Leases Flashcards
Repairing Covenants: key drafting points
- Make sure ‘Premises’ or ‘Demise’ is narrowly defined - as that is key in establishing the scope of the tenant’s obligation (L will want widely defined as opposed to T)
INTERNAL ENVELOPE - make sure all structural and external parts are excluded - will often be something like (for a lease of part):
Premises means ‘the Property situated on [x floors] at address] save for the Common Parts’.
BEWARE OF WORDS LIKE ‘KEEP’ OR ‘PUT AND KEEP’ - if acting for T, make sure to use the word ‘MAINTAIN’
- if using ‘maintain’ T only has to maintain premises in condition tehy were in at outset of the lease (wehreas case law has hel ‘keep’ tp require T to fix things even if in disrepair at start of lease!) So avoid words like ‘put’ and ‘keep’ if acting for T!!!
- Useful to define repairing obligations by refrence to the conidtion of property as evidenced by Schedule of Condition (containing written description and photogaphs prepared by a surveyor)
- Exclude damages caused by fair wear and tear, and also latend or inherent defects arising from the design or construction of the property.
- Exclude oblgiation to repair damage caused by Insured Risks (as T already paying for insurance in relation to them! - otherwise doubly penalised)
- If anything has to be repaired to the satisfcation of the Landlord, should be changed to ‘satisfcation of the landlord’s surveyor, acting reasonably’
Insurance Covenants: key drafting points
- List of Insured Risks set out in definitions - make sure to the satisfaction of L and T, as will massively effect repairing obligations
- normally covers things like fire, flooding, riot, storm, burst pipes, earthquakes
- L can’t insure just 2 floors of a 10 storey building! Rather, L will arrange insurance policy for whole thing and split the cost of premiums between all Tenants, in proportion to their leaseholdings.
- Thus, covenant should be on L to actually insure the Insured Risks, and T to pay for premiums
- Clause should specify reputable insurer and reqiore copy of insurance policy
- Where Insured Damage occurs, L should be subject to a covenant to actually make a claim on the insurance policy and use the proceeds to reinstate the premises (i.e. make habitable again!) - T may want clause requiring L to make up any shortfall - matter of negotiation)
- Rent abatement clause - should be a clause SUSPENDING RENT (cessor clause) if property unfit for use or occupation as a result of Insured Damage - NORMALLY 3 YEARS
- If premises can’t be reinstated within rent suspension period (say 3 years), T will want a right to determine the lease.
- Landlords will often also insure against loss of rent.
Forfeiture (in general)
FORFEITURE - available in commercial leases - proviso enavling L to re-enter the demised premises and prematurely end the lease, on breach by T of covenants, or on occurence of specified events.
It is NOT an automatic remedy - has to be expressly reserved in the lease.
Unless exercising forfeiture for non-payment of rent, must serve a notice under s.146 LPA 1925 on T before forgeiting.
s. 146 notice must:
- set out the breach
- require the breach to be remedied within a reasonable time
- claim any compensation required
T can apply to court under s.146 for relief from forfeture
Note, there are additional considerations when exercising forfeiture for T’s breach of repairing covenant.
Landlord’s Remedies for breach of repairing covenant
Orange
(1) FORFEITURE
- only if right expressly reserved in lease
- if lease was originally granted for at least 7 years and there are at least 3 years left to run at the date of the s.146 notice, then the Leasehold Property (Repairs) Act 1938 will apply, under which:
- s.1 (1) LP(R)A 1938 - T can serve on L a COUNTER-NOTICE, within 28 days,
- if such counter-notice is served then, under s.1 (3), no proceedings to enforce right of re-entry of forfeiture (or damages!) may be taken exception with leave of the court
- leave will only be given if any of factors in s.1 (5) - in particular, that the immediate remedying of the breach is necessary to prevent a ‘SUBSTANTIAL DIMINUTION in the calue of the reversion (or that the breach has caused such)
- under s.1 (4), the s.146 LPA notice must be special - myst state the right of T to make counter-notice under LP(R)A 1938, and stae how, by when etc.
(2) ACTION FOR DAMAGES - s.18 LTA 1927
- s.18 LTA limits amount of damages recoverable to amount of any reduction in value of L’s reversion (likely to be tiny if its a long lease with many years left)
- but s.1 (2) LP(R)A 1938 applies here to - right for damages not enforceable unless first serve s.146 notice informing of right to serve counter-notice - then s.1 (3) applies (see above) - Leave would also be required for right to damages.
(3) SELF-HELP - JERVIS v HARRIS clause
- Landlord can enter the premises and carry out repairs himself, then seek reimbursement from (or sue) T to recover his costs in full
- Needs to be expressly reserved by a Jervis v Harris clause.
