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FLK2 - Property Practice > Content of a Commercial Lease > Flashcards

Content of a Commercial Lease Flashcards

1
Q

advantages of a lease

A
  • Easier to enforce positive covenants compared to freehold
  • Leases are an asset
  • Good for commercial tenants particularly as it offers flexibility
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2
Q

disadvantages of a lease

A
  • It’s a depreciating asset
  • Landlord retains control over tenant (bad for tenant)
  • Tenant may be unreliable and not pay
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3
Q

re: key elements of a business lease

what are the key elements of a business lease of whole property?

A
  • Prescribed clauses
  • Commencement
  • Interpretations
  • Grant of lease
  • Ancillary rights
  • Rights excepted & reserved
  • Annual rent
  • Rent overview
  • Tenant’s covenants
  • Landlord’s covenants
  • LL’s right to enter on breach of repair covenant
  • Re-entry and forfeiture
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4
Q

re: key elements of a business lease

explain prescribed clauses

A

compulsory for leases after 19 June 2006 granted out of registered land which must be registered. Summary of the details HMLR need to complete registration.

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5
Q

re: key elements of a business lease

explain commencement

A
  • date of grant, names and addresses of parties
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6
Q

re: key elements of a business lease

explain interpretation

A

definitions contained in document

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7
Q

re: key elements of a business lease

explain grant of lease

A

operative part of the lease. Term of lease can be:
o Fixed
o Periodic
o At will

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8
Q

re: key elements of a business lease

what is a period tenancy?

A

runs from one period to the next until one party serves a NTQ.

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8
Q

re: key elements of a business lease

what is a fixed lease?

A

can be fixed for any period. Longer leases might inc. a break clause. The lease comes to an automatic end on expiry.

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9
Q

re: key elements of a business lease

what is a tenancy at will?

A

runs indefinitely and can be terminated at any time. Uncommon with commercial leases due to uncertainty but might occur where formal tenancy has ended and tenant remains in occupation

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10
Q

re: key elements of a business lease

explain ancillary rights

A

rights to use the property more effectively i.e. right to car parking space or if lease of part of property, right to use common areas

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11
Q

re: key elements of a business lease

explain rights excepted and reserved

A

rights in favour of the LL. This allows the LL to take certain actions without infringing T’s rights i.e. right to service media (service media = infrastructure i.e. wires, cables, drainage)

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12
Q

re: key elements of a business lease

explain annual rent

A

usually payable quarterly. Other sums may be reserved as rent i.e. insurance premiums

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13
Q

re: key elements of a business lease

explain rent overview

A

allows rent to be increased (uncommon in very short lease)

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14
Q

re: key elements of a business lease

explain tenant’s covenants

A

obligations on T. Types of covenant:
o Absolute
o Qualified
o Fully qualified

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15
Q

re: key elements of a business lease

what is an absolute covenant?

A

T is prohibited from taking the action. LL may allow one-off consent or permanent variation but they have total discretion.

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16
Q

re: key elements of a business lease

what is a qualified covenant?

A

T can carry out action with LL’s consent

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17
Q

re: key elements of a business lease

what is a fully qualified covenant?

A

T can carry out action with LL’s consent, and LL cannot unreasonably withhold consent

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18
Q

re: key elements of a business lease

explain LL’s covenant

A

obligations on LL

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19
Q

re: key elements of a business lease

explain re-entry and forfeiture

A

allows LL to bring the lease to an end on breach

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20
Q

re: full repairing and insuring lease

what is this?

A
  • FRIL requires T to pay for all repairs and maintenance of the property and cover insurances costs through covenants.
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21
Q

re: full repairing and insuring lease

what is the purpose of this?

A
  • Purpose of FRILs is because leases are an investment product. LL will want a clear rental stream (i.e. LL gets all the profits & doesn’t have to use any on repairs etc). A lease which doesn’t do this is not ‘investment quality’
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22
Q

re: repair covenant

what is the position with a lease on the whole building?

A

T usually obliged to repair whole building

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23
Q
A
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24
Q

re: repair covenant

what is the position with a lease on the part of building?

