Grant of a lease - intro to leasehold transactions

Question 1

Examples of where commercial leases may be used?

Answer 1

Commercial leases may relate to an office block, a factory, a warehouse or a shop - whether on the high street or in a large shopping centre.

Question 2

Are commercial leases usually short term or long term?

Answer 2

Short term (unlike residential long lease) - usually for up to 15 years, market rent will be payable.

Question 3

Advantages of a lease over freehold (tenant’s point of view)

Answer 3

• no need to spend capital which may be in short supply (especially with a newly established business, or which may be needed for other purposes).
• some premises will only be available as a leasehold (eg. if a retail chain want to open a shop in a large shopping centre, they have no choice but to take a lease)

Question 4

Advantages of a lease over freehold (tenant’s point of view) - is a leasehold a permanent investment?

Answer 4

No - if the needs of the business change, the tenant may have the opportunity to leave the premises at the end of the lease, or even in other instances.

Question 5

How is the leasehold not being a permanent investment, an advantage for the tenant?

Answer 5

It gives the business flexibility to experiment with taking new/additional premises.

Question 6

Who are commercial landlords?

Answer 6

• Private investors who make a business out of letting premises
• Institutional investors

Question 7

Who are institutional investors?

Answer 7

Financial institutions - typically pension funds & life assurance companies who invest in property just as they would in the stock market.

Question 8

How is property seen as a safe & valuable investment, compared to the stock market?

Answer 8

Because it offers income (through rent) & long term capital growth (through the rise in property prices over time).

Question 9

Why do institutional investors favour a full repairing & insuring (FRI) lease?

Answer 9

Because they’re concerned with the property in terms of the income it produces.

Question 10

What is meant by a full repairing & insuring (FRI) lease?

Answer 10

The tenants pick up the costs associated with the property & landlord receives clear rent.

Question 11

What is meant by covenant strength?

Answer 11

• covenant strength is another issue of concern to an institutional investor
• a landlord will want to know that the tenant has the means to comply with its obligations & also that it has assets that the landlord can recover breaches against.

Question 12

What may the landlord require if the tenant doesn’t have good covenant strength?

Answer 12

A guarantor (such as director of company) or a rent deposit

• a long established company will generally have good covenant strength, off the shelf company will not.

Question 13

What does asset management/property management involve?

Answer 13

Acting for an institutional landlord & dealing with the legal work generated by the property asset on an ongoing basis.

Question 14

Asset/property management - a common area of practice for commercial property solicitors

Answer 14

• granting a lease to a new tenant
• considering applications by the tenant during the lease; eg to alter the premises
• advising on breaches of the lease, such as failure to pay the rent or letting the premises fall into disrepair
• or dealing with the issues that arise when a lease comes to an end and the tenant is leaving or wants a new lease

Question 15

What are the two type of leases?

Answer 15

Residential & commercial.