(4) SPECIFIC PERFORMANCE
- rarely granted
(5) RENT DEPOSIT?
- if L collected rent deposit from T before grant of lease, can draw necessary funds from that.
Alterations
Blue
Leases will normally allow T to make some alterations to property, but will normally be limited to minor, non-structural imporvements, requiring reinstatement at end of term.
L will need EXPRESS COVENANT to prohibit alterations - otherwise T free to carry out ANY alterations to the premises, as long as he does not ‘commit waste’ (devalue property).
ABSOLUTE PROHIBITION against alterations
- statute has no effect - need DEED OF VARIATION
QUALIFIED COVENANTS against alterations
- s.19 (2) LTA 1927 upgrades to fully qualified (consent not to be unreasonably withheld)
- but s.19 (2) does allow, as conditions for consent:
> payment/compensation for loss of value to reversion
> reinstatement of premises at end of term, if such requirement reasonable
> payment of landlord’s legal and other expenses in granting the consent.
LAMBERT v WOOLWORTH:
- “improvements”, for purpose of s.19 (2) LTA 1927 are works which improve the property from the Tenant’s perspective.
- Note: s.1 LTA 1988 does NOT apply to alterations - so no requirement that landlord must respond within a reasonable time (where covenant is fully qualified).
Other common provisions on alterations:
- requirement to obtain necessary statutory consents
- get planning permissions and not to apply for without L’s consent
- decorating covenants
- restrictions on display of signs / names
(Remember, landlord himself may need consents from the ultimate freeholder - as may appear in Official Copy)
DAVIES v DENNIS
- works of alterations could constitute a ‘nuisance’ - may breach a restrictive covenant registered against title of freeholder - so, if applies, will have to make sure works carried out at reasonable hours etc.
Use
AKA ‘User clause’
(Blue)
As with alterations, Tenant free to USE property as he wants, absent an express restrictive covenant on use.
Description of use in the lease may use descriptive wording (e.g. use as offices), OR may define use by reference to a use class in the Use Classes Order 1987
ABSOLUTE PROBITION against changing use
- again, no statutory intervention - need deed of variation
QUALIFIED COVENANT against changing use
- NO UPGRADE!
- s.19 (3) LTA 1927 prevents a landlord for charging a fee for consent to change use - but does NOT upgrade it to fully qualified.
(same other conditions also attach - landlord’s expenses etc.)
Service Charge
In lease of part, T will only be responsible for upkeep of its internal envelope.
L responsible for maintaing structure and common parts - will recover cost of this through service charge.
Make sure to cross-check the service charge obligation and the definition of T’s premises!
L will want definition of Services widely drafted to permit him to recover costs of more than essential maintenance and services - T will want it to be narrowly drafted, clearly setting out what Services are covered and with limited flexibility
(as improvements to the building for reparing latent or inherent defects should be borne by L, and not recovered from T through service charge!)
T will want to exclude liaiblity for services provided to unlet premises.
Often, fees of managing agents covered by service charge - T will want to negotiate a cap on those fees or agree that they must be ‘reasonably and properly incurred.’
L may want catch-all provision to recover costs for services it may provide in future; T should resist this and or ensure its not too wide - e.g. ‘L’s discretion is reasonable and in the interests of good estate management’.
Each T’s proportion of service charge to pay often calculated according to the internal area of its premises - but not always the case - e.g. ground floor only tenant won’t want to pay for maintaining lift! - Would need other Ts to pay more!
L must not be allowed to dilute its obligation to provide services to “such services it deems necessaru” or using “reasonable endeavorus to provide services” - should be a definite obligation!
T should resist L trying to make provision of services conditional on having paid the service charge - they should remain SEPARATE OBLIGATIONS.
L will want to limit liability to provide services if event outside its control happens. T should try to put obligation on L to use “reasonable/best endeavours to restore services as soon as possible”.
[Note: in residential context, money paid for service charge must be held on trust, subject to strict requirements and rights to inspect costs]
Alienation
Without express restrictions on alienation, T can do as it chooses.
As with use and alterations, ABSOLUTE PROHIBITIONS against alienation are not affected by statute - need deed of variation to get around.
s. 19 (1)(a) LTA 1927
- applies to ALL leases and ALL forms of alienation (i.e. assignments, subleases etc.)
- will convert a qualified covenant against alienation into a fully qualified covenant - so consent cannot be unreasonably withheld.
s. 19 (1A) LTA 1927
- only applies to covenants relating to ASSIGNMENT
- only applies in NEW COMMERCIAL LEASES
(i. e. after 1 Jan 1995 and commercial)
- Allows lease to specify a list of CIRCUMSTANCES in which landlord may withhold consent, without being subject to any reasonableness test.
