Lease drafting

Question 1

Structure of lease

Answer 1

1) Prescribed clauses
2) Commencement
3) Interpretation
4) Grant of the lease
5) Ancillary Rights
6) Rights excepted and reserved
7) Annual Rent
8) Rent Review
9) Tenant’s Covenants
10) Landlord’s covenants
11) Landlord’s right to enter on breach of repair covenant
12) Re-entry and forfeiture

Question 2

Prescribed clauses

Answer 2

For leases made after 2006 which are granted out of registered land. The prescribed clauses appear at the beginning of the lease. they are a summary of the important details.

Question 3

Interpretation

Answer 3

Defined terms within the lease

Question 4

Ancillary Rights

Answer 4

These give the tenant rights over other land to enable them to use the leased property e.g right to use roads

Question 5

Rights excepted and reserved

Answer 5

These are rights in favour of the landlord over the leased property e.g right to enter to do repairs

Question 6

Tenant’s covenants

Answer 6

Obligations imposed on the tenant as to how they use and look after the property

Question 7

Key wording to put in tenant’s covenants if acting for the tenant

Answer 7

Regarding landlord’s consent need to add ‘not to be unreasonably withheld’. This will make the covenant fully qualified.

Question 8

Landlord’s covenants

Answer 8

Most important is their obligation to insure

Question 9

What words should the tenant’s solicitor try to insert in covenants

Answer 9

‘Reasonable’ and ‘Reasonably’ to make the covenant fully qualified so the landlord cannot withhold consent unreasonably.

Question 10

Repair - What does it mean to ‘keep’ in repair

Answer 10

Also means to ‘put’ in repair

Question 11

Repair - What does ‘good condition’ mean

Answer 11

Quite onerous for a tenant. It can mean that the tenant is obliged to carry out some works even though there is no actual disrepair

Question 12

Repair - Inherent defects

Answer 12

If the property is new if you are acting for the tenant then you should amend the covenant to exclude the tenant’s liability for disrepair caused by inherent defects and insert a landlord’s covenant to repair them at its own cost.

Question 13

Repair wording

Answer 13

1.1 The Tenant shall repair the Property.
1.2 The Tenant shall not be liable to repair the Property to the extent that any disrepair has been caused by an Insured Risk, unless and to the extent that:
a) the policy of insurance of the Property has been vitiated or any insurance proceeds withheld in consequence of any act or omission of the tenant or any person on the property with the tenant’s authority ; or
b) the insurance cover in relation to that disrepair is excluded, limited or is unavailable as mentioned in clause [the landlord’s covenant to insure]

Question 14

Insurance Provisions

Answer 14

1) A landlord’s covenant to insure the property against defined risks (insured risks) which need to be states expressly
2) A covenant by the tenant to pay for the insurance policy
3) A covenant by the landlord to reinstate the property
4) Rent suspension
5) Termination

Question 15

Insurance - Landlord’s covenant to insure property against defined risks (insured risks) - What are Insured risks

Answer 15

There is often an inclusive list of the risks which the landlord must insure against. It is common for the list to conclude with ‘such other risks as the landlord may reasonably require.’ So that the landlord does not have to insure against unlikely and expensive risks.

Question 16

Insurance - Landlord’s covenant to insure property against defined risks (insured risks) - What is full reinstatement value

Answer 16

If the property is totally destroyed there will not be enough money to pay for its rebuilding. Full reinstatement
value will include costs of demolition ect.

Question 17

Insurance - Example wording of a landlord’s covenant to insure

Answer 17

1.1 Subject to clause [1.2] the landlord shall keep the property insured against loss or damage by the insured risks for its full reinstatement value.
1.2 The landlord’s obligation to insure is subject to:
a) any exclusions, limitation, excesses and conditions that may be imposed by the insurers; and
b) insurance being available in the London insurance market on reasonable terms acceptable to the landlord.

Question 18

Insurance - Insured Risk - Definition within Interpretation Section

Answer 18

means fire, explosion, lightning, earthquake, storm, flood, bursting and overflowing of water tanks, apparatus or pipes, impact by aircraft and articles dropped from them, impact by vehicles, riot, civil commotion, malicious damage and any other risks that the landlord may reasonably require from time to time.

