Grant of a Lease and Underlease

Question 1

Why would a leasehold be disadvantageous for tenants? Or at least percieved this way?

Answer 1

They won’t actually own the property and thus, the landlord will have control over the property.

Tenants will also generally have to do the repairs around the property whilst in ownership - financial disadvantages.

Also, as soon as lease is granted, property depreciates in value for tenant.

Question 2

Why would a leasehold be disadvantageous for landlords? Or at least percieved this way?

Answer 2

Tenant can be unreliable and not pay … meaning much less money is made via tenancy than actually selling the property sometimes.

Tenant may not take care of property properly and this will mean that property could deprecitate in value.

The income and capital are not guaranteed and are dependent
on the state of the property market.

Question 3

Benefits of leasing

Answer 3

For landlord:
Its easier to enforce positive covenants via leases than actually selling a freehold property.

If the contract can be drafted properly, we can ensure that the property will be well-taken care of by tenant and that any repairs are paid for by tenant - this allows for the value of the property to be maintained.

For tenant:
Great for commercial tenants - they can leave whenever they want.

Additionally, renting a property does not contribute to capital outlay - so the capital of the business is not tied up with the property.

Question 4

What makes leases complex?

Answer 4

Because they attempt to deal with all the issues that might arise during the term of tenancy.

Question 5

A typical business
lease of a whole property will contain the following elements:

Answer 5

1. Prescribed clauses : a summary of the important details in the lease and bring together, in one place, all the information that the Land Registry needs in order complete registration. This clause is a requirement for property that is being leased (post 19 June 2006) out of registered land
2. Commencement : has date of grant + info of all parties
3. Interpretation : definitions
4. Grant of the lease : includes the length of the lease
5. Ancillary rights : give the tenant rights over land to enable them to use the leased property more effectively, like rights for tenant to use the lift or reception etc.
6. Rights excepted and reserved : rights for the landlord - to enter and do repairs etc.
7. Annual rent - what the rent will be and if an insurance premium is required and how much.
8. Rent review - a way to increase rent over time. The landlord will want to ensure that there is a mechanism to increase the annual rent in line with rises in rental value in the wider property market.
9. Tenant’s covenants - there will be numerous obligations imposed on the tenant as to how they use and look after the property.
10. Landlord’s covenants : here will be a few obligations imposed on the landlord, notably the obligation to insure
11. Landlord’s right to enter on breach of repair covenant: this gives the landlord the right to enter and inspect, give notice to the tenant to repair and if the tenant fails to do so within a certain period, then the landlord can do the work instead
12. Re- entry and forfeiture : this allows the landlord to bring the lease to an end if the tenant fails to pay the annual rent or is in breach of one of the other tenant covenants in the lease.

Question 6

What are the 3 types of leases?

Answer 6

Fixed term lease,

a periodic tenancy

and a tenancy at will

Question 7

What is fixed term?

Answer 7

Long leasing, such as 3+ years. Set period, after which the contract naturally ‘expires’.

Question 8

For who will a fixed term contract be perfect for?

Answer 8

For tenants who know exactly how long they wish to occupy property and do not object to being locked in for that period of time. For businesses etc that know exactly what they want.

Question 9

What is perodic tenancy?

Answer 9

Think of a shy tenant. They do not know how long they want the place for.

Basically, it is not granted for a fixed period but continues indefinitely from one period to another.

Question 10

For who is perodic tenancy perfect for?

Answer 10

For the uncertain, shy tenant - they are not sure if they want to commit to a fixed, long term stay in that property for whatever reasons.

Question 11

How does a periodic tenancy terminate?

Answer 11

When one party terminates. Must give notice. The notice should be the length of one period of the lease, so one month’s notice for a monthly tenancy and one quarter’s notice for a quarterly tenancy. However, as an exception to the general rule, a yearly tenancy can be terminated on six
months’ notice.

Question 12

What is tenancy at will?

Answer 12

This is where a tenant occupies the property with the permission of the landlord on the terms that the tenancy may be terminated by either party
at any time. Indefinite and perilous term length. At either party’s whim.

Question 13

Who is tenancy at will good for?

Answer 13

NOT good for commercial properties as it is too uncertain. So, I imagine it is great for residential tenants. Businesses that satisfy certain criteria are able to extend the lease.

Question 14

A clear way landlords maintain control of the property?

Answer 14

The leasehold covenants - the tenant covenants

Question 15

What are the 3 types of tenant covenants?

Answer 15

They are all subject to the landlord’s discretion.

Absolute covenant (STRICT):
Tenant cannot carry out stated action, unless landlord consents to a one-off time or permanently varies the contract terms for this.

Qualified covenant (better for landlords as they have absolute discretion): Tenant can do stated action but needs landlord’s consent.

Fully qualified covenant (A little strict on landlords): Tenant can do stated action but needs landlord’s consent - the landlord’s response cannot be unreasonable - cannot withold consent just for justs.

Question 16

In the UK, leases of commercial property is FRI

Answer 16

FRI = full repairing and insuring, meaning that the landlord gets a ‘clear’ rental stream (all profit) and does not have to dip into it to pay for repairs, maintenance and insurance
contribution.

