Grant of a lease Flashcards
Who are commercial landlords?
- Private investors – individuals or companies
- Institutional investors – financial investors (pension funds, life assurance companies
o Generally, property is one class of asset amongst others, so will be concerned with comparing it to other classes of investments.
o Because these investors are concerned with the property in terms of income, they favour a repairing and insuring FRI lease. (Full repairing and release, tenant also normally pays for upkeep of common building)
o Benefit to landlord is the rent is rent, it’s a clear rent, landlord can keep the clear rent.
o So, tenants pick up costs associated with property and landlord receives the clear rent
o Other concern is covenant strength. A landlord will want to know that the tenant has the means to comply with its obligations. They have assets if they breach it. Broadly a company with a lot of money, will have a lot of covenant strength.
Essentials of a lease?
- Exclusive possession
- Fixed term or periodic tenancy
- Formalities – must be created by deed if the term is over 3 years
Reversion – the reversion is the interest the landlord holds subject to the lease. At the end of lease term, the property reverts to landlord.
Landlords objective for a lease?
- Will want a lease that ensures the premises are:
- Insured
- Kept in repair
- Only used for permitted purpose
- Also want:
- Control whom may occupy premises
- To have a say over how premises are altered by the tenant
- Increase rent in line with market rent over contractual term of the lease
Tenants objectives?
- Allows them to use it for their intended purposes
- Has a contractual term that is satisfactory to the tenants
- Provides some flexibility
- Will NOT want
- Onerous restrictions
- Provision that allows for a steep rise in rent
- Excessively unfair provisions
Terms of a lease?
- Must be determinate
- Typical commercial terms are 3,5,10,15 years depending on sector
- Shorter and more flexible leases have become more popular in recent years
Term commencement date - May be date of completion of the lease
- Common for term commencement date to be earlier than the lease is dated
- The term may also start after the lease is dated – this is called a revisionary lease
Calculating expiry of a lease term?
Meaning of ‘from and including’
- A certain day of the year, the term expires on the day before that day of the year
Meaning of ‘from’
- The term starts the day after that day and so expires ON that day of the next year
Break clauses?
- If it does not include a break clause, neither landlord nor tenant can bring the lease to an end before the end of the fixed term without agreement of the other
- Can either be a landlord break (only landlord can exercise it) a tenant break (only tenant can) or mutual.
- Break clause may specify a date – or it may be a rolling break SO AT ANY TIME SUBJECT TO SUFFICIENT NOTICE.
Rent?
- More leases fall into one of two categories – either a short lease with market rent or a long lease with ground rent
Rent in commercial leases – usually short leases with a market rent – a premium is not usually charged on the grant of a commercial lease
Rent in residential leases – may be long leases say 99 or 999 years with a ground rent that may be a low sum, first person to buy the property will pay a premium to the landlord for the grant of the lease
Rent in commercial FRI lease?
RENT AND RENT REVIEW
Full repairing and insurance lease
- Landlord will recover cost for any community parts from insurance
- Any services will be paid for by service charge
- Tightly control FRI lease.
Covenant strength – landlord will carry out checks on prospective tenants to see if covenant strength it good
- If not good might need a rent deposit, or a guarantor
Agreements of lease are only useful in a a few situations
- If they don’t want it straight away but want the contract in place.
- Will have a final copy of draft lease.
Rent review?
PAYABLE QUATERLY. REVIEWED TO OPEN MAKRET, UPWARDS ONLY
- Usually expressed as a yearly figure but payable quarterly
- Divided into approximate quarters
- Rent is usually in advance on the quarter day
- However, lease needs to state if rent is payable in advance – if silent the rent is payable in arrears
- If rent is completed part way through a term, then it will be portioned to reflect that
Types of rent review
- No implied right for landlord to be able to increase the rent. An FRI lease of 10 years will usually contain a rent review clause as an institutional investor will want to make sure rents are keeping up with the market.
