Leasing and Letting Flashcards
What constitutes a lease?
· Exclusive occupation
· Defined demise / property
· Defined term
· Rent
What are the main principles of the RICS UK Commercial Estate Agency Professional Statement, 2016?
- Be fair, honest and transparent
- Due skill, care and diligence
- Terms of engagement
- Avoid conflicts
- Don’t discriminate
- Communicate in timely and fair manner
- Advertising honestly and accurately
- Hold client money separately and insured
- PII cover
- Ensure all parties are aware of your obligations
- Provide realistic assessments of value
- Act as per client’s wishes
What is included within the RICS Professional Statement – Code for Leasing Business Premises, 2020?
· Negotiations should be constructive and in good faith
· Unrepresented parties should be made aware of the Code and advised to seek expert advice
· Comprehensive HoTs must be agreed before solicitors instructed (16 main points)
What is included in ToEs for agency work?
- Agency rights (sole, joint, multiple)
- Client care/main contacts/person dealing
- Where disposal – address of property
- Scope of work – to dispose of X property, to acquire new premises
- Fee basis
- Professional Indemnity details
- Marketing costs and disbursements
- Terms of contract and termination options
- Complaints Handling Procedures/terms of business
- Anti-Money Laundering Regulation Requirements
- Remuneration (timescale)
- Confirmation of no conflicts
What are the different types of agency?
- sole agency – only one agent
- joint agency – two or more agents sharing a fee on a pre-agreed basis
- multiple agency – any number of agents but only the successful agent gets a fee
What would you include in a property marketing report to a client?
- Details of the subject property
- Current market commentary/conditions/demand
- Local area competition
- Comparable rental evidence/relevant transactions
- Recommended marketing materials and associated costs – brochure, photography, boards etc.
- Achievable terms/costs
- Comments on condition/specification of property and any recommendations prior to marketing – redecorate etc.
- Proposed fee basis of agency
What is the difference between a lease and a licence?
lease:
ability to pass or sublet
automatically runs for another year (tacit)
rent must be received
exclusive occupation
specified term
terms: landlord and tenant
license:
personal right (cannot be passed)
no tacit relocation
terms: licensor and licensee
What things do you consider when assessing the strength of a tenant’s covenant? *
- Usually request the past 3 years’ audited accounts
- Bank account information and trade references
- Previous landlord’s reference where applicable
- Credit check
What do you use to check credit of a tenant? *
- My firm primarily use Dunn and Broadstreet software which assesses a potential tenant’s, accounts and assigns a financial strength rating 5A, 4A, 3A, 2A, 1A, A, B ,C , D,E , F, G , H.
- It also assigns a risk rating between 1 and 4 with 1 being the lowest (minimal risk) and 4 (significant level of risk).
What do you look for when reviewing a prospective tenant’s accounts?
- Use the profits tests:
o Net profit of the business is 3 times the annual rent for 3 consecutive years
o Net asset value of the business is more than 5 times the value of the rent
If a tenant does not meet the profits test/has a weaker covenant, what devices would you consider? *
- Rental deposit
- Guarantee
- Sureties
What does the Estate Agents Act 1979 cover?
- Applies to individuals and firms, governed by the Trading Standard Offices of the local authority:
o Clarity – as to the terms of agency (section 18)
o Honesty and accuracy
o Agreement and liability for costs
o Openness – regarding personal interest (section 21)
o Absence of discrimination
o Legal obligation to tell client about offers received
o Keep client’s money separate - HA – Honesty and Accuracy
- T – Clarity on Terms of agency – s18 – specify all costs
- D – Absence of Discrimination
- O – Tell clients all Offers
- M – Keep clients’ Money separate
- A – Agreement and liability for costs – costs have to be itemised
P – Openness for Personal Interests – s21 - Section 18 – Terms of engagement, specify all costs/fees, itemise all payments – no global budget allowed – section 18 governs ToE for leasing and letting instructions
- Section 21 – disclosure of personal interests
Cooling off period = 14 days – clients can change mind
Personal interest should be stated on particulars and HOTs.
Specify nature of agency and selling rights to be agreed
Policed by Trading Standards Office for LA:
* Prohibition order – stop agent practicing
Warning order – written order telling the agent not to do it again – and/or fine
What are Heads of Terms?
