Leases: Complex Clauses, Termination and Remedies Flashcards
What is meant by ‘alienation’?
Alienation: The voluntary act of an owner of some property to dispose of the property
Alienation provisions deal with the tenant’s interest in the property, such as:
→ assigning it (selling the residue of the lease)
→ subletting;
→ charging it (creating a mortgage over the tenant’s leasehold interest).
If the lease contains no provisions regarding alienation, the tenant can deal with it as they wish (but this would be unusual).
Why must a property solicitor look at the alienation provisions in a lease?
When acting for a tenant, the alienation provisions must be carefully considered - including covenants within the lease. There are statutory protections that will be implied into some leases depending on the type of covenant.
What is an absolute covenant?
Prohibits the specified act from being carried out
What is a qualified covenant?
Does not absolutely prohibit the tenant from doing something but makes it conditional upon first obtaining the landlord’s consent. N.B: Does not imply any requirement for the landlord to act reasonably
What is a fully qualified covenant?
Requires the landlord to act reasonably in deciding whether to grant their consent.
Case law has interpreted what is reasonable behaviour.
How does a qualified covenant become a fully qualified covenant?
Effect of Section 19(1)(A) LTA 1927 (implied provision): Converts a qualified covenant against assignment into a fully qualified covenant against assignment
“The tenant shall not assign the lease without the landlord’s consent, such consent not to be unreasonably withheld.”
How is consent authorised by the landlord for alienation?
Given in the form of a licence - a licence to assign or sublet.
Consent to assigning a lease is granted via a ‘licence to assign’. This creates privity of contract between the landlord, outgoing tenant and assignee.
In what other situation is consent required from the landlord?
Change in use of the demised premises
Most leases will also impose an obligation on the tenant to apply to the landlord for consent to change the use of the demised premises (separate to planning permission)
What are the landlord’s rights where there is a qualified covenant relating to change in the use of the property?
Landlord cannot charge any fine or premium to tenant as a condition of giving consent, but landlord will be entitled to recover any reasonable costs that they incurred in giving consent
*N.B: Exception - unless change of use will involve structural work to the property
How can a tenant make alterations to the demised premises?
This is a situation where there is an absolute prohibition against the tenant making any alterations to the property.
However… note exception below:
S3 LTA 1927: Allows tenant to apply to court for the authorisation to make improvements to the property
What is the Code for Leasing Business Premises?
The objective is to improve the quality and fairness of negotiations on lease terms and to promote the issue of comprehensive heads of terms that should make the legal drafting process more efficient.
The standard and code do not prescribe the outcome, but seek to make it fair and balanced by identifying the terms that are usually important and encouraging both parties to obtain advice from property professionals.
This enables negotiations to proceed properly so that each party can make an informed decision about whether to proceed on the terms that they negotiate.
What are recommended practices written into the Code for Leasing Business Premises?
Alienation should be permitted, and consent should not be unreasonably withheld;
L should not impose any circumstances or conditions unless the assignee is of questionable financial position;
T should not have to enter into an AGA unless A is of questionable financial standing
When can a landlord terminate a lease by forfeiture?
A landlord can only forfeit a lease if:
1) [Provision made] There is a provision in the lease allowing the landlord the right of re-entry; OR
2) [Tenant obligation is breached] The tenant’s obligation is termed a condition in the lease - the right of forfeiture then arises automatically if the condition is breached. If a tenant’s breach continues (e.g tenant fails to repair demised premises in accordance with the lease), the landlord’s right to forfeit the lease also continues.
Why would the client be against forfeiture?
Serious consequence for client - landlord’s right to forfeit long residential lease that might have many years to run
When would a mortgage lender be against forfeiture?
Right to forfeit a long residential lease on the bankruptcy of tenant is not acceptable to any mortgage lender. This provision must be resisted by the tenant’s solicitor when the lease is granted.
