Grant of Lease Flashcards
What are the advantages of a lease from a tenant’s prospective?
- no need to spend capital upfront
- not a permanent investment offering business flexibility
- some premises that are attractive may only be leasehold
Who are commercial landlords?
- private investors - individuals or companies that make a business out of letting premises
- institutional investors - financial institutions - typically pension funds or life assurance companies
What is asset management work for solicitors?
Acting for institutional landlord and dealing with legal work generated on ongoing basis such as:
- granting a lease to a new tenant
- considering applications by the tenant during the lease eg to alter premises
- advising on breaches on 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 and wants a new lease
What is a lease?
‘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 of a lease?
Tenant must be able to exclude strangers and even the landlord from the premises (except where landlord is exercising its right to enter the premises eg inspection)
What is a fixed term or periodic tenancy?
Lease must be for a fixed term (6 months, 20 years)
Or
Periodic term (weekly, monthly, yearly)
Not for an indeterminate term (eg for a long as the tenant is an employee of the landlord)
What formalities are required for lease over 3 years?
Lease must be created by deed
What formalities are required for a lease of less than 3 years?
No requirement for lease to be created by deed
Can be created in writing or orally
What is the reversion?
The reversion is the interest that the landlord hold subject to the lease. At the end of the lease term, the property reverts to the landlord
What is a lease?
Document that creates a leasehold interest
What are the landlord’s objectives in lease negotiations?
Will want to ensure premises are
- insured
- kept in repair
- only used for the permitted purpose
Will also want
- to control whom may occupy of the premises
- to have a say over how the premises are altered by the tenant
- to increase the rent in line with market rent over the contractual term of the lease (by way of rent review)
What are the tenant’s objectives in lease negotiations?
Tenant will want lease that
- allows the tenant to use the premises for its intended purpose
- has a contractual term (say 10 years) that is satisfactory to the tenant
- provides some flexibility if circumstances change
Tenant will not want
- onerous restrictions
- provisions that allow for a steep rise in rent
- excessively unfair provisions
What is the meaning of ‘from and including’ with regard of the term commencement date?
Means term will expire on the day before that day at end of relevant period
eg ten years lease from and including 24 March 2019 expires on 23 March 2029
What is the meaning of ‘from’ with regard of the term commencement date?
Term starts the day after that day and so expires on that day of the year in the relevant year
Eg ten years lease from 24 March 2019 expires on 24 March 2029
What is a break clause?
Clause by which the lease can end before its full term
What is a landlord break clause?
Only landlord can exercise break clause
What is a tenant break clause?
Only tenant can exercise break clause
Must a break clause always specify a date?
No can be a rolling break clause so can be exercised anytime after relevant date
What are the two categories of rent?
- short lease with market rent
- long lease with a ground rent
What is the most common form of rent for commercial leases?
Short leases with market rent
What is the most common form of rent for residential leases?
Long lease with a ground rent annually and a premium up front to pay to grant the lease
How is rent usually payable in commercial leases?
Normally expressed as yearly sum but payable quarterly
What quarters are used for paying rent in commercial leases?
Traditional quarters:
- 25 December to 24 March
- 25 March to 23 June
- 24 June to 28 September
- 29 September to 24 December
Modern quarters:
- 1 January
- 1 April
- 1 July
- 1 October
What is stepped rent review?
Rent may periodically increase over the term of the lease eg
£25k for first two years
£30k for next two years etc
What is turnover rent review?
Rent may be calculated based on the tenant’s turnover at the property
What is index-linked rent?
The rent is increased by reference to agreed measure of inflation such as retail price index
What is open market rent review?
Most common - involves ascertaining the rent based on comparable premises and certain principles
What happens with open market rent review?
Often landlord and tenant will try agree new rent between themselves
If they cannot agree, lease will set out mechanism for specialist valuer to determine rent review
How will valuer determine open market value for rent review?
They will consider rent payable for comparable premises (size and location)
AND
terms of hypothetical lease - based on the actual terms of the lease but assuming certain matters and disregarding others
What basic assumptions will a valuer make in determining the terms of the hypothetical lease for market review?
- premises are vacant and available
- willing landlord and willing tenant
- tenant has complied with all its covenants under lease
- landlord has complied with all its covenants under lease
- on the terms of the actual lease other than rent payable
- term of the hypothetical lease is term remaining of actual lease
- if damaged or destroyed, premises have been repaired/rebuilt
What disregards will a valuer make in determining the terms of the hypothetical lease for market review?
- effect of tenant’s occupation on the rent
- goodwill attached to the tenant’s business
- tenant’s improvements (other than obliged under the lease)
What happens after rent review?
New rent is documented in rent review memorandum which is signed by landlord and tenant.
Kept with lease for future reference
Is further SDLT or LTT payable on rent review?
Yes, only if rent review is before 5th anniversary of term commencement date
Who is bound by the Royal Institution of Charted Surveyors Code for Leasing Business Premises?
Members of RICs and RICs regulated firms
What does the code contain?
Provisions on
- negotiations
- heads of terms
- mandatory requirements
- good practice
Do RICS members and regulated firms have to follow provisions which a good practice?
