Grant Of A Lease Flashcards
What are the different types of lease?
Leases can be long-term (99 or 999 years) with low rents, assured shorthold tenancies (6 or 12 months) at market rent, and commercial leases (up to 15 years) for various uses.
What are the advantages of a lease from a tenant’s perspective?
Advantages include not needing to spend capital, flexibility to leave at the end of the lease, and access to premises only available as leasehold.
Who are commercial landlords?
Commercial landlords include private investors and institutional investors like pension funds and life assurance companies.
What is the concern of institutional investors regarding leases?
Institutional investors prefer full repairing and insuring (FRI) leases and are concerned about the tenant’s covenant strength.
What is asset management in commercial property?
Asset management involves ongoing legal work for landlords, including granting leases, considering tenant applications, and advising on lease breaches.
What is the definition of a lease according to Woodfall’s Law?
A lease is defined as ‘the grant of a right to the exclusive possession of land for a determinate term less than that which the grantor has himself in the land.’
What is exclusive possession in a lease?
Exclusive possession allows the tenant to exclude others, including the landlord, from the premises, except for specific rights of entry.
What are the formalities for creating a legal lease?
A lease over 3 years must be created by deed; a lease of 3 years or under can be created in writing or orally.
What is the reversion in a lease?
The reversion is the landlord’s interest in the property that returns to them at the end of the lease term.
What are the landlord’s objectives in lease negotiations?
Landlords aim to ensure the premises are insured, kept in repair, used for permitted purposes, control occupancy, and increase rent.
What are the tenant’s objectives in lease negotiations?
Tenants seek to use the premises for intended purposes, have a satisfactory lease term, and avoid onerous restrictions or steep rent increases.
What is the significance of a break clause in a lease?
A break clause allows either party to end the lease early, providing flexibility for tenants uncertain about long-term commitments.
What is the term commencement date in a lease?
The term commencement date is when the lease term starts, which may be the date of completion or earlier/later than the lease date.
How is the expiry of a lease term calculated?
The expiry depends on the lease definition; it typically expires on the day before the anniversary of the commencement date.
What are the two categories of rent in leases?
Leases are typically either short leases with market rent or long leases with ground rent.
What is the typical duration of commercial lease terms?
Typical commercial lease terms are 3, 5, 10, or 15 years, with shorter leases gaining popularity for flexibility.
What are the two categories of leases?
Most leases fall into either a short lease with a market rent or a long lease with a ground rent.
What is a commercial lease typically like?
Commercial leases are usually short leases (up to 15 or 20 years) with a market rent, and a premium is not usually charged.
What is an example of a commercial lease rent?
A commercial tenant may pay a rent of £20,000 per annum, but will not pay a premium to the landlord on the grant of the lease.
What are residential leases typically like?
Residential leases may be long leases (say 99 or 999 years) and often require a premium payment to the landlord.
What is a ground rent?
Ground rent is a low sum, often around £150 per annum, imposed on long residential leases.
What changes occurred regarding ground rents after 30 June 2022?
Most new long residential leases have been restricted to imposing a peppercorn rent only.
How is rent expressed in a commercial FRI lease?
The rent is usually expressed as a yearly figure (e.g., £80,000 per annum) but is payable quarterly.
What are the traditional quarter days for rent payment?
The traditional quarter days are 25 December to 24 March, 25 March to 23 June, 24 June to 28 September, and 29 September to 24 December.
When is rent usually due in a commercial FRI lease?
Rent is usually due in advance on the quarter day, for example, on 25 March for the period up to and including 23 June.
What happens if the lease is silent on rent payment timing?
If the lease is silent, the rent is payable in arrears, which is more common in residential long leases.
What are the types of rent review?
Types of rent review include stepped rent, index-linked rent, turnover rent, and open market rent review.
What is a stepped rent?
Stepped rent may set out a yearly rent of £25,000 for the first two years, then £30,000 for the next two years, and so on.
What is an index-linked rent?
Index-linked rent is increased by reference to an agreed measure of inflation, such as the retail prices index.
What is turnover rent?
Turnover rent is calculated based on the tenant’s turnover at the property, commonly seen in retail leases.
What is an open market rent review?
Open market rent review ascertains the rent based on comparable premises and certain principles.
What does ‘upwards only’ rent review mean?
‘Upwards only’ means the rent can only increase; if market rents have fallen, the rent stays the same.
What happens after a rent review?
Once the new rent is agreed or determined, it is documented in a rent review memorandum signed by both parties.
What tax implications arise from rent reviews?
If the rent review is before the 5th anniversary, the tenant may have to pay further Stamp Duty Land Tax; after the 5th anniversary, they will not.
What is the principal term of a lease summary?
Commercial leases are usually for a fixed term, with landlords preferring longer terms and tenants having varying preferences.
What is a tenant’s break clause?
A tenant’s break clause can offer a compromise where a landlord wants a longer term and the tenant wants to end the lease early.
What is the common rent review provision for FRI leases?
For terms longer than 5 years, there will usually be rent review provisions, and for an FRI lease, the rent review will be upwards only.
What complexities arise from open market rent review?
Open market rent review is complex and depends on a hypothetical lease with assumptions and disregards, which can be contentious.