A

T usually obliged to repair non-structural parts and LL obliged to repair structural parts and common areas, but there is usually a service charge provision so the LL can recover these costs

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24
Q

re: repair covenant

when will the obligation to repair arise?

give an example

A
  • The obligation ‘to repair’ will arise when the physical condition of the property has deteriorated in some way, albeit the property need not be kept in perfect condition, but must be fit for occupation of a reasonably minded T

example

o i.e. high-end office building may require higher standard of repair than a basic warehouse or scuff on a wall is likely to be general wear and tear and unlikely to breach the repair obligation.

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25
Q

re: repair covenant

what is the definition of repair?

A

renewal/replacement of part, not the whole thing. The work required will depend on the facts and the age and nature of property and lease length

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26
Q

re: repair covenant

when could the obligation be particularly onerous?

A
  • T may be obliged to remedy an inherent defect in the property if that is the only way to effect the repair
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27
Q

re: repair covenant

when are some covenants more onerous than others?

give examples

A

o ‘to keep a property in repair’ means ‘put’ the building in repair, so they may have to put the building into a better state than when they entered the lease
o ‘to keep the property in good condition’ means T has to undertake work to keep the property in good condition, even if there is no disrepair

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28
Q

re: insurance covenant

what is the position?

A

Lease of whole building > T could pay the insurance, but more common for LL to take out insurance and recover this from T as separate insurance rent (this is done with lease of part of building).

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29
Q

re: insurance covenant

what are the common covenants?

A

o LL to insure against defined risks (‘insured risks’)
o T to pay insurance rent
o LL to reinstate the property
o Rent suspension
o Termination

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30
Q

re: insurance covenant

explain ‘LL to insure against defined risks (‘insured risks’)’

A

 Lease will often state a list of risks the LL must insure against i.e. fire, flood and ‘such other risks the LL may reasonably require’ the latter is to prevent LL from insuring against unlikely and expensive risks
 LL should ensure the covenant is limited so that they are not liable for exclusions, limitations, conditions etc and that T must pick up shortfall
 Should be insured to ‘full reinstatement value’ as this inc. cost of demolition, site clearance, professional fees etc

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31
Q

re: insurance covenant

explain ‘T to pay insurance rent’

A

 Insurance rent will be defined in the contract but may inc.: T paying the insurance premium; any excess etc; insurance to cover LL’s loss of rent if T cannot pay due to occurrence of an insured risk
 If the lease doesn’t explicitly state T needs to pick up any shortfall, the LL will need to pay this.

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32
Q

re: insurance covenant

explain ‘LL to reinstate the property’

A

o LL must use the insurance proceeds to fix the property. T may negotiate that if reinstatement is impossible, they are paid the insurance proceeds as they have been paying the premium

 May include provision that T will be liable if the policy has been vitiated / insurance proceeds withheld due to action of T

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33
Q

re: insurance covenant

explain ‘rent suspension’

A

rent will continue to be payable, unless there is express provision to the contrary (time frame for suspension must be inc.)

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34
Q

re: insurance covenant

explain ‘termination’

A

o lease should inc. provision for termination if reinstatement is impossible as frustration can only be relied on in exceptional circumstances
 May be available to LL only or T and LL

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35
Q

re: insurance covenant

what happens if the damage as occurred from an uninsured risk?

A
  • If the damage has resulted from a risk which is not insured, T is liable to remedy the damage under the repair covenant
36
Q

re: alteration covenant

give an overview

A

Alterations are often categorised & either absolute, qualified or fully qualified:
o Alterations affecting structure and exterior;
o Non-structural interior alterations;
o Alterations affecting service media;
o Demountable partitionings

T can alter the premises in anyway in the absence of any alteration covenants

37
Q

re: alteration covenant

can T alter the property is the covenant is absolute?

A

They can rely on s3 LTA 1925 procedure

38
Q

re: alteration covenant

what is the s3 LTA 1925 procedure?

