Grant of a Lease or Underlease

Question 1

Who drafts the lease?

Answer 1

The landlord’s solicitor.

It is then sent to the tenant’s solicitor and it will go backwards and forwards until the provisions are agreed.

Question 2

In what situations is a contract (usually called an agreement for lease) useful?

Answer 2

Where:

1) There is going to be a delay between agreeing the lease/ underlease and actually granting it; and

2) One or both of the parties require the other parry to be bound to the transaction.

Question 3

List some examples of when a contract for a lease will be used (ie an agreement for lease).

Answer 3

1) Landlord is constructing the property and wants to ensure tenant is bound total the lease on completion of the works so that there will be rental income to help offset the building costs;

2) Landlord carrying out repair/refurbishment works on the future tenant’s request (and wants to ensure the funding for the works is reimbursed);

3) Tenant carrying out major works to the property prior to the grant of the lease;

4) Landlord requires consent for a lender or superior landlord to grant the lease;

5) Landlord is negotiating a surrender from a current tenant and wants to tie this in to the grant of the new lease (ie make sure the tenant is definitely taking the lease);

6) Tenant needs to obtain planning permission for the proposed works.

Question 3

Explain the contents of the agreement for lease (ie the contract equivalent of an exchange contract for the purchase of a property)

Answer 3

• It is drafted in the same way as a contract for the sale of freehold property.
• Particulars must state property is leasehold and give details of the term of the lease.
• Final agreed form of the lease should be attached to the agreement with an obligation in the agreement that the tenant will take the lease in this agreed form on completion.
• Incumbrances affecting the superior title must be disclosed;
• The attached lease should contain an indemnity in respect of future breaches of any covenants affecting title.

Question 4

What is the effect of SC 8.2 and SCPC 11.2.3?

Answer 4

1) Lease or underlease must be annexed to the draft contract; and

2) Landlord must engross the lease/underlease and supply the tenant with the engrossment at least 5 working days before the completion date.

Question 5

If the freehold property is subject to a mortgage, does this have an effect on the ability to grant a lease?

Answer 5

Yes, it will likely prohibit or restrict the landlord (borrower) from granting a lease. As such, if a lease was to be granted, lender consent would likely have to be obtained.

Question 6

Is deduction of title recommended when granting a lease?

Answer 6

Tenant will want the landlord to deduce title to the freehold interest.

Important where a premium is being paid, where the property is being offered as security for a loan, or where a tenant is paying a significant rent.

Question 7

Is it still necessary to deduce title (for the grant of a lease) where the property is registered with absolute title?

Answer 7

Yes - the tenant will want to see whether there is anything on the freehold title which will bind the new leasehold title.

Question 8

Is the landlord required to deduce their title to the tenant prior to the grant of a lease?

Answer 8

No, unless the lease is for a term of more than 7 years.

Where this is the case, and there is an agreement for lease (contract) SC 8.2.4 (SCPC 11.2.4) requires landlord to deduce title in a way which enables the tenant to obtain registration with an absolute title at the LR

Question 9

What steps should the tenant of an underlease take where the headless is unregistered?

Answer 9

In the pre-contract stage:

1) under tenant is entitled to call for headlease and all subsequent assignments under which the headlease has been held for the last 15 years.

2) under tenant is only entitled to call for deduction of the freehold title where the transaction is the grant of a lease for a term of more than 7 years.

Question 9

How does the requirement to provide details of the freehold cause problems to a head tenant?

Answer 9

It will cause issues for the head tenant if they themself did not call for deduction of the freehold title when it took the headlease.

Question 9

If the headlease is registered and the tenant is being granted an underlease, is deduction of freehold title required?

Answer 9

No, however tenant is entitled to obtain and review copies of:

1) The headlease itself; and
2) Official LR copies of the headlease.

Question 10

What steps should the head tenant’s solicitor take where the head tenant cannot comply with the request to provide details of the freehold title (as they did not deduce title when they took out the headlease)?

Answer 10

The requirement from the under tenant to deduce title must be excluded from the standard conditions.

Question 11

Which documents should be provided to the tenant’s solicitor by the landlord’s solicitor?

Answer 11

1) Draft agreement for lease (if being used);

2) Draft lease/underlease;

3) Evidence of freehold/ headlease title;

4) Copies of relevant planning consents;

5) Evidence of the lender’s consent to the grant of the lease/ underlease (where relevant).

Question 12

Which searches and enquiries are conducted are conducted prior to the contract/ completion of a lease?

Answer 12

The same enquiries and searches as would be undertaken when buying a freehold property.

Normally will be additional queries relating specifically to a lease (eg specific details of the landlord’s insurance policy).

Question 13

What is licence to underlet?

Answer 13

Tenant’s wishing to underlet a lease will first require the consent of the landlord. This is very common for most leases.

Question 14

Who are the parties to a licence to underlet?

Answer 14

• Tripartite document between:

1) Headlandlord;
2) Headtenant;
3) Undertenant.

• The headlandlord gives their consent to the underlet, and the head tenant gives consent to the under tenant.
• Headlandlord’s consent is needed either before or on completion. If not, the head tenant is likely to have breached their alienation covenant in the lease.

Question 15

How does a licence to underlet deal with contractual liability for breaches of covenants?

Answer 15

1) Usually a condition whereby the under tenant enters into a direct covenant with the headlanlord to observe both the convents in the headlease and also the main lease.

2) This will exclude headlease covenants to pay rent etc and will mainly be limited to those covenants which relate to the underlet property.

3) The under tenant does not usually enter into a direct covenant with the head tenant.