Doing otherwise would prevent leasing from being a good way to invest.

Question 17

What is leasing, effectively?

Answer 17

Generally, a long term capital investment. And when the property is sold, capital gains can be made.

Question 18

Between tenant and landlord, who assumes responsibility for what?

Answer 18

The tenant will normally be responsible for the non-structural parts of the premises and the landlord will assume responsibility for the structural parts of the building and the common areas.

Landlord can actually charge for any structural repairs they have to do via a service charge.

Question 19

What is ‘repair’ or when does a situation beg a ‘repair’?

Answer 19

Repair is renewal and restoration of parts of a whole… not the whole thing.

Repair is necessary when something is in disrepair, so it has deteriorated from the previous physical condition.

For new properties, deterioration is inevitable - it is alright for there to be disrepair, without it giving rise to a repair if the state of repaor renders it fit for the occupation of a reasonably minded tenant of the class that would take such a property - so the threshold is somewhat high.

Landlord can oblige tenant to make a repair rending the property ‘wholly different’ if it is the only way to repair property.

Question 20

Repair and wordings like ‘keep’/ ‘put’ building in repair vs ‘keep property in good condition’

Answer 20

Keep or put = sometimes means to put the property in a little bit better situation than they recieved it.

‘Keep property in good condition’ = leave the property in better condition than they got it, even if there is no actual disrepair

Question 21

Landlords can insure the building, which will cover the repair for particular damages. This means what for the tenant?

Answer 21

The tenant should ensure that they are not
responsible for repairing damage arising as a result of insured risks as this type of damage
should be covered by the insurance provisions in the lease.

Question 22

How can landlords get some money back/ save some money for insuring their property?

Answer 22

They can charge the tenant a separate insurance rent.

Question 23

Why should landlord obligation to insure property be limited?

Answer 23

So that the main defined risks (such as fire, storm, flood, bursting pipes, riot, impact by aircraft etc) and that the property is insured to its ‘full reinstatement value’ if property is totally destroyed, can be covered by insurance - without insurance companies adding random risks and making the insurance unnecessarily more expensive.

Question 24

Tenants are expected to pay for the insurance policy, what is this called?

Answer 24

Insurance rent. This ensures absolute profit for landlords ( reducing any annual rent loss)- tenant should pay landlord the insurance rent, any amount deducted relating to insurance policy and also perhaps for any valuation of property for insurance purposes.

Question 25

What does the covenant by the landlord to reinstate the property do?

Answer 25

Ensures that proceeds from insurance are in fact used to reinstate the property.
Tenants with a strong negotiating position can have it agreed so that they recieve all or part of the insurance proceeds for their interests.

Question 26

When should a rent suspension be used?

Answer 26

When there has been a damage caused by an insured risk and therefore, tenant cannot live there until it is fixed - tenant should be able to suspend the rent.

Must be agreed through contract.

Question 27

The right to termination in the event of building being destroyed

Answer 27

It is good to ensure that the lease gives both landlord and tenant this right if reinstatement of the destroyed building is impossible (as a result of defined risk that should have been covered in the insurance). Otherwise, tenant will still be paying rent on a property that they cannot use.

Question 28

What happens if landlord has complied with their covenants to insure the property to its full reinstatement value against the insured risks specified in the lease?

Answer 28

The landlord should be able to
reinstate the property using the insurance proceeds from the buildings insurance policy, the
premium having already been recovered from the tenant as insurance rent.
If there is a rent suspension clause: Tenant will not have to pay rent during the reinstatement - but landlord will still be able to receive a sum under the loss of rent insurance policy, paid for by tenant (via insurance rent). Rent or a fair portion of it will be suspended for 3 years or earlier.
Rent suspension will not apply if there has been any act or default of the tenant.
If there is a break clause, tenant can also terminate tenancy.

Question 29

What happens when the damage that occurs is not a part of the insured risks that the landlord has for the property? Or insurer is witholding all or part of the pay-out?

Answer 29

Tenant is liable, under the repairing covenant.

Question 30

Can tenant terminate lease if there is damage to property as a result of an insured risk?

Answer 30

No. Termination clauses entitle landlord to terminate the lease if they think it is impossible to reinstate the property.
Or, yes the tenant can terminate the lease but only if the property has not been reinstated
so as to be fit for occupation and use within three years following the date of the
damage (ie when the rent suspension period expires).

Question 31

If the damage to the property occurs as a result of something the tenant has done (act/ omission)…

Answer 31

The insurance policy will be likely be breached as there is responsibility on tenant - insurance is unlikely to be forthcoming. Tenant is responsible for reinstating property.
Tenant will have to pay for rent during this time - if rent suspension clause adds that tenants act/ omission causing the damage = no rent suspension.

Question 32

If a tenant makes alterations to property?

Answer 32

This could reduce the value of property - to prevent this, landlords will add an alteration clause.

