Chapter 8: Lease structure and content

Question 1

1 Repair and insurance
1.1 Repair - who is responsible?

Answer 1

A commercial tenant will almost always be responsible for the repair of their demise, ie the extent of the premises let to them. The first step is to look at the definition of ‘Premises’, ‘Demised Premises’, ‘Property’ or similar in the lease.

Question 2

1.1.1 Lease of whole

Answer 2

In a lease of whole of the landlord’s title such as an office block, the definition of ‘Premises’ will refer simply to the title and postal address of the office block. The tenant is responsible for the interior, exterior and structural repair.

Question 3

1.1.2 Lease of part

Answer 3

By contrast, in a lease of part, say the fifth floor of the office block, the definition of ‘Premises’ will specify the fifth floor of the office block. But it will also go into much more detail of the demise, such as including the floor and ceiling
coverings, but not the structure nor exterior of the building. The tenant is only responsible for interior repair.
In a lease of whole, the repairing responsibility is solely the tenant’s

Question 4

1.1.2 Lease of part

Answer 4

In a lease of part, other demises are the responsibility of their respective tenants. Areas of the
building or estate used commonly by all tenants (‘common parts’), such as hallways, lifts and
staircases, communal car parking, etc, are the responsibility of the landlord.
Although the landlord will bear responsibility for repairing the common parts, the landlord will
recover the cost of doing so collectively from the tenants by way of service charge payments. An
FRI lease typically contains extensive clauses setting out the services and how they are charged.

Question 5

Example

Answer 5

Three different businesses occupy a lease block under FRI leases. Business A occupies two floors,
and businesses B and C occupy one floor each. The lift needs replacing at a cost of £20,000. The landlord will carry out the work and recover £10,000 from A, and £5,000 from each of B and C by way of service charge.

Question 6

1.2 Types of repairing covenant

Answer 6

The repairing obligation is set out as a tenant’s covenant in the lease. Without this, the tenant’s implied responsibilities as to the repair of the premises would be minimal, so the obligation is
essential to a commercial landlord. A covenant containing a full repairing obligation (which is required for an FRI lease) might say:
‘to keep the Premises in good repair’

Question 7

1.2 Types of repairing covenant

Answer 7

Don’t be misled by the word keep, as this obligation means that if the premises are not in good
repair, the tenant must put the premises in good repair. A tenant taking on a full repairing obligation should obtain a survey so they are aware of any
major items of repair that may be needed.

Question 8

A covenant containing a qualified repairing obligation might say:

Answer 8

‘to keep the Premises in good repair but not to put the Premises in any better state of repair
than it was in at the date of this lease as evidenced by the Schedule of Condition’. The schedule of condition will contain photographs recording the state of the premises. By definition, this is not an FRI lease repair covenant, and only likely to be accepted by an
institutional lender in exceptional circumstances (eg, a short letting or a difficult market).

Question 9

1.3 Limits of the repairing obligation

Answer 9

Unless the lease states otherwise, the tenant may generally choose whether to repair or replace
an item of disrepair.

Question 10

Example

Answer 10

A tenant has a lease of whole, and the roof is dilapidated. The tenant may choose to replace the
roof entirely, but if it is possible to do so, does not have to, and may instead repair it. If the lease does state that damaged items must be replaced, then the tenant will want this obligation only to apply if the item is beyond economic repair

Question 11

If the premises are damaged beyond repair

Answer 11

Note that if the premises are damaged beyond repair; for example, if subsidence has caused the
premises to be so damaged that they need to be rebuilt, this is renewal, not repair and the tenant
is not responsible for doing this under a simple repairing obligation. A tenant may be asked to
covenant to renew the premises, but this is onerous and should be avoided. If the lease refers to keeping the premises in good repair and condition, this is more onerous to the tenant (for example, condensation comes within condition, but not repair).