- Stepped rent – increases incrementally in written time periods
- Turnover rent – may be calculated based on tenant’s turnover at property – mostly seen with retail leases
- Index-linked rent - increased by reference to an agreed measure of inflation
Rent review in FRI lease?
- Open market rent review – most common adopted by FRI leases – involves ascertaining rent on comparable premises and certain premises
o Can be complex and may be a contentious area for negotiation
o Almost always have an upwards only rent review
o Typically rent review clauses will give landlord and tenant opportunity to agree on new rent between themselves if they cannot agree then lease will set out a mechanism for a valuer to be engaged to determine new rent
o They use rent payable for comparable premises and the terms of the hypothetical lease
o The hypothetical lease - If the rent review is before 5th anniversary of term commencement date, the tenant may have to pay further SDLT
In FRI lease
o Qualification
o Basis on which valuing should be made
o ASSUMPTION THAT TENANT HAS KEPT UP WIH REPAIRING COVENANTS
o ASSUMPTION – is that NOT SAME FOR LANDLORD
o Disregards – if tenant has made improvements.
o It is then backdated and interest will be paid on backdated rate
Code for leasing business premises?
the code exists to:
- Improve quality and fairness of negotiations on leas terms’
- Promote the issue of comprehensive heads of terms that should make the legal drafting process more efficient
Where does it come from and whom does it apply?
- Written by Royal institution of chartered surveyors RICS and applies to members of RICS and RICS regulated firms
Code contains –
Concerns itself with negotiations and heads of terms, divided into mandatory requirements and good practice
Mandatory requirements of code for leasing business premises?
- Lease negotiations not be approached in a constructive and collaborative manner
- An unrepresented party must be advised about existence of the code and recommended to seek professional advice
- The landlord is responsible for ensuring that heads of term complaint with the code are agreed before the draft is circulated.
- Mandatory to prepare written heads of terms – stating that it is subject to contract
- Extent of premises
- Length of term and break rights
- Rent and rent review
- Repairing obligations
- Rights to assign or underlet the lease
- Permitted use of property
- Indicated by word should:
- RICS members MUST follow unless there are exceptional circumstances
- Premises – clearly define the demise, provide a lease plan and refer to all the rights the tenant will need for its use of property
- Not many firms will be RICS members.
- Length of term, renewal and break rights – heads of terms should specify the length of term and any break rights
- Rent and rent review – clearly state initial rent and whether VAT will be charged. If landlord intends to review rent, tenant should be advising how and how often.
- Landlords title – should be responsible for obtaining any consent needed to grant the lease
- Repairs – tenants repairing obligations should be appropriate
Procedure for grant of lease - Pre-exchange?
Landlords’ solicitor
- Takes instructions
- Prepare draft lease – draft is based on heads of terms. May use a generic precedent lease – advantages of this, some of drafting and details will already be there. Hopefully terms would have been agreed with client.
- Deduce title and respond to any queries on title
- Answer pre-contract enquiries
- Once agreed, engross (prepare a final copy for signature) the agreement for lease, obtain landlords signature and send counterpart to tenants’ solicitor
Tenants’ solicitor
- Takes instructions
- Review draft lease and agreement for lease and amend as required – OFTEN NOT NEEDED, in which case parties will simply complete once the tenant’s solicitor is happy with their title investigations and form of lease is agreed.
- Investigate title – should ensure landlord has title to grant the lease, and will also need to consider any freehold convents that will bind the tenants
o Raise CPSE1 enquiries but also CPSE3 which are specific to grant of lease
- Deduce landlords title – check for charges, restrictive covenants because any that bind the freehold will automatically bind the leasehold. And most importantly check they have full legal title.
- Raise pre-contract enquiries and searches
- Arrange for tenant to sign counterpart lease
Exchange - grant of a lease?
- No deposit payable usually
- Agreement for lease may set a fixed completion date but set out what conditions need to be satisfied and by when for completion to take place