A
  1. T serves notice setting out improvements on LL
  2. LL has 3 months to consent, object or offer to carry out the work in return for a reasonable increase in rent.
  3. If LL objects, T can apply to court for authorisation to carry out the improvements
  4. The court will authorise the improvements if they:
    o Add to the value of the property;
    o Are reasonable and suitable to the character of the property; and
    o Do not diminish the value of any other property of the LL
  5. If LL does not object within 3 months and does not offer to carry out the work, then T can lawfully carry them out
39
Q

re: alteration covenant

must LL accept proposals under s3 notice?

A

o T is under no obligation to accept LL’s offer, but if they reject it the court cannot give T authority to do the work itself.

40
Q

re: alteration covenant

what happens if T withdraws their s3 proposal?

A

o If T withdraws their offer, LL cannot proceed with the improvements

41
Q

re: alteration covenant

when will the court authorise the s3 improvements?

A

The court will authorise the improvements if they:
o Add to the value of the property;
o Are reasonable and suitable to the character of the property; and
o Do not diminish the value of any other property of the LL

42
Q

re: alteration covenant

what can T claim if they successfully use the s3 procedure?

A
  • If s3 has been used, T can claim compensation at the end of the term for improvements that have added value to the property.
43
Q

re: alteration covenant

what is the position regarding qualified covenants?

A
  • s19 LTA 1927 converts a qualified covenant against making improvements to a fully qualified covenant.

Effect  LL cannot unreasonably withhold consent re: qualified and fully qualified covenants to make improvements

44
Q

re: alteration covenant

where are the conditions for qualified and fully qualified covenants usually recorded?

A
  • Conditions are usually contained in a separate doc called ‘licence to alter’
45
Q

re: alteration covenant

what is the definition of improvements?

A

works that increase the value or usefulness of the property, even if it will reduce the LL’s reversionary interest

46
Q

re: use and planning covenant

what is this?

A
  • i.e. covenants to limit/restrict the use of the property
47
Q

re: use and planning covenant

what form might this take?

A
  • Covenant could be narrow and completely prohibit this. More common to allow the possibility to change the use but limited to a category. Might be framed as a qualified covenant for greater control.
48
Q

re: use and planning covenant

what is the limitation of this?

A

o LL cannot charge a fine or increase as a condition for giving consent (unless there is structural alteration involved)

49
Q

re: alienation covenant

what is this and what does it include?

A

Umbrella term for ways an interest is created for the benefit of a 3rd party:
o Assigning
o Underletting
o Charging
o Sharing occupation
o Parting with possession

  • T can dispose of the lease in anyway unless there is provision in the lease
50
Q

re: alienation covenant

what is assigning? what is the covenant is usually included?

A

o Assigning = transfer of existing lease to someone else
 Often assignment of the whole lease (but not part) is allowed

51
Q

re: alienation covenant

what is underletting?

A

o carving a sub-lease out of the headlease

52
Q

re: alienation covenant

when is underletting desirable?

A

 Desirable if T wants to dispose of part of a property or whole property for a brief time or if LL is concerned about the financial stability of the new occupier and so doesn’t agree to assignment. Risk is then with the headtenant and not the LL if the occupier defaults.

53
Q

re: alienation covenant

why might a LL be concerned about underletting?

A
  1. The undertenant may become the direct T, i.e.:
     HT’s lease is forfeited and the undertenant successfully applies to the court for relief from forfeiture;
     HT’s lease is surrendered/disclaimed by the HT’s liquidator; or
     Both leases expire and the undertenant exercises their statutory right to stay in the property and apply for a new lease and the HT does not
  2. The LL will have little control because the HT becomes the LL
54
Q

re: alienation covenant

what is charging? what is the covenant is usually included?

A

mortgaging. Usually complete prohibited in case T defaults

55
Q

re: alienation covenant

what is sharing occupation? what is the covenant is usually included?

A

i.e. allowing a 3rd party to occupy i.e. under a licence

LL may allow sharing occupation where there is a group of companies, so long as a new tenancy is not created

56
Q

re: alienation covenant

what is ‘parting with possession’?