Question 33

3 types of alteration clauses

Answer 33

Absolute covenants
Tenants can still carry out ‘improvements’ in this situation. Must send notice to landlord. Landlord has 3 months within which to object. If objects, tenant can take to court and court will consider if it is reasonable = tenant can repair.
Landlord can also consent to doing the work themselves but they will likely increase rent for this.
If landlord does not object = tenant can repair.
The court can authorise the improvements if they add to the letting value of the property, are reasonable and suitable to the character of the property and do not diminish the value of any other property of the landlord.

Qualified and fully qualified
Many landlords will allow tenants to make non-structural alterations and changes to service
media, but with consent so that the landlord can retain control by imposing conditions
about how the works are done. If alterations made improves use or value of the property, this will constitute to ‘improvement’ even if the property diminishes in value. In relation to
improvements, therefore, the landlord will not be able to withhold their consent unreasonably.

Question 34

Can tenant claim compensation for the improvements they make?

Answer 34

If the repair that they did ‘adds to the letting value of the holding’, then yes. But there are time limits.

Question 35

Landlord can control the use and planning of the property, what does this mean for the tenant?

Answer 35

Landlord can say, this property can only be used as a restuarant - this is a narrow clause.
Ideally, the landlord may provide a fully qualified covenant that means that the landlord cannot ‘unreasonably withold’ the diversification of the property - if tenant wants that freedom.

Landlord can also further restrict the use of property by imposing a tenant’s covenant not to apply for planning consents without the landlord’s permission - planning is necessary for changing the tenant’s business focus.

Question 36

What is alienation?

Answer 36

When tenant transfers property rights, such as a lease, to another 3rd party. Landlords may want to limit this.
Examples:
* assignment - when lease is transfered.
* underletting (also known as subletting/ subelase and underlease) - when someone else is allowed to occupy.
* charging (also known as mortgaging)
* sharing occupation (allowing a third party in while continuing to occupy, perhaps under a
licence or concession arrangement)
* parting with possession (a catch- all term which covers assignment and underletting but
also includes informal arrangements which may be difficult to classify).

Question 37

Assignment of lease by tenant

Answer 37

Has to be the whole property usually in commercial leases.

1. Section 19(1)(a) Landlord and Tenant Act 1927*: this implies into any qualified covenant
   (not to assign without the landlord’s consent) that it be deemed to be subject to a proviso
   that such consent is not to be unreasonably withheld. The effect, therefore, is to convert a
   qualified covenant into a fully qualified covenant.
2. Section 19(1A) Landlord and Tenant Act 1927*: this allows for the landlord and the
   tenant to agree in advance conditions and circumstances in which it would not be
   unreasonable for the landlord to refuse consent. Conditions are often that the assignor
   agrees to give an authorised guarantee agreement (‘AGA’ – see 8.4) for the assignee
   and/or that the assignee agrees to provide guarantors. Circumstances can include that
   the assignor is up-to-date with the rent and/or that the assignee is of sufficient financial
   strength to enable it to comply with the tenant’s covenants in the lease. The effect is that
   such pre-agreed conditions and circumstances are deemed reasonable.
3. Section 1 Landlord and Tenant Act 1988*: this means that where there is a qualified
   covenant on assignment (whether the proviso that consent is not to be unreasonably
   withheld is express or implied by statute) and the tenant has made a written application
   for consent, the landlord must within a reasonable time:
   a) give consent, except in a case where it is reasonable not to give consent
   b) serve on the tenant written notice of its decision whether or not to give consent
   specifying in addition:
   i) if the consent is given subject to conditions, those conditions,
   ii) if the consent is withheld, the reasons for withholding it.

Landlord’s reasons for rejecting assignment must relate to the relationship of landlord and tenant under the lease, only.

Landlord would be unreasonable if they deny assignment when it would be detrimental to tenant and that the benefit Landlord has is extremly disproportionate to the benefit gained by landlord.

Question 38

What are some reasonings for landlord to deny assignment of lease by tenant that are reasonable?

Answer 38

Where landlord is unsatisfied with the assignee and perhaps their ability to pay and care for the property.

Where landlord unsatisfied regarding assignor (their tenants) current ability to care for the property as there has been extensive breaches.

Where allowing an assignment might interfere with the landlords serious goals for the property in the long term.

In some situations, landlord can refuse assignment to some assignee’s because they have reasons for believing that their use of the property would be a breach of the terms of the lease. Page 21 of Chap 6.

Question 39

Security of tenure - the benefits

Answer 39

1. Hold over. Just the right to stay and on the same terms.
2. A new lease. Until one of the ways of the 1954 Act has caused it to be terminated.

Question 40

If tenants (commercial tenant, protected by 1954) need to be kicked out by landlord, what will the tenant get in return

Answer 40

Compensation.

Question 41

What 3 things does a tenant need for a 1954 protected tenancy?

Answer 41

1. needs to be

Question 42

What contracts can you add a break clause to?

Answer 42

All of them.

Question 43

One option for a tenant is a license

Answer 43

Right to use property.
Disadvantage: landlord can go in and take possession - does not give exclusive possession. Landlord has the right to move tenant.