Grant of a lease

Question 1

What is a lease?

Answer 1

A lease can be 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.

Question 2

What are the 3 essential ingredients of a lease?

Answer 2

1. Exclusive possession
2. Certainty of term
3. Formalities

Question 3

What is an FRI lease?

Answer 3

A full repairing and insuring lease, meaning that any costs are met by the tenant.

Question 4

What is the term commencement date?

Answer 4

This is the date on which the lease term starts.

It may be the date of completion of the lease, but may also be before or afterwards.

Question 5

If the term of a lease is “from and including” a certain day of the year, when will the lease expire?

Answer 5

It expires on the day before that day of the year in the relevant year.

E.g. a lease with a term of 10 years from and including 24 March 2019 expires on 23 March 2029.

Question 6

If the term of a lease is “from” a certain day of the year, when will the lease expire?

Answer 6

The term starts the day after that day, and so expires on that day of the year in the relevant year.

E.g. a lease with a term of 10 years from 24 March 2019 will start on 25 March 2019 and expire on 25 March 2029.

Question 7

What is a stepped rent review?

Answer 7

When the lease sets out a yearly rent of £25,000 for the first two years, a yearly rent of £30,000 for the next two years and so on.

Question 8

What is a turnover rent review?

Answer 8

When the rent is calculated based on the tenant’s turnover.

Question 9

What is an index-linked rent review?

Answer 9

When the rent is increased by reference to an agreed measure of inflation.

Question 10

What is an open market rent review?

Answer 10

The most common type of rent review that is used for a commercial property to ensure it matches the current market value.

Question 11

What will a specialist valuer consider when carrying out an open market rent review?

Answer 11

The rent payable for comparable premises + the terms of the hypothetical lease.

Question 12

What assumptions will a specialist valuer make when carrying out an open market rent review?

Answer 12

-The tenant and landlord have complied with all their covenants under the lease

-On the terms of the actual lease other than the rent payable

-The term of the hypothetical lease is the term remaining of the actual lease

-If damaged/destroyed, the premises have been repaired/rebuilt

Question 13

What disregards will a specialist valuer make when carrying out an open market rent review?

Answer 13

-The effect of the tenant’s occupation on the rent

-Goodwill attached to the tenant’s business

-Tenant’s improvements (other than as obliged under the lease)

Question 14

What happens after an open market rent review has been completed?

Answer 14

The new rent is documented in a rent review memorandum, that records the new rent and is signed by the landlord and tenant.

Question 15

If the rent review is before the 5th anniversary of the term commencement date, what will the tenant have to do?

Answer 15

The tenant may have to pay further SDLT or LTT.

If it is after, the tenant will not have to pay further SDLT or LTT.

Question 16

What is the aim of the Code for Leasing Business Premises and who does it apply to?

Answer 16

The Code aims to make commercial lease negotiations fairer and more transparent. The Code applies to RICS members and RICS regulated firms.

It does not apply to those who are not regulated by RICS.

Question 17

What are the mandatory requirements of the Code for Leasing Business Premises?

Answer 17

-Lease negotiations must be approached in a constructive and collaborative manner

-An unrepresented party must be advised about the existence of the Code and recommended to seek professional advice

-The landlord or its letting agent is responsible for ensuring that heads of terms compliant with the Code are agreed before the draft lease is circulated

Question 18

What is good practice in respect of premises under the Code for Leasing Business Premises?

Answer 18

Heads of term should clearly define the premises, provide a lease plan and refer to all the rights the tenant will need.

Question 19

What is good practice in respect of length of term, renewal rights and break rights under the Code for Leasing Business Premises?

Answer 19

Heads of term should clearly specify the length of term and any break rights.

Question 20

What is good practice in respect of rent/rent review under the Code for Leasing Business Premises?

Answer 20

Heads of term should clearly state the initial rent, frequency of payment and VAT. Also should include any rent review details.

Question 21

What is good practice in respect of the landlord’s title under the Code for Leasing Business Premises?

Answer 21

The landlord should be responsible for obtaining any consent needed to grant the lease.

Question 22

What is good practice in respect of repairs under the Code for Leasing Business Premises?

Answer 22

The tenant’s repairing obligation should be appropriate to the length of term and condition of the premises.

Question 23

What is good practice in respect of insurance and damage under the Code for Leasing Business Premises?

Answer 23

The lease should suspend the rent if the premises are damaged by an insured risk or an uninsured risk.

Question 24

Is the grant of a lease transaction similar to a freehold transaction?

Answer 24

A grant of lease transaction may follow the same steps as a freehold transaction ie pre-exchange, exchange, pre-completion, completion, post completion.

Question 25

What will the landlord’s solicitor do at pre-exchange stage in the grant of a lease transaction?

Answer 25

The landlord’s solicitor will:

-take instructions

-prepare draft lease

-deduce title and respond to any queries

-engross the agreement for lease, obtain landlord’s signature and send counterpart to tenant’s solicitor

Question 26

What will the tenant’s solicitor do at pre-exchange stage in the grant of a lease transaction?

Answer 26

The tenant’s solicitor will:

-take instructions

-review draft lease and amend as required

-investigate title and raise any queries

-arrange for tenant to sign counterpart lease

Question 27

When will an agreement for lease be needed?

Answer 27

Where the parties want to commit to completing the lease but either are not yet ready or there are conditions that need to be satisfied.

Question 28

What enquiries will a tenant’s solicitor raise during the grant of a lease transaction?

Answer 28

CPSE1 enquiries as well as CPSE3 enquiries which are specific to the grant of a lease.

Question 29

Outline the process on exchange of an agreement for lease.

Answer 29

On exchange of an agreement for lease:

-Law Society Formula B is usually adopted

-no deposit is usually payable

-the agreement for lease may set a fixed completion date

-the agreement for lease will usually have a draft of the agreed form of lease annexed to it

Question 30

What will the landlord’s solicitor do during pre-completion stage?

Answer 30

The landlord’s solicitor will:

-prepare original and counterpart lease, obtain landlord’s signature to original and send counterpart to tenant’s signature

-prepare and send completion statement, detailing the money due on completion

Question 31

What will the tenant’s solicitor do during pre-completion stage?

Answer 31

The tenant’s solicitor will:

-arrange for tenant to sign counterpart lease

-obtain funds from client needed to complete

-raise pre-completion searches

Question 32

What is a completion statement?

Answer 32

A statement that details the money due on completion e.g. any apportioned annual rent, service charge and annual rent.

Usually, the rent is paid quarterly so for a rent of £80,000 plus VAT a sum of £20,000 plus VAT will be paid each quarter.

Question 33

What pre-completion searches are carried out for the lease of a whole/lease of a part?

Answer 33

OS1 search with a lease of whole.

OS2 search with a lease of part.

Question 34

What search is carried out when the lease is not registrable?

Answer 34

An OS3 search could be used but this doesn’t confer priority.

Question 35

On completion of the lease, what steps do the solicitors for both parties take?

Answer 35

On completion of the lease:

-the tenant’s solicitor sends the landlord’s solicitor the completion monies

-both solicitors agree over the telephone to complete and date the executed leases they are holding

-both parties send the completed original and counterpart to each other

Question 36

What form is used to register a new lease if the landlord’s title is registered/unregistered?

Answer 36

Form AP1-registered.

Form FR1-unregistered.

Question 37

What post-completion step must be taken if the landlord’s freehold title is charged?

Answer 37

A letter of consent from the lender will also be needed when applying to register the lease.