- A document outlining the key points of a lease to be negotiated or agreed between a landlord and prospective tenant prior to agreement of any formal legal missives and signing of a lease
- HoTs are not legally binding
- Contents are important as they shall dictate the provisions within the lease
What might be included in a typical set of Heads of Terms for a lease?
- Landlord entity
- Proposed Tenant
- Solicitor’s details for both parties
- Agent’s details for both parties where applicable
- The subject property/demise
- Size of property – if this is accepted or to be verified via measurement/joint
measurement - Rent
- Incentive
- Deposits
- Service Charge
- Insurance
- LBTT & Registration fees
- Business rates
- Any additions such as parking or storage
- Alienation
- Alteration
- Permitted use
- Date of Entry
- Legal Costs
- Any necessary approvals (LL board approval)
- Writing (Scotland) Act 1995 – rules about which rights may be constituted orally and which require writing
Is there any caveat that you would include within Heads of Terms?
- In accordance with the Writing (Scotland) Act 1995, this letter is neither intended to create or to be relied upon as creating ay contractual relationship or commitment
What things do you consider when assessing the strength of a tenant’s covenant?
- Usually request the past 3 years’ audited accounts
- Bank account information and trade references
- Previous landlord’s reference where applicable
- Credit check
What is a salient lease clause
Salient lease clauses are the critical or most important clauses in a lease contract. These are the ones that have substantial impact on either the landlord or the tenant, or both. In other words, they define key terms of the agreement that are crucial for all parties involved to be aware of and understand
example of salient lease clause
- term of the lease,
- rent and rent review clauses,
- repair obligations, insurance and
- service charge provisions,
- any restrictive covenants,
- break clauses,
- options for renewal, and assignments and subletting rights.
- These clauses lay down the fundamental rights and responsibilities of both the landlord and the tenant.
Explain a break clause
Time of the essence, notice period typically 3-6m (depends on size)
Conditions:
* Up to date payment of rent and S/C
* Compliance with covenants
Vacant possession
What is a Calderbank letter?
- Based on the case of Calderbank v Calderbank (1975)
- It is a letter or offer used to achieve an early resolution of a dispute to prevent costs escalating
- The letter must be marketed ‘without prejudice save as to costs’
- It can be a tool for influencing costs as the losing party will have to pay for the other sides recoverable costs – it can avoid the equal awarding of cists
- The letter must set out the terms to settle the dispute and a time limit from which the other party must accept – this is usually 21 days
- It must be a genuine offer to settle
- The arbitrator is obliged to make an award for costs
What is included in Particulars
- Address
- Description
- Accommodation
- Parking and local amenities
- Registered title use class
- Service and utilities
- Measurement, floor plans and photos
- EPC Details
- Price or Rent
- Contact Information
If there is an error in Particulars, what could happen.
Misrepresentation Act 1967 – applies to mis-statements/ false/fraudulent statement or misrepresentations made during pre-contractual enquiries by the vendor or their agent to the proposed purchaser.
What is the Misrepresentation Act 1967
- The Misrepresentation Act 1967
o Relates to the misrepresentation or false statement of fact made by a party during pre-contractual enquiries
o The vendor and/or agent can be sued for damages and contract rescinded
o It is a civil office – actionable as tort
o Misrepresentation can be fraudulent, innocent or negligent
o Agent has a duty of care to check advice, information and opinion is reliable
o Exclusion/disclaimer may protect vendor and their agent if fair and reasonable
o Hedley Byrne Co Ltd v Heller Partners (1964) created THREE tests to decide an agent’s liability for negligent claims:
1. Forseeability – the damage was reasonable foreseeable
2. Proximity – relationship can be characterised in law as being sufficiently proximate
3. Fairness – it is regarded as fair, just and reasonable for such a duty of care to arise
ME Disclaimer – Misrepresentation Act
- Particulars are a guideline only
- All information is given in good faith and subject to change
- Purchasers/tenants must investigate and satisfy themselves information is correct
Areas and measurements are approximate and for identification only
What terms would be favourable for a landlord?
- High rent, able to achieve quoting
- Security – good tenant covenant or rental deposit
- Minimum incentive
- Longer term
- Rent reviews at ‘higher of’ or fixed
- No service charge cap
What terms are favourable when acting for a tenant?