What are the consequences of a tenant not having good covenant strength
Landlord may require a guarantor (such as a director of the company) or a rent deposit
What is an upwards only rent review
Rent reviewed every 5 years, to higher of market rent and current rent (upwards only)
Usual in FRI LEASE
What are the disregards in open market rent review
The effect of the tenants occupation on the rent (convenience of not having to move disregarded)
Goodwill attached to the tenants business
Tenants improvements
What is the purpose of the Code for Leasing Business Premises?
To improve the quality and fairness of negotiations on lease terms and promote comprehensive heads of terms for more efficient legal drafting.
Transparency key purpose
Not fairness of the actually terms themselves - tenants can agree to non advantageous terms If they wish
Who writes the Code for Leasing Business Premises?
The Code is written by the Royal Institution of Chartered Surveyors (RICS).
To whom does the Code apply?
The Code applies to members of the RICS and RICS regulated firms - important for solicitors as their client may fall into this
What are the mandatory requirements of the Code?
Mandatory requirements include constructive lease negotiations, advising unrepresented parties about the Code, and ensuring heads of terms compliant with the Code are agreed before circulating the draft lease.
What must be included in the written heads of terms?
The heads of terms must cover extent of the premises, length of term and break rights, rent and rent review, repairing obligation, rights to assign or underlet, permitted use, and rights to alter the property.
What distinguishes good practice from mandatory requirements in the Code?
Good practice is indicated by the word ‘should’ and must be followed unless there are exceptional circumstances, while mandatory requirements are indicated by ‘must’ and must be followed without exception.
What are the stages in the grant of lease transactions?
The stages can be divided into Pre-exchange, Pre-completion, and Post-completion, or just Pre-completion and Post-completion if no exchange is needed.
What tasks does the landlord’s solicitor perform in the pre-exchange stage?
The landlord’s solicitor takes instructions, prepares the draft lease, deduces title, answers pre-contract enquiries, and engrosses the agreement for lease.
What is an agreement for lease?
An agreement for lease is a commitment to complete the lease, often used when parties are not yet ready or conditions need to be satisfied.
What happens during the completion stage of a lease?
The tenant’s solicitor sends completion monies, and both solicitors agree to complete and date the executed leases.
Who is responsible for repairs in a commercial lease?
Typically, the commercial tenant is responsible for the repair of their demise, while the landlord is responsible for common parts.
What is a full repairing obligation in a lease?
A full repairing obligation requires the tenant to keep the premises in good repair, meaning they must repair any issues that arise.
What is a qualified repairing obligation?
A qualified repairing obligation requires the tenant to keep the premises in good repair but not to improve the state beyond what it was at the lease’s start.
What is a qualified repairing obligation in a lease?
A qualified repairing obligation limits the tenant to keeping the premises in good repair but not improving it beyond the state at the start of the lease as evidenced by the Schedule of Condition.
What does the Schedule of Condition contain?
The Schedule of Condition contains photographs recording the state of the premises.
What is the general rule regarding a tenant’s choice to repair or replace?
Unless the lease states otherwise, the tenant may generally choose whether to repair or replace an item of disrepair.
What happens if the lease states that damaged items must be replaced?
If the lease states that damaged items must be replaced, the tenant will want this obligation to apply only if the item is beyond economic repair.
What is the tenant’s responsibility if the premises are damaged beyond repair?
If the premises are damaged beyond repair, such as needing to be rebuilt due to subsidence, this is considered renewal, not repair, and the tenant is not responsible.
What should a tenant ensure regarding inherent and structural defects?
A tenant should ensure that inherent and structural defects are excluded from the tenant’s repairing obligation and service charge contributions.
Who is typically responsible for insuring the building in a commercial lease?
A commercial landlord will almost always be responsible for the insurance of the building.
What is ‘insurance rent’?
The money that the tenant pays to the landlord for insurance is usually referred to as ‘insurance rent’.
What are typical insured risks in a lease?
Typical insured risks include fire, explosion, lightning, earthquake, storm, flood, and damage from vehicles, among others.
What is the tenant’s responsibility regarding damage from insured risks?
The tenant is not responsible for damage by insured risks, except in limited circumstances.
What does a full repairing obligation entail?
A full repairing obligation requires the tenant to keep the premises in repair and to put them into repair if they are not.
What is the difference between a lease of whole and a lease of part?
In a lease of whole, the tenant is responsible for repairing the whole building, while in a lease of part, the tenant is responsible for repairing the defined demise.
What searches will a tenants solicitor raise pre - exchange in a lease transaction
CPSE1 enquiries (as does a buyer’s solicitor in a commercial freehold transaction) but will also raise CPSE3 enquiries which are specific to the grant of a lease
Should the tenants solicitor raise the same searches as they would if they were buying a freehold pre - exchange
Yes.
In general the tenant’s solicitor should ideally exercise the same care over their investigations with a leasehold transaction. In practice, the tenant may agree with their solicitor that the cost of full investigations are not justified for a very short lease with limited repair and other obligations. In this case, the tenant’s solicitor should ensure that the tenant is advised of the risks.
Is deposit usually payable on exchange of an agreement for lease
No
What does a completion statement deal with (pre - completion stage leasehold transaction)
Details the money due on completion (eg, any apportioned annual rent, service charge and insurance rent)
What pre - completion searches are carried out leasehold transactions
As with a freehold transaction, pre-completion searches are carried out. The appropriate search is an OS1 search with a lease of whole, an OS2 search with a lease of part.
If the lease is not registrable, then an OS3 search could be used. This does not confer priority, but will check that the landlord is free (or not) to grant the lease.