Question 19

Insurance - A covenant by the tenant to pay for the insurance policy

Answer 19

To pay a sum reserved as rent (the ‘insurance rent’), which includes the premium for the buildings insurance policy and an associated policy covering the landlord for loss of the annual rent during any period where the tenant is unable to use the building following the occurrence of an insured risk.

Question 20

Insurance - Example wording for a covenant by the tenant to pay for the insurance policy

Answer 20

Goes after Landlord’s covenant
1.3 The tenant shall pay to the landlord on demand:
a) the Insurance Rent;
b) any amount that is deducted or disallowed by the insurers pursuant to any excess provision in the insurance policy; and
c) any costs that the landlord incurs in obtaining a valuation of the property for insurance purposes.

Question 21

Insurance - Insurance Rent - Interpretation section of the lease

Answer 21

in each year the cost of the premium for the insurance of:
a) the Property, for its full reinstatement cost (taking inflation of building costs into account) against loss or damage by or in consequence of the Insured Risks, including costs of demolition, site clearance, site protection and shoring-up, professionals’ and statutory fees and incidental expenses, the cost of any work which may be required under any law and
VAT in respect of all those costs, fees and expenses;
b) loss of Annual Rent of the Property for three years; and
c) any insurance premium tax payable on the above.

Question 22

Insurance - A covenant by the landlord to reinstate the property

Answer 22

This is expressed as a covenant to use the insurance proceeds to reinstate the property. Ideally, a tenant would like this extended to include an obligation for the landlord to make good any shortfall in the insurance proceeds from its own resources as there will have been a failure to
insure the property to its full reinstatement value.

Question 23

Insurance - A covenant by the landlord to reinstate the property - Where reinstatement is impossible

Answer 23

Many leases provide for the insurance monies to be retained by the landlord, but a tenant in a strong negotiating position may have agreed that the proceeds will be passed over to them or that the proceeds will be shared between
landlord and tenant proportionate to their respective interests in the building.

Question 24

Insurance - Example wording of landlord’s covenant to reinstate

Answer 24

1.4 The Landlord shall, subject to obtaining all necessary planning and other consents, use all insurance money received (other than for loss of rent) to reinstate the Property. The Landlord shall not be obliged to:
a) provide accommodation identical in layout or design so long as accommodation reasonably equivalent to that previously at the Property is provided; or
b) repair or rebuild the Property after a notice has been served pursuant to [the break clause].

Question 25

Insurance - Example wording of landlord’s covenant to reinstate - Where reinstatement is impossible

Answer 25

1.5 If the Landlord reasonably considers that it is impossible or impractical to reinstate the Centre, the Landlord may terminate this lease by giving notice to the Tenant whereupon any proceeds of the insurance shall belong to the [Landlord / Landlord and Tenant] proportionate to the values of their respective interests.

Question 26

Insurance - Rent Suspension

Answer 26

The tenant should ensure that the lease provides for
the payment of rent to be suspended during any period that the property cannot be occupied following damage by an insured risk. Landlord can insure against lost rent but only for 3 years usually.

Question 27

Insurance - Example suspension of rent wording

Answer 27

1.6 If the property is damaged or destroyed by a risk against which the landlord is obliged to insure [see clause 1.1 and 1.2 above] so as to be unfit for occupation and use then,
unless the policy of insurance of the property has been vitiated in whole or in part in
consequence of any act or omission of the tenant or any other person on the property
with the actual or implied authority of the tenant, payment of the annual rent, or a fair proportion of it according to the nature and extent of the damage, shall be suspended until the property has been reinstated and made fit for occupation and use, or until the end of three years from the date of damage or destruction, if sooner

Question 28

Insurance - Termination

Answer 28

The lease will often give the landlord the right to terminate the lease should reinstatement prove impossible. The tenant should try to ensure that they have the same right. The tenant should be able to terminate the lease if the property has not been reinstated by the end of the rent suspension period.

Question 29

Insurance - Example landlord termination clause

Answer 29

1.7 If, following damage to or destruction of the property, the landlord reasonably considers that it is impossible or impractical to reinstate the property, the landlord may terminate this lease by giving notice to the tenant. On giving notice this lease shall determine but this shall be without prejudice to any right or remedy of the landlord in respect of any breach of the tenant covenants of this lease. Any proceeds of the insurance shall belong
to the landlord.