- Also allows landlord to specify a list of CONDITIONS which must be satisfied before it will consent to assignment (e.g. AGA, guarantee, etc.)
s. 1 LTA 1988
- applies to all leases and all forms of alienation
- where there is a fully qualified covenant (i.e. consent not to be unreasonably withheld), the landlord must respond within a reasonable time
- either consent (with or without conditions) or refusal, together with reasons for refusal (if reasonable etc.)
DONG MANG MINERVA
- general rule that ‘reasonable time’ (for purposes of s.1 LTA 1988) = 28 DAYS.
- case only relevant to requests for alienation.
When is it reasonable or unreasonable to refuse consent?
INTERNATIONAL DRILLING FLUIDS
- will be reasonable to refuse consent if it refers to the relationship of landlord and tenant.
- e.g. not because you don’t like that tenant or their football team etc.
- this test applies to requests for consent for alienation, change of use and alterations.
ASHWORTH FRAZER
- if landlord anticipates a breach of a use covenant by an assignee, it will be REASONABLE to refuse consent to that assignment.
Types of Rent Review
STEPPED RENT
- L and T agree to increase the rent in fixed amounts each year
TURNOVER RENT
- rent assessed based on T’s turnover at the property (used in retail)
BY REFERENCE TO ANNUAL INFLATION
OPEN MARKET RENT REVIEW - the main one
- Periodic revaluation of the rent of property
- Based on what rent would be if premises were re-let afresh at the date of the review, by reference to internal factors (e.g. the covenants in the lease, how tenant friendly are they) and external factors (e.g. comparable rents in local area)
- Normally they are ‘upwards’ only
- Take care with L’s definition or ‘reviewed rent’ - should ideally be “rent at which premises could reasonably be expected to be let in the open market” - however, L may try to make it “best rent” - this would allow the valuer to take into account very high rent that potential tenants with a special interest in property might be willing to pay for it (e.g. occupiers of neighbouring premises).
Rent review clauses normally exist in leases over 10 years, and reviews take place at intervals of around 5 years.
ASSUMPTIONS
What assumtion should valuer make when undertaking rent review?
PROPERTY TO BE LET WITH VACANT POSSESSION
- fair to assume, as no hypothetical tenant would pay to rent property occupied by someone else!
TENANT HAS COMPLIED WITH ALL ITS OBLIGATIONS
- fair, as if T has not complied, likely to depress the rent.
- e.g. if T has failed to repair, property is in worse state, so rent a hypothethcial tenant would pay would be lower
- Tenant should not benefit from his own breaches
LANDLORD HAS COMPLIED WITH ALL OBLIGATIONS
- unfair to assume as T would suffer higher rent despite L breaching his obligations
- if L has failed to repair exterior, for example, property would attract a lower rent
- if valuer was to assume that L has complied with this obligation, L would benefit from his breach
DISREGARDS
What should the valuer disregard when making a rent review?
THE TENANT’S OCCUPATION OF THE PREMISES AND ITS GOODWILL THERE
- fair to disregard tenant’s occupation, as tenant would be prepared to pay a higher rent to stay in its current premises
- so this should be disregarded to acheive the rent a hypothethical tenant would pay
THE RENT REVIEW PROVISIONS IN THE LEASE
- unfair to disregard - this would make it appear more tenant friendly and therefore artifically inflate rent.
ANY INCREASE IN RENTAL VALUE ATTRIBUTABLE TO IMPORVEMENTS CARRIED OUT BY THE TENANT
- this would doubly penalise T, having paid for the improvements, and then having to pay a higher rent because of it.
ANY RENT FREE PERIOD
- depends, but usually unfair to disregard
- headline rent does not equal effective rent, but rent review figure will be based on a rent that appears higher than it actually was
- may be fair only to disregard rent free period if it was granted for fitting purposes only, since those types of incentives are not linked to a poor rental market
[see doc]
Old and New Leases
OLD LEASES
- Granted prior to 1 January 1996
- Original tenants remained liable for future breaches of ALL future tenants!
- The doctrine of ‘original tenant liability’
NEW LEASES
- Granted on or after 1 January 1996
- Abolished original tenant liability
- But Landlord can make an outgoing Tenant sign an ‘Authorised Guarantee Agreement’ - AGA - guaranteeing the liability of the immediate assignee
- under s.16 LT(C)A 1995
- But only the incoming assignesee! Once that assignee assigns to someone else, the original tenant is released of all liability
- Only applies in qualifying leases - means COMMERCIAL leases.
- Tenant can only be required to sign an AGA if the lease expressly provides for it.
- When enforcing an AGA , the original Tenant will only be liable for rent or other fixed sums due from an assignee if Landlord has served notiec on Tenant within 6 months of money becoming due - s.17 (2) LT(C)A 1995.