A

catch-all term for agreements that are difficult to classify

57
Q

re: alienation covenant

what is the position regarding qualified covenants?

A
  • If the covenant is qualified s19 implies consent cannot be unreasonably withheld.

Effect  qualified covenant becomes a fully qualified covenant

58
Q

re: alienation covenant (qualified & fully qualified)

what will the court consider when determining reasonableness?

A

CoA guidelines when considering ‘reasonableness’:
o Would the premises be used/occupied in an undesirable way?
o LL cannot refuse on grounds which have nothing to do with the LL/T relationship and subject matter of the lease
o LL does not need to prove their reasons are justified if a reasonable person might reach the same conclusion in the circumstances
o LL is only bound to consider relevant interests, but it would be unreasonable not to consider detriment T would suffer by refusal

59
Q

re: alienation covenant (qualified & fully qualified)

give examples where consent has been reasonably withheld

A

o Assignee had unsatisfactory references;
o Longstanding breach of repair covenant by T and LL is not satisfied assignee will remedy it
o Assignee would compete with LL’s business
o Assigning would reduce the LL’s reversion (not be a reasonable ground if the LL has no intention of selling the reversion)
o Assignee’s proposed use is detrimental/inconsistent with LL’s policy
o Assignee would acquire protection under Part II LTA 1954

60
Q

re: alienation covenant (qualified & fully qualified)

give examples where consent has been unreasonably withheld

A

o LL refused consent to obtain advantage for themselves
o There were minor breaches
o Slight harm to LL outweighed prejudice to T
o Withholding consent on grounds of race, sex, disability (EQA 2010)

61
Q

re: alienation covenant (qualified & fully qualified)

what court will the question ask itself where consent is refused on the basis of an anticipated breach?

A
  • If consent is refused on the basis LL anticipates the assignee/new T will breach, the question to ask is ‘what would a reasonable LL do?’
62
Q

re: alienation covenant (qualified & fully qualified)

what control do LL and T have over when consent can be refused?

A

S19(1)(a) TLA 1927 allows T & LL to agree conditions and circumstances where it would not be unreasonable for consent to be withheld

63
Q

re: alienation covenant (qualified & fully qualified)

what are examples of conditions LL & T might agree to?

A

Assignment  assignor gives an AGA

Underletting  terms of underlease mirror headlease; annual rent is at least as high as headlease and rent is reviewed on the same terms; underletting excludes Part II LTA 1954; further underletting prohibited
* If new T does not comply with conditions, the headlease and sub-lease can be forfeited

64
Q

re: alienation covenant (qualified & fully qualified)

what are examples of circumstances LL & T might agree to?

A

 Current T is up to date with rent
 Assignee/new T has sufficient finances to comply with covenants

65
Q

re: alienation covenant (qualified & fully qualified)

how does T obtain consent?

A

they should make a written application to LL

66
Q

re: alienation covenant (qualified & fully qualified)

what must LL do once they receive a written request?

A

LL must within a reasonable time:
o Give consent, except where it is reasonable not to give consent; and
o Serve on written notice of its decision T, which must include:
 If consent is given subject to conditions, the conditions; or
 If consent is refused, the reasons why

67
Q

re: rent & rent review

what should the lease provide?

A

Lease will state annual rent and T’s covenant to pay it. Lease should confirm:
o How and when rent is payable;
o if it is payable in advance (if silent on the matter, then rent is deemed to be paid in arrears);
o how instalments are apportioned;
o VAT;
o rent review

68
Q

re: rent & rent review

when can rent be changed?

A

only if there is a rent review clause and then in accordance with this

69
Q

re: rent & rent review

what are the types of rent review?

A
  1. Fixed
  2. Index-linked
  3. Tenant’s receipts
  4. Open market (most common)
70
Q

re: rent & rent review

explain fixed

A

the rent will increase to a set amount on a specific date

71
Q

re: rent & rent review

explain index-linked

A

rent review is linked to external index, such as RPI

Often inc. a ‘cap & collar’ to limit the increase & ensure a minimum increase

72
Q

re: rent & rent review

explain tenant’s receipts

what are the pros and cons?