Question 12

1.4 Inherent and structural defects

Answer 12

If the property is newly constructed, it may have inherent or structural defects that only come to
light over time. These may cause issues that the tenant would be obliged to repair under its
repairing obligation. This is unfair, as the tenant is not responsible for them, and the landlord should have warranties from the contractors (the builder, structural engineer, architect, etc) that the landlord can rely on.

Question 13

1.4 Inherent and structural defects

Answer 13

A tenant taking a lease of a newly constructed property should ensure that inherent and
structural defects are therefore excluded from the tenant’s repairing obligation and service charge
contributions.

Question 14

Example

Answer 14

A tenant takes a lease of a floor of a newly constructed office block. Due to a structural design
fault, the walls along one side of the office develop cracks. If the tenant has excluded structural
and inherent defects from the repairing obligation and service charge, the landlord cannot require
the tenant to be responsible either directly for the repair, or indirectly through the service charge.

Question 15

1.5 Insurance

Answer 15

A commercial landlord will almost always be responsible for the insurance of the building (even
where it is a lease of whole). In keeping with the principles of an FRI lease, the cost of insuring will
be recovered from the tenant under the lease:
* In a lease of whole, the landlord will insure the whole, and the sole tenant will refund the
landlord the whole of the insurance premium.

Question 16

1.5 Insurance

Answer 16

• In a lease of part, the landlord will insure the whole, and each tenant will refund the landlord a
  proportionate part of the insurance premium.
  The money that the tenant or tenants pay to the landlord will usually be referred to as ‘insurance
  rent’. The reason for this is covered in the chapter on termination of leases.

Question 17

1.5.1 Insured risks

Answer 17

A typical definition of insured risks in a lease might look like the following: fire, explosion, lightning, earthquake, tempest, storm, flood, bursting and overflowing of water tanks, apparatus or pipes, damage to underground water, oil or gas pipes or electricity wires or cables, impact by aircraft and aerial devices and articles dropped from them, impact by vehicles, subsidence, ground slip, heave, riot, civil commotion, strikes, labour or political
disturbances, malicious damage

Question 18

1.5.1 Insured risks

Answer 18

These are the risks that will be covered by the insurance policy taken out by the landlord. The
definition may allow for the landlord to add other risks to the list from time to time. They will also be excluded from the tenant’s repairing obligation, except in certain instances (eg, if the tenant’s negligence means that the insurance is not paid out).

Question 19

1.6 Summary

Answer 19

• In a lease of whole, the tenant is responsible for repairing the whole building. The landlord
  insures the building, and recovers the whole cost from the tenant.
• In a lease of part, the tenant is responsible for repairing the demise, which will be defined in
  detail. The landlord insures the building and maintains the common areas and recovers a
  proportionate part of the cost from each tenant.

Question 20

1.6 Summary

Answer 20

• A full repairing obligation is typically expressed as an obligation to keep the premises in repair,
  but extends to putting the premises into repair if they are not.
• A qualified repairing obligation limits the tenant’s repairing obligation to keeping the premises
  in the same state of repair as at the beginning of the lease term.

Question 21

1.6 Summary

Answer 21

• By definition, an FRI lease will contain a full repairing obligation, not a qualified repairing
  obligation.
• The tenant is not responsible for damage by insured risks, except in limited circumstances.
• A lease will contain provisions to protect the tenant if the premises become unusable.

Question 22

2 Alterations, user and planning
2.1 Alterations

Answer 22

Alterations are changes to the premises, such as reconfiguring the internal walls, opening up new
windows, adding a mezzanine floor, etc.
If the lease is silent on alterations, then the tenant is free to carry out alterations. The only restriction imposed by law is the doctrine of “waste” which means that the tenant cannot carry out alterations which reduce the value of the premises.

Question 23

2.1 Alterations

Answer 23

In practice, an institutional landlord will want to control tenant’s alterations to avoid issues such as
the premises being less appealing to other future tenants

Question 24

Example

Answer 24

A tenant with a warehouse might want to install a gantry crane if they deal in heavy engineering
parts. If the next prospective tenant deals in soft furnishings, the crane is likely to be an
unnecessary hindrance.

