Landlord and Tenant Flashcards
What is the difference between a lease renewal and a rent review?
- Lease renewals
o Statutory procedure laid down by the Landlord and Tenant Act 1954 Part II (as amended)
o It sets out the process by which a lease is renewed
o In the event of non-agreement, the matter is settled by court. From July 1997, an unopposed lease renewal can be determined under PACT (Professional Arbitration or Court Terms) – this is a service provided jointly by the law society and the RICS - Rent reviews
o Contractual procedure contained within a lease – it can say anything and it’s between the parties to agree
o In the event of non-agreement, the matter will be settled in accordance with the review clause which usually states that the rent shall be determined by either an independent expert or an arbitrator and the matter can be referred to court on a point of law if appropriate
What information do you require from your client at commencement of the instruction?
- Receive instruction from client
- Make sure you are competent and that there is no COI or PI
- Agreed ToE
o In writing
o Issue standard Terms of Business alongside
o Confirm fee basis - Understanding of your client’s strategy and objectives
- Request copy of the existing lease and any plans attached to the lease
- Copies for any licences
o License for alterations
o Improvements
o Sub-letting
o Assignment
o Deeds of variation to the lease
o Copy of any rent review memorandum - Contact details for the T/LL/agent to arrange an inspection of the property
- Confirmation of which party will be responsible for service of notices
- A copy of the property management file
o To see if there is any historic rental evidence on the file or relevant background information which could assist your negotiations - Details of any rental comps relating to similar property held by the client
What fees can you negotiate for rent reviews or lease renewals?
- A fixed fee (stage 1: report and stage 2: negotiations)
- Performance related (a % of uplift achieved or saving made from quote – cannot be used for expert witness work)
- Hourly rate (common for expert witness)
How might a conflict of interest arise in a rent review?
If you’re acting for either the landlord or the tenant on a nearby property and you’re acting for the opposite party on the subject property
Once you have received the legal documents what are you looking out for and what do you do after?
- Rent review:
o Understand rent review clause
o Check whether time is of the essence - Lease Renewal:
o Check whether the lease is contracted out of the security of tenure provisions of the LL&T Act 1954 (Sections 24-28) in the case of a lease renewal
o If silent, lease is inside Act - Undertake a site inspection and measurement of the property in accordance with the guidance contained in RICS Surveying Safely (2018) and Property Measurement (2018)
- Undertake a market rent valuation, having regard to the terms of the lease
- Prepare your report to your client setting out recommendations
- Agree your strategy with client and confirm who is serving relevant notices
o Always instruct a lawyer to serve 1954 Act lease renewal notices - Upon receipt of instructions, open negotiations, once correct notices have been served
- Check that notices received are valid
- Conclude negotiations and document the rent review in a rent review memorandum
- Depending on what happens, there will be the opportunity to refer the matter to 3rd party in the event that agreement cannot be reached
- Alternatively a Calderbank offer can be submitted and that should lead to an agreement
- For a lease renewal, instruct solicitors to prepare the new lease in accordance with HOTs prepared for new lease
What should you preface all your discussions with?
Without prejudice and subject to contract
What does without prejudice and subject to contract mean?
- Without prejudice: during the negotiations period, the opposing party cannot rely on any document/discussions and cannot be used in court
o If used for RR, correspondence cannot be shown to the arbitrator/independent expert to show how negotiations have been conducted - Subject to contract: document/negotiations are subject to contract
What is a licence?
- A right to enter a property
- A personal arrangement between the licensor and the licensee
- The licensee acquires no interest in the property
- It is merely a personal right which can be terminated by either party
- E.g. right to park a car or a pop up shop in a shopping centre
What are the 4 requirements of a lease?
- Exclusive occupation
- Payment of rent
- Duration for a specified term
- If more than for 3 years, terms must be in writing, signed as a deed
What is the difference between a lease and a licence?
- Lease:
o A lease can be for a fixed term or periodic and the 4 requirements are that you have to have:
exclusive rights of possession
It has to be for a specific duration (minimum term is 6 months)
The rent or periodic payment is made in return for possession
If more than 3 years, it has to be in writing signed and registered
o provides an occupier with an estate in the relevant land
o can be assigned
o cannot be terminated until it expires (unless there is a break clause) - Licence:
o permission to make it lawful for someone to use the land
o normally a personal right that cannot be assigned
o can usually be revoked at any time
What case law relates to the differentiation between a lease and a licence?
- Street vs Mountford
- If exclusive possession is granted of a defined area for over 6 months, it is likely to be a lease
- The case involved a license to occupy a refurbished room in a house. The agreement conferred exclusive possession of the rent. The owner provided neither attendance nor services and the houses of services ruled that this agreement effectively constituted a tenancy/lease
What is a tenancy at will?
- Form of licence created by written agreement for an unspecified time in which the LL may evict the tenant at any time
- Not a legal interest in land with no renewal right
- Used for allowing a tenant early entry for fit out works or whilst tenant is agreeing a new contracted out of the 1954 Act lease after the lease expiry
What is a wayleave?
