Leasehold transactions: Granting a lease Flashcards
How is a new lease granted?
The landlord’s solicitor drafts the lease and attaches it to the agreement for the lease. The terms of the lease are subject to negotiation between the landlord and the tenant
When does granting a lease typically occur?
Likely scenario - Seller is a development company that is building (or converting) a block of flats and is granting long leases to each buyer of the individual flat / apartment. The buyer will be the first tenant named in the lease.
How is grant of a lease different from assignment of a lease?
When a lease is assigned, the assignee (incoming tenant) can only review the lease terms that were previously completed. Any change to the lease terms would require the landlord’s agreement and a deed of variation of the existing lease.
Explain the terms: Freeholder, Tenant, Headlease, Sublease
Freeholder: Tenant’s landlord - grants headlease to tenant
Tenant: Sub tenant’s “immediate landlord”. If the headlease permits it, the tenant can grant an underlease / sublease to the sub tenant.
Headlease: Original lease granted out of the freehold. The freeholder and the tenant will enter into the lease and the freeholder will be the tenant’s landlord.
Sublease: Must be of a shorter term than a headlease
What are the preliminary issues for commercial leases?
1) Heads of terms
Prepared by the estate agent for commercial premises which sets out the agreement between the landlord (seller) and tenant (buyer) of the premises). The parties may comply with the RICS Code for Leasing Business Premises.
2) Extra security for landlord
Rent deposit - Depending on the financial position of the tenant, the landlord may require an incoming tenant to pay a rent deposit at the start of the tenancy
Guarantor - Landlord may require the additional security of a personal guarantee being given by a guarantor. On the grant of a new lease, the guarantor will be a party to the lease and will guarantee the tenant’s obligations under the lease. In the event of default, the landlord can pursue the guarantor as there is a contractual arrangement between the landlord and the guarantor
What are the pre-exchange steps when granting a new lease?
Drafting the lease (“agreement for lease”): Done by the landlord’s solicitor. This is attached to the contract and is referred to as an ‘agreement for lease’.
What happens if the lease granted is for a term of > 7 years?
More than 7-year lease - registrable at HMLR. The landlord must deduce the title to enable the tenant to register the lease with title absolute.
Registered land: Producing register entries and title plan of
the freehold
Unregistered land: Producing an epitome of title
What documents are included in the contract pack for a new lease?
Contract pack for granting a new lease
1) Agreement for lease x2 in duplicate with draft lease annexed to it
2) The landlord (seller’s) freehold title
3) Property Information Form or CPSE if commercial
4) Replies to leasehold pre-contract enquiries
5) Details of management company responsible for maintaining the common parts
6) Consent from lender for grant of the lease (if landlord’s title is in mortgage)
7) New Build Warranty (if property is residential and less than 10 years old)
What else is included in the contract if this is a new property / development?
Additional documents if this is a new property / development:
8) Planning permission and buildings regulations consent;
9) Service charge budget
What is the overall position on exchange when granting a lease?
Once a contract or agreement for lease is exchanged, the terms of the lease cannot be changed if a copy of the proposed draft lease was attached to the contract / agreement for lease
What are the post-exchange steps for granting a new lease? Is there a difference between a leasehold transaction and a freehold transaction?
Post-exchange steps
Pre-completion searches, Completion Information and Undertakings, application for funds, sending out completion statements.
DIFFERENCE: Instead of the parties executing a TR1 or TP1, they enter into the lease.
How is the lease signed and what is meant by an ‘engrossment’?
Signing the lease
The landlord’s solicitor will prepare final copies of the lease for signature, including all plans referred to. The final version of the lease is called an “engrossment” and it will be prepared in two parts:
Original - signed by the landlord;
Counterpart - signed by the tenant (and guarantor if there is one).
After completion, the parties swap documents so each holds an identical copy of the lease signed by the other.
What are the pre-completion tasks when granting a new lease?
Pre-completion tasks
Pre-completion searches
- Bankruptcy search if buyer needs a mortgage
- OS2 if title registered (it is likely to be a lease of part in a residential transaction)
- OS1 (if a lease of whole of land in the landlord’s title; more likely in a commercial transaction)
- Repeat company search if seller is a company (more likely in a leasehold transaction).
Obtaining funds to complete
- Request cash from client;
- Submit certificate of title to request drawdown of mortgage funds if there is a lender
Completion
- Completion by post
What are the post-completion tasks when granting a new lease?
1) Paying SDLT / LTT on the lease;
2) Registering the lease at HMLR;
3) Serving notice of the mortgage on the landlord;
4) Applying for share in management company
Explain the post-completion task of paying SDLT / LTT on the lease
The SDLT / LTT is assessed on the premium; that is, the purchase price. If the total rent over the life of the lease (“the net present value”) is more than the relevant thresholds for England and Wales, additional SDLT / LTT is also payable. This is less likely to be payable on a long residential lease as the annual rent is often a low sum.
Explain the post-completion task of registering the lease at HMLR
If the lease is granted for a term of > 7 years, the buyer / tenant’s solicitor then applies to register the lease at HMLR to create a new title for that lease. If the property has been purchased with a mortgage, the new mortgage will be registered at the same time.
Explain the post-completion task of serving notice of the mortgage on the landlord
If the tenant / buyer bought a new lease with a mortgage, the solicitor must serve notice of the mortgage on the landlord after completion
Explain the post-completion task of applying for a share in the management company
If the leasehold property is located in a block to be managed by a management company, the buyer / tenant may need to apply for a share in the management company
What terms are included when drafting a lease?
Property details:
- Address
- Landlord:
- Registered Office:
- Company Number:
- Landlord’s title:
Terms of lease:
- Lease of whole of the premises or part
- Access:
- Rent term:
- Use for property:
- Tenant covenants (what is the tenant responsible for)
- Landlord covenants (what is the landlord responsible for)
- Provision of shared services
- Protection of Landlord and Tenant Act (LTA) 1954
- Alienation clauses
- Alteration clauses
As the solicitor, you will need to take instructions on the above and also provide advice on:
Typical tenant covenants
Typical landlord covenants
Landlord and Tenant Act 1954
Alienation clauses
Alteration clauses