Yes unless there are exceptional circumstances
What are the mandatory requirements under RICS Code?
- 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
- landlord is responsible for ensuring heads of terms compliant with the Code are agreed before the draft lease is circulate
Mandatory subjects in heads of terms include:
- extent of premises
- length of term and break rights
- rent and rent review (including basis for rent review)
- repairing obligation
- rights to assign (transfer to a new tenant) or underlet the lease
- permitted use of the property (and whether tenant can change it)
- rights to alter the property and any obligations to put the property back in its original state
What is good practice under the Code for provision for premises?
Premises should be clearly defined in heads of terms, lease plan provided and all rights tenants needs to use premises should be referred to
What is good practice under the Code for provision for length of term, renewal rights and break rights?
Heads of terms should clearly specify the length of term and any break rights
What is good practice under the Code for provision for rent and rent review?
Heads of terms should clearly state initial rent, frequency of payment, and whether VAT will be charged.
Rent review should be specified as to how it is to be done and how often
What is good practice under the Code for provision for Landlord’s title?
Landlord should be responsible for obtaining any consent needed to grant the lease
What is good practice under the Code for provision for repairs?
Tenant’s repairing obligation should be appropriate to length of term and condition of premises
What is good practice under the Code for provision for insurance and damage?
Lease should suspend rent if the premises are damaged by insured risk (unless damage done by tenant’s negligence) or an uninsured risk
If there is to be a pre-exchange step, what must the landlord’s solicitor do?
- take instructions
- prepare draft lease and if relevant, agreement for lease
- deduce title and respond to any queries on title
- answer any pre-contract enquiries
- once agreed, engross the agreement for lease, obtain landlord’s signature and send counterpart to tenant’s solicitor
If there is to be a pre-exchange step, what must the tenant’s solicitor do?
- take instructions
- review draft lease and agreement for lease and amend as required
- investigate title and raise any queries on title
- raise pre-contract enquiries and searches
- arrange for tenant to sign counterpart
Who drafts the lease and who reviews the lease?
Landlord’s solicitor will draft the lease and the tenant’s solicitor will review and amend anything that is unfair/onerous to tenant (balance it more to tenant’s interest)
Will an agreement for lease be needed?
Not normally unless parties want to commit to completing the lease but neither party are ready yet or conditions need to be satisfied
Normally parties’s solicitors will therefore just complete once tenant’s solicitor is happy with title investigations and form of the lease is agreed
What will tenant’s solicitor do to investigate title and searches and enquiries?
- investigate landlord’s title deduction so they have title to grant lease and any covenants that will bind tenant
- tenant’s solicitor will raise CPSE1 enquiries and CPSE 3 enquires (specific for lease)
- tenant’s solicitor should raise the same searches as they would if buying the freehold
What will landlord’s solicitor do to investigate title and searches and enquiries?
Landlord’s solicitor will deduce landlord’s title
What happens on exchange of agreement for lease?
- landlord’s solicitor and tenant’s solicitor exchange in similar manner as for a freehold contract
- no deposit is usually payable
- the agreement for lease may set a fixed completion date, but more likely will set out what conditions need to be satisfied and by when for completion to take place
- the agreement for lease will usually have a draft of the agreed form of lease annexed to it, so it can only be exchanged once the terms of lease have been agreed
What will the landlord’s solicitor do at pre-completion?
- 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 (eg any apportioned annual rent, service charge and insurance rent)
What will the tenant’s solicitor do at pre-completion?
- arrange for tenant to sign counterpart lease
- obtain funds from client needed to complete as per completion statement
- raise pre-completion searches
What pre-completion searches should the tenant’s solicitor carry out?
- OS1 search for lease of whole
- OS2 search for lease of part
- OS3 search is lease is not registrable (will not confer priority)
What happens on completion of the lease?
- tenant’s solicitor sends landlord’s solicitor the completion monies
- landlord’s solicitor and tenant’s solicitor agree over the telephone to complete and date the executed leases that they are holding
- the landlord’s solicitor and tenant’s solicitor send the completed original and counterpart to each other
What must the landlord’s solicitor do post-completion?
Send summary of main provisions of lease to client
What must the tenant’s solicitor do post-completion?
Arrange to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary
Register lease if necessary
How is SDLT calculated on leases?
- if premium paid, then on premium
- if lease for market value then on lump sum equivalent to rent over the years (specific calculation)
Can a lease of 3 years and under be registered?
No and cannot be noted on landlord’s title
Can a lease of more than 3 years and up to 7 years be registered?
Does not have to be registered
Can be noted against the landlord’s title (will appear in the schedule of leases to the landlord’s freehold title)
Can a lease of more than 7 years be registered?
Yes - it must be registered
Will appear in the schedule of leases to the landlord’s freehold title
What is the procedure for registering a lease?
Tenant applies to register lease
- form AP1 if landlord’s title is registered
- form FR1 if landlord’s title is unregistered
What additional step must be taken if landlord’s freehold title is charged?
Letter of consent from lender will also be needed