What is the method of forfeiture for non-payment of rent? (Forfeiture 1 situation)
Forfeiture 1 situation…
A) Situation: Non-payment of rent by tenant - breach
B) Formal demand (by landlord): Landlord must make a formal demand for rent due - demand sum at the property on the day rent is due, unless this requirement is excluded in the lease or the rent is at least 6 months in arrears
C) Landlord may seek court order for possession if rent is still not paid
D) Landlord may effect forfeiture by peaceable re-entry (for commercial property)
What is the method of forfeiture for breach of covenants other than non-payment of rent? (Forfeiture 2 situation)
Forfeiture 2 situation…
A) Situation: Right of re-entry has arisen as a result of a breach of other covenant
B) s146 LPA notice: notice specifies the breach, requiring a remedy if possible within a reasonable time period and requiring compensation if desired
C) Tenant fails to remedy the breach
D) Landlord may seek a court order for possession or attempt peaceable re-entry (only for commercial properties)
When does the landlord waive the right to forfeit the lease?
Knows of the tenant’s breach
Does something / takes steps that recognise that the lease continues to exist (e.g demanded or accepted rent after being aware of the breach)
Communicates that act to the tenant
What are the tenant remedies available for forfeiture?
Remedied non-payment of rent: if all arrears and landlord’s costs are paid, the tenant is usually entitled to keep the lease
Court order for relief under LPA s146(2): For breaches of other covenants, tenant may apply for a court order for relief under LPA s146(2) any time before landlord re-enters the property. Relief is not available unless breach has been remedied.
What are the other methods of lease termination apart from forfeiture?
1) Expiry of the lease (“effluxion of time”)
2) Termination by notice (“notice to quit”)
3) Surrender and merger
4) Disclaimer
5) Frustration
Explain the termination method ‘expiry of the lease’
Where the lease is for a fixed period, it will automatically finish at the end of that period (even where tenant has option to renew for another period)
Explain the termination method ‘termination by notice’
A periodic tenancy will usually come to an end by either party serving written notice of the requisite length on the other.
Explain the termination method ‘surrender and merger’
Parties can agree to bring the tenancy to an end - known as ‘surrender’ and should be by deed.
If the landlord transfers the reversion to the tenant, this is known as a merger since the term merges with the reversion. The leaseholder and freehold interest fuse. In law, a tenant cannot be their own landlord
Explain the termination method ‘disclaimer’
Tenant may have the right to ‘disclaim’ the lease - tenant can be released from future liability. E.g company has gone into liquidation - the liquidator can disclaim the tenant company’s liability under the lease. TiB has similar powers in the event of personal insolvency of a tenant.
Explain the termination method ‘frustration’
Doctrine of frustration ends a party’s obligations under a contract if an event occurs due to the fault of neither party rendering the contract impossible to perform.
Lease will normally provide for parties’ rights and obligations if the premises can no longer be occupied.
What is a rent review clause?
In a commercial lease, there are three types of rent review - open market, turnover and stepped. Rent review provision must be inserted into the lease to change the rent
What are the landlord’s remedies for non-payment of rent?
- Debt action
- Taking possession of goods
- Forfeiture - Brings the lease to an end. If tenant is in breach of the repairing obligations, landlord must first give a s146 notice. The purpose of the s146 notice is to warn the tenant of the landlord’s desire to forfeit to give the tenant time to rectify the breach
NOTE: Notice under s146 Law of Property Act 1925: This must specify the breach, require the breach to be remedied within a reasonable time (if capable of remedy) and require the tenant to pay compensation to the landlord for the breach if required by the landlord
- Deduction from tenant’s rent deposit, and
- Commercial Rent Arrears Recovery (CRAR) - The tenant must be given 7 days’ notice of enforcement before the bailiff or enforcement agency can enter the premises.
What are the landlord’s remedies for other breaches?
- Injunction (prevent a breach, such as subletting)
- Specific performance (to remedy a breach, such as disrepair, and to force the tenant to carry out their repairing obligations)
- Damages (damages should not exceed the cost of the breach)
- Forfeiture (not an automatic right)
- Pursue guarantors
- Self-help / Jervis v Harris clause (must be expressly provided for in the lease)
What are the tenant’s remedies for breaches made by the landlord?
- Injunction (to prevent a breach of a negative covenant)
- Specific performance (performance of a repairing covenant)
- Damages (to restore the tenant to the position they enjoyed before the breach)
- Repudiation (can bring a lease to an end) and;
- Set off (tenant can give notice to landlord of their failure to carry out repairing covenants, carry out the repairs themselves, and deduct the cost in set off against any rent due)