Question 25

2.2 Restrictions on alterations

Answer 25

Typical provisions in an FRI lease:
* The type of alterations permitted (external or internal, structural or non-structural?)
* If they are permitted, whether landlord’s consent needed
* Whether they must be reinstated (ie, the premises returned to its original state) at the end of
the lease term
The degree of control will likely depend on the type of alteration. For example, in an office lease, it
is common to allow internal non-structural partitions to be altered to provide a different office
configuration

Question 26

2.2.1 Absolute covenant

Answer 26

An absolute covenant against alterations means that they are not permitted. If the tenant wants to make an alteration covered by an absolute covenant, they can ask the landlord, but the landlord has no obligation even to consider such a request

Question 27

2.2.2 Qualified covenant

Answer 27

A qualified covenant against alterations means that they are only permitted with landlord’s consent. The landlord does not have to give consent. A fully qualified covenant is similar to a qualified covenant, but in this case, the landlord must act reasonably in deciding to withhold consent.

Question 28

2.2.2 Qualified covenant

Answer 28

The same lease may have a mixture of absolute, qualified and fully qualified covenants for different matters. For example, it might have an absolute covenant against external and structural
alterations, a qualified covenant against internal non-structural alterations, and no covenant against alterations to internal partitioning. This terminology is not restricted to alterations – you will see it in relation to other covenants.

Question 29

2.2.3 Improvements

Answer 29

Improvements: If the lease contains a qualified covenant against alterations, s19(2) LTA1927 converts it to a fully qualified covenant insofar as the tenant’s proposed alterations are improvements from the point of view of the tenant.

Question 30

The conversion from qualified to fully qualified covenant

Answer 30

It will be rare that a tenant will propose alterations that do not constitute an improvement from
their point of view (otherwise why would they want them?). Note that you will come across other areas where there is interplay between the drafting of a
lease and statute. Unfortunately, it is not consistent, and you need to know different rules for different provisions

Question 31

Example

Answer 31

A tenant applies for consent under a qualified covenant to modernise the air conditioning system.
As it is an improvement for the tenant, the landlord must act reasonably in its decision to give/withhold consent

Question 32

2.2.4 Licence for alterations

Answer 32

If the landlord consents to alterations under a qualified covenant, then the consent will usually be
documented in a licence for alterations. As well as details of the works consented to, and any time limit for carrying them out, it will contain various tenant’s covenants as below

Question 33

2.2.4 Licence for alterations

Answer 33

• carry out the works in compliance with the landlord’s requirements, typically with good quality
  materials and a high standard of workmanship
• obtain all necessary consents, which could include planning permissions and building regulations approval
• pay the landlord’s costs in dealing with the tenant’s application for a licence for alterations (these will usually be the surveyor’s and solicitor’s costs)
• reinstate the premises at the end of the lease term (ie, put them back in their original state without the alterations and put right any damage caused)

Question 34

2.2.5 Tenant’s statutory right to carry out improvements

Answer 34

If the tenant’s proposed alterations are improvements, then even if the lease contains an absolute covenant against alterations, the tenant may be able to circumvent this by using this statutory
procedure:
* Under s3, LTA1927, the tenant serves notice on the landlord of its intention to carry out
improvements.
* If the landlord objects, the tenant can apply for the court’s permission to carry out the improvements. The court will give permission if the improvements:

Question 35

2.2.5 Tenant’s statutory right to carry out improvements

Answer 35

• add to the letting value of the property;
• are reasonable and suitable to the character of the property; and
• will not diminish the value of any other property belonging to the landlord.
• If the landlord does not object within three months, the tenant may go ahead and carry out
  the improvements.
• The landlord may offer to carry out the works itself and increase the rent, but the tenant does
  not have to agree to this. However, the tenant can then not ask the court for permission.

Question 36

2.3 User

Answer 36

User refers to what the lease allows the tenant to use the premises for. If the lease were to be silent on user, then the tenant is free to use the premises for anything they like. The lease will therefore control the use of the premises with a user clause.