Question 30

Insurance - Tenant’s termination clause

Answer 30

1.8 Provided that the tenant has complied with its obligations in this clause, the tenant may terminate this lease by giving notice to the landlord if, following damage or destruction by a risk against which the landlord is obliged to insure, the property has not been reinstated so as to be fit for occupation and use within three years after the date
of damage or destruction. On giving this notice this lease shall determine but this shall
be without prejudice to any right or remedy of the landlord in respect of any breach of the tenant covenants of this lease. Any proceeds of the insurance shall belong to the
landlord.

Question 31

Alterations

Answer 31

A landlord will try and restrict the extent to which a tenant can make alterations,
while not making the restrictions too onerous for the tenant. Most alterations clauses make a distinction between different types of alteration:
1) Alterations affecting the structure and exterior of the building
2) Non-structural interior alterations
3) Alterations affecting service media
4) Demountable partitioning

Question 32

Alterations - External or structural alteration

Answer 32

Usually an absolute covenant

Question 33

Alterations - Example external or structural alteration

Answer 33

The tenant shall not make any external or structural alteration or addition to the property and shall not make any opening in any boundary structure of the property

Question 34

Alterations - Non-structural alterations and changes to service media

Answer 34

Usually qualified and fully qualified covenants

Question 35

Alterations - Example changes to service media

Answer 35

The tenant shall not install any service media on the exterior of the property nor alter the route of any service media at the property without the consent of the landlord, such consent not to be unreasonably withheld

Question 36

Alterations - Example non-structural alterations

Answer 36

The tenant shall not make any internal, non-structural alteration to the property
unless:
(a) all necessary consents from any competent authority have been obtained
(b) the landlord has been supplied with drawings and where appropriate a
specification in duplicate prepared by an architect who must supervise the
work throughout
(c) the reasonable fees of the landlord, any superior landlord, any mortgagee
and their respective professional advisors have been paid
(d) the tenant has entered into such covenants as the landlord may require as to
the execution and reinstatement of the alterations
(e) the landlord’s prior written consent has been obtained (such consent not to
be unreasonably withheld).

Question 37

User and planning

Answer 37

Landlord would prefer a qualified covenant. Tenant would prefer a fully qualified covenant. There is nothing in statute that landlord’s consent cannot be unreasonably withheld. Landlord may also add in a covenant that tenant cannot apply for planning permission without their permission

Question 38

User and planning - Qualified covenant

Answer 38

Not to use the Premises other than as a restaurant or such other use falling within Use
Class E of the Town and Country Planning (Use Classes) Order 1987 as the Landlord may approve in writing.

Question 39

User and planning - Fully qualified covenant

Answer 39

Not to use the Premises other than as a restaurant or such other use falling within [Use
Class E] of the Town and Country Planning (Use Classes) Order 1987 as the Landlord may approve in writing (such approval not to be unreasonably withheld).

Question 40

Alienation

Answer 40

Most leases contain an absolute covenant against all types of alienation but then go on to permit certain types of alienation on controlled terms. Always have an absolute covenant but then go on to state what they can do

Question 41

Alienation - Example Absolute Covenant

Answer 41

1.1 Except as expressly permitted by this lease, the Tenant shall not assign, underlet,
charge, part with or share possession or share occupation of this lease or the Property or hold the lease on trust for any person.

Question 42

Alienation - If client needs to charge property but there is an absolute covenant need to amend that to say

Answer 42

The Tenant must not:
(a) assign, underlet, part with or share possession or occupation of the whole or part of either this lease or the Property; [or]
(b) hold the Lease on trust for any person.
The Tenant may charge the whole of this Lease with the consent of the Landlord (such consent not to be unreasonably withheld).

Question 43

Alienation - Absolute covenant

Answer 43

This will always go first in the clause and then will be followed by the qualified and fully qualified covenants

Question 44

Alienation - Assignment

Answer 44

A commercial lease will usually allow assignment of the whole property but not of part

Question 45

Alienation - Example Assignment clause (follows after absolute covenant) - First part

Answer 45

1.2 The tenant shall not assign the whole of this lease without the consent of the landlord, such consent not to be unreasonably withheld.