- Temporary right and receives an annual payment
- E.g. It provides a right for an electricity company to install and retain their apparatus
- It is personal to the company and cannot be automatically transferred to a new owner
- It is not compulsorily registrable
What is easement?
- Permanent right and receives a capital payment
- It is capable of being registered at the Land Registry
- It allows a right enjoyed by one party over the land of another
- A prescriptive right of way/easement can be obtained because of continuous and uninterrupted use being proven over a period of not less than 20 years
- A permissive right can be granted by a landowner to allow access over the land. They are not public rights of way and the public do not have a right to use them
- There is usually signage in place to confirm that this is a permissive right of way
What is adverse possession?
- The process by which a person who is not the legal owner of the land can become the legal owner through possession of the land for a specified period of time, without the owner’s permission
- If the land is registered and a squatter has clocked up 12 years of possession before the Land Registration Act came into effect in 2003, claim would be successful
- If after 2003, new rules apply and 10 years of occupation is required
- If the land is not registered, then 12 year rule applies
What lease terms affect value in a rent review?
- Alienation clause
o This will determine whether the tenant is entitled to assign/sub-let the premises
o Depending on what it says, it could possibly have a negative impact on rental value if its onerous on the tenant
o E.g. if it says that the tenant can’t assign/sub-let, this is harsh as they cannot get out their lease so it’s going to have a negative impact on the value. However, most of the time it will say that the tenant is permitted to assign/sub-let with landlords consent (NTBUWOD) - Rent Review clause
o Type of Rent Review – Open Market, RPI, CPI, Fixed Uplift
o Is time is of the essence? If a lease is silent, it means that time is not of the essence
o Rent review pattern – the longer the review periods, the higher the rent. If you have a 21 year review pattern, the tenant is likely to pay a higher rent on that because it provides greater security that the rent isn’t going to change for a period of time (more valuable to a tenant) - Repairing obligations
o Any unusual repairing obligations on the tenant may impact the value
o It’s up to the parties to negotiate the rental value based on whether or not it is considered to be onerous
How does the RR provision affect value?
Usually the rent review is upward only so if there were lots of rent reviews, it would be more beneficial for the landlord as they can reassess the value and put it up to Market Rent
What is time of the essence?
It means that timing is material to the lease and it concerns timeframes to respond to the notices contained within the rent review provision
Is there a time where you wouldn’t put ‘without prejudice’?
If time was of the essence as you would want to present this to the court/arb/IE
What is more valuable in this market, an upwards only rent review or RPI fixed increases?
- It depends what kind of property it is
- For example, if it’s industrial, an open market RR is probably better but retail isn’t doing that well so RPI might be better
How does the valuation basis for a rent review differ from that for a lease renewal?
The basis for a lease renewal is prescribed by the 1954 Act, not the lease
What are the contents of a rent review clause / What are the factors that the rent review clause sets out?
The rent review clause deals with the machinery for initiating the rent review. The three basic factors are:
- Who the trigger notice is served by (landlord/tenant)
- The basis for valuation (open market/upwards open market/CPI/RPI/stepped increases/fixed uplifts)
- The means for settling a dispute when the parties cannot agree on the revised rent
How is a rent review initiated?
- Generally by a service of a notice in writing to the landlord/tenant’s registered office
- A rent review trigger notice doesn’t have to be in a prescribed form unlike inside the Act lease renewals (set out by the law society)
- You can say whatever you want as long as it has the salient details; address of the property, date of the rent review, parties involved, proposed rent
What case law relates to time of the essence?
- United Scientific Holdings vs Burnley Borough Council
- General presumption that time is not of the essence unless there are contra-indications that indicate otherwise
- The exception to this is if there is a break clause which then makes time of the essence
- If RR has not been initiated for 13 years, time is still not of the essence (Bello v Ideal View)
What are the usual assumptions of a rent review clause?
- Property available to let on open market by a willing tenant to a willing landlord for a term of … years as stated (hypothetical term)
- Property is fit and available for immediate occupation and use
- All covenants observed by LL&T
- Property may be used for purpose set out in lease
- Vacant possession
What are the usual disregards of a rent review clause?
- Any effect on goodwill on tenant’s occupation
- Ignore goodwill attached to property
- Tenant’s improvements if LL has been granted for the works (improvements that were done under the current lease or less than 21 years ago)
- Any licenses (such as alcohol which is personal to the tenant)
What is the Case Law that refers to disregards?
Ponsford vs HMS Aerosols – The lease had no provision for excluding the tenant’s improvements and therefore they had to be taken into account at rent review
Why is it important to review the license for alternations (if there are any)?
You need to know whether it’s a tenant’s improvement depending on whether or not there is a license for alterations as that will determine whether it’s rentalised or not. If there is a licence for alterations, it cannot be rentalised and it is disregarded for the purposes of the rent review. However, if the licence for alterations is over 21 years, it can be rentalised.