Question 37

2.3 User

Answer 37

The user may be very specific (‘as a tailor’s shop’) or more general (‘as retail premises’) or may be
by reference to the appropriate use class (“as a use within Class E(a) of the Town and Country
Planning (Use Classes) Order 1987”). Generally, the tenant will want a more general use to allow
them flexibility, and to make the lease more appealing if they want to pass the lease on.

Question 38

2.3 User

Answer 38

Conversely, the landlord may wish to keep the user very narrow. However, this can backfire on the
landlord, as it limits the appeal of the premises. This could limit the market rent on rent review.

Question 39

2.3.1 Change of use

Answer 39

As with alterations, the lease may prohibit changes of user (an absolute covenant), allow changes
of user with consent (qualified covenant) or allow changes of user with consent not to be
unreasonably withheld (fully qualified covenant).
Note that unlike a qualified alterations covenant (regarding tenant’s improvements), statute does
not convert a qualified user clause to a fully qualified user clause

Question 40

2.3.1 Change of use

Answer 40

However, section 19(3) of the Landlord and Tenant Act 1927 does mean that if the landlord decides
to give consent to a change of use, the landlord may not charge a lump sum or increase the rent for giving consent unless the change of use also requires structural alterations (in which case the landlord may charge a lump sum or increase the rent for giving consent).

Question 41

Assessment tip

Answer 41

Make sure you understand how statute affects qualified covenants of different types. It is less
generous to the tenant for changes of use than for alterations. You do not need to know, however, the statutory references.

Question 42

2.4 Planning law for alterations and changes of use

Answer 42

Remember that alterations may involve building works, and a change of use may take the
property outside the use class for which it has planning permission. The lease will usually contain a clause requiring that the tenant complies with relevant laws (and this obligation will usually be restated in the licence for alterations or licence to change use). Accordingly, to comply with the lease and to ensure that it does not face enforcement action, the tenant must ensure they have the relevant consents.

Question 43

Example

Answer 43

A landlord gives consent to a clothes shop (use class E(a)) in a shopping centre being converted to
a betting shop (sui generis use). The change of use will require planning permission. In addition,
the tenant will need a betting premises licence. (You wouldn’t be expected to know the specific
details of this example, but just need to understand the principle.)

Question 44

2.5 Code for Leasing Business Premises

Answer 44

The Code sets out some points of good practice on alterations and change of use such as the
following:
* The lease should only restrict alterations and change of use insofar as necessary to protect the
value of the premises and any adjoining or neighbouring premises of the landlord.

Question 45

2.5 Code for Leasing Business Premises

Answer 45

• The Code (subject to certain exceptions) requires a landlord to at least give the tenant a fully
  qualified covenant for internal non-structural alterations in a lease of part, and the tenant the
  ability to carry out internal non-structural alterations without consent in a lease of whole.

Question 46

2.5 Code for Leasing Business Premises

Answer 46

• If the landlord will require any alterations to be reinstated at the end of the lease, this should
  be made clear in the heads of terms. Otherwise, the lease may only require this if it is reasonable.

Question 47

2.6 Summary

Answer 47

• FRI leases will control what alterations the tenant may carry out, and may distinguish between external/internal and structural/non-structural alterations.
• A covenant against alterations (and various other matters) may be absolute (not allowed), qualified (allowed with landlord’s consent) or fully qualified (allowed with landlord’s consent not to be unreasonably withheld)

Question 48

2.6 Summary

Answer 48

• A qualified covenant will be converted to a fully qualified covenant regarding tenant’s improvements (and there is a statutory procedure for allowing the tenant to carry out improvements even where there is an absolute covenant).
• If the landlord consents, this and the tenant’s obligations will be documented in a licence for
  alterations.

Question 49

2.6 Summary

Answer 49

• FRI leases will control the use of the premises, and again, changes may be subject to an absolute, qualified or fully qualified covenant. Statute does not upgrade a qualified covenant to fully qualified, but does have some restrictions.
• The lease will usually require the tenant to comply with relevant laws, such as planning