document that transfers the leasehold estate itself

Question 8

What happens when an existing leasehold interest is sold?

Answer 8

The existing tenant is the seller, and
The new, incoming tenant is the buyer.

If the incoming tenant finds any of the terms of the existing lease unacceptable, they will need to ask the outgoing seller/existing tenant to negotiate directly with the landlord to alter the terms of the lease with a deed of variation.

Under the terms of the lease, the landlord (freehold owner), may also have to give their consent to the sale

Question 9

What is it necessary to indicate in a residential or commercial lease?

Answer 9

Which party will take responsibility for the maintenance of the common areas that are shared between all leaseholders, such as shared gardens in a residential context, or the external parts of the building (e.g., the roof or the foundations).

Question 10

What is common re responsibility for maintenance?

Answer 10

Common in both residential and commercial contexts for a management company to be set up.

This is a legal entity which will be a party to the lease + will take on the responsibilities specified in the lease

Question 11

What is common re management companies?

Answer 11

Often the buyer will take a share in the management company when their purchase completes.

The landlord may covenant in the lease to transfer the freehold of the property to the management company when the last leasehold sale in the building or development completes.

Question 12

What will a management typically prepare?

Answer 12

A yearly budget that accounts for anticipated maintenance costs.

Question 13

How do service charges typically work?

Answer 13

Service charge amounts should be reasonable + as comprehensive as possible.

This sum is then divided up amongst the tenants, who are responsible under the terms of their leases for paying a defined share of the service charge in addition to their rent.

Question 14

What is the effect of service charges on a management company?

Answer 14

Whilst the management company is responsible for carrying out repairs and maintenance to the building and its common areas, the costs of this are passed on to the tenants + shared between them.

Question 15

What are ‘prescribed clauses’? When are they needed?

Answer 15

If a lease term is more than 7 years + subject to compulsory registration at HMLR, the lease must contain ‘prescribed clauses’ at the front of the lease.

These clauses are a summary of the lease terms + are in a standard form so that HMLR can refer to them + complete the registration of leases more quickly.

Question 16

What are the main provisions that would be expected in a well-drafted, long-term residential lease?

Answer 16

1. Term
2. Easements and exceptions
3. Suspension of rent
4. Service charge
5. Management company

Question 17

What lease term is normally unacceptable to a mortgage lender?

Answer 17

A term of less than 80 years

Question 18

What does a suspension of rent provision in a lease do?

Answer 18

Suspends the payment of rent in the event the premises are damaged or destroyed

Question 19

What will a management company provision in a lease do?

Answer 19

This provision will address the role of the management company, and will indicate whether the landlord has agreed to transfer the freehold to the management company on the grant of the last long lease, and whether each tenant may take a share in the management company

Question 20

What do typical tenant covenants relate to?

Answer 20

1. Rent
2. Repair
3. Alterations
4. Use
5. Insurance
6. Alienation

Question 21

What will a tenant’s rent covenant in a lease address?

Answer 21

The tenant’s payment of rent.

Rent is typically a nominal sum in a long residential lease, perhaps only £100 per year, because a premium has already been paid on the grant of the lease

Question 22

What will a tenant’s repair covenant in a lease typically do?

Answer 22

Typically, the tenant is responsible for inside repairs an the landlord/management company for outside repairs and repairs to common parts.

The landlord or management company usually recovers expenses via the service charge

Question 23

What does a tenant’s alteration covenant do in a lease?

Answer 23

Alterations by the tenant to the premises often require the landlord’s consent, though this consent cannot be unreasonably withheld

Question 24

What does a tenant’s covenant on use do?

Answer 24

In a residential lease, the tenant’s use of the premises is often restricted to residential use only + no business use is allowed in a long residential lease.

Question 25

What does a tenant’s covenant re insurance do?

Answer 25

Landlord typically insures the entire property + often recovers a proportion of this cost from the tenant via the service charge

Question 26

What does a tenant’s covenant re alienation do?

Answer 26

Typically no restriction on the ability of the tenant to sell or mortgage the lease unless there is a contrary lease provision.

However, many leases require the landlord’s consent to assign the lease.

Provisions regarding the landlord’s consent to assignment should not be overly restrictive in a long residential lease.

Question 27

What are typical landlord covenants?

Answer 27

Clauses relating to:
1. Quiet enjoyment
2. Landlord’s ability to enforce other tenants’ covenants, and
3. Forfeiture

Question 28

What are unacceptable covenants in leasehold transactions?

Answer 28

E.g., a clause imposing an absolute prohibition against assignment in a long residential lease + the buyer’s solicitor should resist its inclusion in a new lease

Question 29

What should be done if an unacceptable clause is contained in an existing lease?

Answer 29

The buyer’s solicitor should insist that the lease is amended between the seller and the landlord by a deed of variation.

If the clauses aren’t altered or removed, the buyer’s solicitor should advise their client to withdraw from the transaction.

Question 30

How do rent provisions differ in commercial leases?

Answer 30

Commercial context - landlord will require much higher rental payments than for a long residential leasehold, where the rent payments are usually nominal.

Commercial rent typically will be paid on a monthly or quarterly basis.

Question 31

Why is it considered reasonable for a landlord to refuse consent to an assignment of the lease in a commercial context?

Answer 31

Because the obligation to pay this significant rent is ongoing, it is considered reasonable for a landlord to refuse consent to an assignment of the lease if the landlord has reason to believe the incoming tenant will not be able to pay throughout the lease term.

These provisions will therefore be more restrictive than those in a long residential lease

Question 32

How can rent be increased in a commercial lease?

Answer 32

If a landlord is letting premises for a no. of years, they will want the ability to review and increase the rent during the lease term.

This can be done only if there is a provision for rent review in the lease.

Question 33

What happens if there is a rent review provision in the lease?

Answer 33

The rent review will take place at specified intervals and involve a valuation of the property at the time of the review.

The landlord will usually serve a notice on the tenant calling a rent review at the review date

Question 34

What happens if the landlord and tenant cannot agree a new rental figure at the review date?

Answer 34

They should be able to take the matter to arbitration if the lease so provides

Question 35

What use provisions will be in a commercial lease?

Answer 35

Commercial lease will specify the permitted commercial use to which the property can be put by the tenant