Question 46

Alienation - Example Assignment clause (follows after absolute covenant) - Second part

Answer 46

1.3 The tenant shall not assign part only of this lease.

Question 47

Alienation - Example Assignment clause (follows after absolute covenant) - Third Part

Answer 47

1.4 The landlord and the tenant agree that for the purposes of section 19(1A) of the LTA 1927 the landlord may give its consent to an assignment subject to all or any of the following conditions:
a) a condition that the assignor enters into an authorised guarantee agreement in the form set out in Schedule 1; and
b) a condition that a person of standing acceptable to the landlord acting reasonably enters into a guarantee and indemnity of the tenant covenants of this lease in such form as the landlord may reasonably require.

Question 48

Alienation - Example Assignment clause (follows after absolute covenant) - Fourth Part

Answer 48

The landlord and the tenant agree that for the purposes of s 19(1A) of the LTA1927 the landlord may refuse its consent to an assignment if any of the following circumstances exist at the date of the tenant’s
application for consent to assign this lease:
(a) the Annual Rent or any other money due under this lease is outstanding
or there is a material breach of covenant by the tenant that has not been
remedied; or
(b) in the landlord’s reasonable opinion the assignee is not of sufficient
financial standing to enable it to comply with the tenant’s covenants and conditions contained in this lease.

Question 49

Alienation - Underletting - First part

Answer 49

The tenant shall not underlet the whole of the property except in accordance with this clause nor without the consent of the landlord, such consent not to be unreasonably withheld.

Question 50

Alienation - Underletting - Second part

Answer 50

The tenant shall not underlet part only of the property

Question 51

Alienation - Underletting - Third part

Answer 51

Any underletting by the tenant shall be by deed and shall include:
(a) an agreement between the tenant and the undertenant that the provisions of ss
24 to 28 of the LTA 1954 are excluded from applying to the
tenancy created by the underlease;
(b) the reservation of a rent which is not less than the full open market rental value
of the property at the date the property is underlet and which is payable at the
same times as the annual rent under this lease;
(c) provisions for the review of rent at the same dates and on the same basis as the
review of rent in this lease;
(d) a covenant by the undertenant, enforceable by and expressed to be
enforceable by the landlord (as superior landlord at the date of grant), to
observe and perform the tenant covenants in the underlease and the tenant covenants in this lease, except the covenant to pay the rents reserved by this
lease; and
(e) provisions requiring the consent of the landlord to be obtained in respect of any
matter for which the consent of the landlord is required under this lease, and
shall otherwise be consistent with and include tenant covenants no less onerous
(other than as to the annual rent) than those in this lease.

Question 52

Rent and rent review

Answer 52

The lease needs to make clear:
1) When rent is payable
2) Whether it is payable in advance or arrears
3) How instalments are to be apportioned
4) How the rent is to be paid
5) VAT
6) Review of the rent

Question 53

Rent and rent review - Example of tenant’s covenant to pay rent

Answer 53

1.1 The tenant shall pay the annual rent and any VAT in respect of it by four equal
instalments in advance on or before the rent payment dates. The payments shall be
made by banker’s standing order or by any other method that the landlord requires
at any time by giving notice to the tenant.
1.2 The first instalment of the annual rent and any VAT in respect of it shall be made
on the date of this lease and shall be the proportion, calculated on a daily basis,
in respect of the period beginning on the date of this lease and ending on the day
before the next rent payment date.

Question 54

Rent and rent review - Example of rent review clause - Assumptions

Answer 54

Useful to include:
a) the tenant has fully complied with its obligations in this lease
b) the Landlord has fully complied with its obligations in this lease unless the Landlord is in persistent and material breach of its obligations in the lease, the Tenant has notified the Landlord of the breach, and the Landlord has failed to remedy the breach within a reasonable time.

Question 55

Rent and rent review - Example of rent review clause - the matters to be disregarded

Answer 55

a) Any effect on rent of the fact that the Tenant has been in occupation of the Property
b) Any goodwill attached to the Property by reason of any business carried out there by the Tenant
c) Any effect on rent attributable to any physical improvement to the Property carried out by the Tenant with all necessary consents and not pursuant to an obligation to the Landlord