A

review is linked to T’s receipts from use of the property i.e. turnover, profit, or sum from sub-letting

Pro  tracks T’s financial health.

Con  if T’s business doesn’t perform, cannot increase rent

73
Q

re: rent & rent review

briefly, what is open market review?

A

rent is adjusted at regular intervals by reference to open market rental value of the premises

74
Q

re: rent & rent review

how does open market review work?

A
  • Valuer will determine a fair market rent at the date of the review based on the reality of the situation (i.e. the physical property & terms of the lease) and hypothetical assumptions & disregards stated in the lease
75
Q

re: rent & rent review (open market)

what are the common assumptions?

A

o There is a LL and T prepared to grant and take the lease;
o There is vacant possession;
o The terms of the hypothetical lease mirror the current lease (not inc. rent);
o The duration of the hypothetical lease
o T has complied with all their obligations
o If the property has been destroyed/damaged, that is has been full restored

76
Q

re: rent & rent review (open market)

explain ‘duration of the hypothetical lease’ assumption

A

this could match the terms of the original lease or the unexpired term (+ inc. minimum term to avoid unrealistic assumptions when close to expiry)

77
Q

re: rent & rent review (open market)

what are the common disregards

A

o T’s occupation
o Goodwill generated by T’s business
o T’s voluntary improvements, whether they increase or decrease property value

78
Q

re: rent & rent review (open market)

explain ‘T’s occupation’ disregard

A

disregarded to avoid any argument by the LL that T would pay more rent to avoid relocating;

79
Q

re: rent & rent review (open market)

explain ‘goodwill generated by T’s business’ disregard

A

i.e. regular customers, good reputation)  disregarded so LL cannot argue T should pay more rent on this basis

80
Q

re: rent & rent review (open market)

explain ‘T’s voluntary improvements’ disregard

A

whether they increase or decrease property value (i.e. not repair work to comply with contract)

81
Q

re: rent & rent review (open market)

what will this clause also need to set out?

A

o Whether the clause is upward-only (i.e. rent stays the same or increases) or upward-downward
o Frequency of review
o Procedure for agreement
o Provision for independent determination in the event parties cannot agree

82
Q

re: rent & rent review (open market)

typically, how often is the review?

A

usually every 3 – 5 years

83
Q

re: rent & rent review (open market)

explain ‘procedure for agreement’

A

i.e. formal notice and counter-notices or informal negotiations through specialist valuers (latter more common these days), when these discussions take place (i.e. before or after review)

84
Q

re: code for leasing business

when does this apply?

A

most LLs and their solicitors are not RICS members so this is irrelevant

85
Q

re: code for leasing business

what is this?

A
  • Royal Institute of Chartered Surveyors (RICS) has made a code to redress imbalances between LLs and Ts
86
Q

re: code for leasing business

how does this work?

A
  • RICS members must follow mandatory parts and need justifiable reasons to depart from the best practice statements
87
Q

re: code for leasing business

what is the effect of failure to comply?

A

o Failure to comply can lead to disciplinary action & support a negligence claim

88
Q

re: code for leasing business

what are the mandatory elements?

A

o Negotiations should be approached in a collaborative and constructive way
o Any party not represented by RICs or other property professional must be informed of the code and encouraged to get professional advice
o The transaction must be recorded in writing, subject to contract and summarise specified details (as a minimum), i.e.: identity and extent of premises (inc. special rights granted); length of term (inc. renewal and break rights); amount of rent, frequency, review; liability for insurance premiums; ability to assign, underlet etc; repairing, permitted use, alterations

89
Q

re: code for leasing business

what are the best practice points?

A

the lease should:
o Define the property, inc. a lease plan, grant T all rights for intended use
o State the length of term and break provisions
o Inc. standard provisions re: assignment of whole and underlet of whole/part
o Inc. appropriate repair obligations to length and condition of lease
o Controls on alterations should be no more restrictive than necessary to protect property value

FLK2 - Property Practice (16 decks)

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