Grant of a lease Flashcards
Essentials for a lease
Exclusive possession:
Tenant must be able to exclude strangers and even the landlord from the premises.
Formalities:
A legal lease must be created by deed if the term is over three years.
A tenancy of three years or under may be created in writing or orally.
Fixed term or periodic tenancy:
Lease must be for a fixed term or a periodic term.
Generally cannot be for an indeterminate time.
Reversion:
Reversion is the interest that the landlord holds subject to the lease. At the end of the lease term the property reverts to the landlord.
What is the term commencement date?
The date on which the lease term (eg 5 years) starts.
May be the day of completion of the lease or it may be before or afterwards.
Common for the term commencement date to be earlier than the lease is dates. A landlord may want all of the leases to start at the same time for simplicity.
Note: if a term starts in the past, tenant not generally expected to pay rent for the period they haven’t used.
What is a reversionary lease?
When the term of the lease starts after the day the lease is dated.
What is a break clause?
A clause which allows the parties to end the lease before the end of the fixed term.
Can be a landlord break (meaning only the landlord can exercise it), a tenant break (meaning only the tenant can exercise it) or a mutual break (either party can exercise it).
May specify a specific date which to exercise the break (eg fifth anniversary) or could be a rolling break (any time after fifth anniversary)
Leases - categories of rent
Commercial leases: usually short leases (up to 15 or 20 years) with a market rent. A premium (lump sum) is not usually charged on the grant of a commercial lease.
Residential: can be short but also long leases (99 or 999 years) with a ground rent (that may be a low sum say £150 per annum). The first person to buy the property will pay a premium to the landlord for the grant of the lease.
Rent in a commercial FRI lease
- Usually expressed as a yearly figure but payable quarterly
- Year is divided into approximate quarter days:
25 December - 24 March
25 March - 23 June
24 June - 28 September
29 September - 24 December
Still commonly used but some use modern quarter days (1 jan, 1 april, 1 july, 1 october)
Although quarters are not equal, rent is divided equally.
How is rent due in a commercial FRI lease
Payable in advance on the quarter day (if the lease is silent the rent is payable in arrears).
If lease is completed part way through the term then the quarter will be apportioned so the tenant will only pay the appropriate portion of the rent.
Lease will set out how rent is to be paid and whether VAT is payable on it
- insurance premium and service charge will usually be described as “rent”
Types of rent review
Stepped rent - the lease may set out a yearly rent of x for first two year and then increase that by 5k for next two and so on
Index-linked rent: rent is increased by reference to an agreed measure of inflation such as the retail prices index
Turn-over rent: rent is calculated based on the tenant’s turnover at the property - commonly seen with retail leases
Open market rent review - most common for FRI leases and involves ascertaining the rent based on comparable premises and certain principles
Open market rent review
Almost always “upwards only” meaning the rent can only increase. If market rents have fallen on the date of the rent review the rent stays the same.
Typically the rent review clauses will give the landlord and tenant the opportunity to agree the new rent between themselves. If they cannot agree then the lease will set out a mechanism for a specialist valuer to be engaged to determine the new rent.
Valuer will consider:
- rent payable for comparable premises
AND
- the terms of the hypothetical lease - an imaginary lease based on the actual lease but assuming certain matters and disregarding others
Hypothetical lease: open market rent review
Rent review provision instructs the valuers on assumptions and disregards (so different from actual lease)
Basic assumptions:
- premises are vacant and available
- there is a willing landlord and willing tenant
Common disregards:
- ignore what tenant has done voluntarily and not as an obligation of the lease
- rationale is that the tenant should not be penalised with a higher rent if, for example, the tenant has improved the premises for its own use.
Hypothetical lease: assumptions and disregards (fair?)
- Tenant has complied with all its covenants under the lease: yes - should not be rewarded for breach e.g. letting it fall into disrepair
- Landlord has complies with all its covenants under the lease: no - if landlord has let fall into disrepair unfair to tenant
- on terms of actual lease other than the rent payable - yes fair
- term of hypothetical lease is the term remaining of the actual lease - maybe - may work against tenant if shorter term is more favourable to new tenants
- if damaged or destroyed, fixed or rebuilt - yes this is fair
Disregards:
- effect of tenant’s occupation - yes: may be worth more to tenant if fitted it out
- Goodwill attached: yes fair
- Tenant’s improvements: yes, tenant should not pay more because of improvements they have made
What happens after rent review?
New rent is documented in a rent review memorandum - signed by landlord and tenant and kept with lease.
If before 5th anniversary of the term commencement date the tenant may have to pay further SDLT/LTT (as this is calculated on the first five years’ rent
If it has taken time to determine new rent, it will be backdated to the rent review date.
Code for leasing business premises
Applies to RICS - Royal Institution of Chartered Surveyors and tenancies of more than 6 months and only commercial lettings
Concerns negotiations and heads of terms:
- negotiations are constructive and collaborative
- unrepresented party must be advised about the existence of the Code and recommended to seek professional advice
- landlord or letting agent is resp for making sure heads of terms are compliant with the Code:
Must be covered in heads of terms:
- extend of the premises: lease plan and rights for use
- length of term and break rights: have conditions for what is acceptable
- rent and rent review (including basis for rent review and how often): initial rent, frequency of payment and whether VAT.
- repairing obligation
- rights to assign (transfer to a new tenant) or underlet the lease
- permitted use of the property (and whether tenant can change it
- rights to alter the property and any obligations to put the property back in its original state
What if the landlord is RICS certified but the letting agent is not?
The heads of terms still have to comply.
What are the difference between mandatory requirements and good practice in the Code for Leasing Business Premises?
When the Code applies, RICS members and regulated firms must follow mandatory requirements. They must follow good practice unless there are exceptional reasons for not doing so.