Why do tenant’s improvements get disregarded? – surely they benefit from whatever they’ve done to improve the premises
- If the tenant carried out the works at their own cost, they should not be penalised to do the improvements and then have to pay a higher rent for having done them
- E.g. if an office tenant want to install AC and the provide the plans and landlord granted the license, you can’t then expect the tenant to be paying a rent attribute to air conditioned offices when they paid for them to be installed
What else might a modern commercial lease provide for an assumption/disregard?
- ‘Fit out’ rent free period
- E.g. a RR clause might assume that the tenant has either had, or does not need a RF period for fitting out; or a RR clause might disregard the typical period that an incoming tenant might receive in the open market for fitting out
What is a headline rent?
- A headline rent ignores all incentives granted on a letting, whether they be for fitting out, pure incentives or dilapidations/works
- Case law proves it’s difficult for LL’s to achieve a Headline Rent at rent review unless explicitly stated
- Headline RR clauses are rare in modern commercial leases
What is the hypothetical term?
- The length of term to be assumed for rent review purposes can influence rental values
What should you assume for a hypothetical term if the wording is not explicit?
- The unexpired residue term
- British Gas v Dollar Land Holdings
What is the impact/relevance on the rental value on the hypothetical term?
The hypothetical term is very important in determining the market rent. If the length of lease in the open market is longer or shorter than the hypothetical term, an adjustment would be made to the rental value. Anything relating to rent reviews is a contractual negotiation, so it’s up to the parties to decide where to settle it at.
E.g. If the hypo term is 25 years but the property is a high street retail unit in Bradford, the market lease length is probably c.5 years so you’d have to reduce the rent significantly.
What are deeming provisions?
- some RR clauses in older leases require the LL to specify the rent in the trigger notice
- The clause will state that if the tenant does not serve the appropriate counter notice within a specified time, the tenant will have deemed to accept the new rent
Can rent review evidence be taken into account post rent review date?
No
What are the dispute resolution options for rent reviews?
- Dispute resolution options will be identified in lease
- Typically the 2 options are:
o Independent expert
o Arbitration - Leases typically provide for the appointment of the dispute resolver to be made via an application to the RICS Dispute Resolution Service (DRS)
o £425 for application
Who can apply for the appointment of a third party?
- Both parties (landlord and tenant)
- Sometimes a lease will provide LL the option to choose between the 2
Who appoints the 3rd party?
- The president of the RICS
- It is possible but rare that the parties can choose who is to be appointed
Why is that rare to see that the landlord and tenant choose who is appointed in a rent review clause?
The parties would never agree to it as they would appoint an arbitrator/independent expert who they are friendly with
If you were to appoint an arbitrator, how might you protect your clients position of costs?
A Calderbank offer
What is a Calderbank/without prejudice and save as to costs offer?
- An unconditional offer to settle on specified terms
- Must be marked without prejudice and save as to costs
- To be valid, the offer must:
o be a genuine offer to settle
o be clear
o be capable of unconditional acceptance
o remain open for a sufficient period to allow the recipient to properly consider the proposal - Offer requires careful drafting and should have clear client approval because the terms are biding if accepted by receiving party
- It has to be a reasonable proposal regarding costs incurred up to the date of the offer
- This is not a negotiating tactic, it is a binding agreement if it is confirmed in writing
Why are Calderbank offers used?
- To give a party in dispute some protection against the high costs of dispute resolution
o If you believe that you are negotiating with a party that is deliberately being difficult/dragging matter out and you just want to settle the rent review, you would make a Calderbank offer because it’s not fair for you to bear the costs of arbitration - They also have another function of focussing attention of disputing parties to achieve an agreement if the tribunal for dispute resolution has the power to award costs
Why is the Calderbank generally speaking only applicable with an arbitrator?
- The independent expert is governed by the terms of the lease so the lease sets out who pays the cost (it will say that the costs are either borne by both parties or by the party that brings the independent expert), which is not open to negotiation
- The arbitrator is governed by the Arbitration Act which states that unless otherwise agreed, the arbitrator has the power to award costs. You are able to protect your clients position because the arbitrator has power to award costs
- Therefore, it is usually only used where there is an arbitrator unless the lease says that the independent expert has the power to award costs (but this is rare)
Can you withdraw a Calderbank offer?
- If it has been accepted then you can’t but if it hasn’t you can
- You can’t withdraw it within the 21 day period
Generally, how long is Calderbank offer available for acceptance?
No timescales but it is open for acceptance for 21 days
At what point do you declare that you have made a Calderbank offer?
Once the third party has determined what they think it is going to be
What does without prejudice, save as to costs mean?
The evidence that you have given is not to be relied upon on in court save as to the subject of costs (providing it is a genuine attempt to settle). That bit is disclosed once the arbitrator has made their award
What does subject to contract mean?
The parties do not intend to be legally bound until a formal contract is executed