- Lower rental, negotiated below quoting
- Avoid a deposit where possible
- Cap the service charge
Tell me when you would understand a lease to be concluded? *
- Exchange of formal letters ‘missives’ between solicitors – offers & final acceptance letter
- Land Registration (Scotland) Act 199 – ownership must now be virtually registered
What would be included in a normal marketing process?
- Dependent on budget and size/scale of property:
o Property particulars (internal/external)
o Online listings – agent website and external third parties such as Zoopla, Realla etc.
o Marketing video/virtual tour
o Email flyer to agents
o Erection of marketing board
o Agent tours/launch event
Social media post
What is alienation in commercial leases?
- Alienation is the clause that sets out the tenant’s right, or lack of right to assign or sub-let their lease interest
- Clauses may stipulate whether a tenant can do this in whole or part
- Conditions may be attached to this that assignee or sub-tenant must have a stronger covenant etc.
- Will ultimately be subject to landlord approval
- Sometimes will state that allowed without approval if to another company within tenant’s organisation or another department/body under the same parent co.
- For a sub-let may stipulate rental conditions i.e., tenant cannot profit from the rent and are only able to charge sub-tenant the current rent, s/c etc.
What is the difference between a sub-let and an assignation?
- In a sub-let, the original tenant passes the right to exclusive occupation but remains the Head Tenant, ultimately responsible for the fulfilment of the lease obligations, payment of rent, repair, dilapidations etc.
- An assignation sees the tenant assign in full the lease obligations to the new tenant, in this instance they are no longer bound by the conditions of the lease and the interest is now fully the responsibility of the new occupier
- Assignation not binding until formal landlord approval
- This assignation should be documented and registered as a deed and appended to the lease
- If lease sates ‘joint & several liability’ the original tenant may still be liable for costs/obligations
What would you do if your client was looking to assign their lease?
- Read the lease
- Obtain landlord’s consent
- Obtain licence to assign
- Deed of variation to document successful assignation
What are major lease issues that would affect property value?
- Lease length/term certain
- Break clauses
- Alienation
- Repairing obligations
- User clauses
- Rent review pattern and basis of valuation
- Impact of a restrictive lease clause (competitions proximity, retail examples)
- Planning use
Tell me about the Consumer Protection Regulations?
- Consumer Protection Against Unfair Trading Regulations, 2018
o These apply to all agency work – sales, lettings, online agency
o Principle-based regulations offering protection to all consumers in business to consumer activities
o Agents have a duty of care
o Agents must declare everything known about a property
o Agents must not exert undue pressure on buyers
o If information is discovered during the agency process, must be disclosed to all parties
o Any omissions can lead to a breach
o Full due diligence is required on all new instructions and must be verified by the client
o Policed by Trading Standards Office
o Disclaimers do not apply to this criminal offence - There are also Business Protection from Misleading Marketing Regulations, 2008 which apply to business to business activities
What are the differences between the Consumer Protection Regulations 2008 and the Misrepresentation Act 1967?
CPR
Applies during the entire agency process
criminal offence
penalty unlimited fine, prohibition order
prison up to 2 years
Misrepresentation
applies to miss statements, false or fraudulent statements during pre-contractual enquiries
civil offence
sued for financial damages
What taxes would you consider relating to agency work?
- VAT
- Lands and Buildings Transaction Tax on leases and purchases
- Capital Allowances
- Business Rates
- Capital Gains Tax
- Inheritance tax
Talk me through a closing date?
- Letter/notice issued in advance to all parties who have either formally noted interest or enquired about the property
- Set date and time for all offers
- Once all offers received, open with client and review together
- Where no conditions, accept highest offer
- Where conditions attached, review and advise client on recommended offer to accept
What would you do if an offer was received after the closing date?
- I would be obliged to report the offer to the client and it is their decision how to proceed depending on progress of any other offers
Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 (“S.63 Regs”)
- Regulations apply to buildings which have a GIA more than 1,000 sq m being offered for sale or rent to a new tenant
- Buildings constructed under Building Regulations prevailing 4th March 2002 onwards are exempt and leases for less than 16 weeks may also be exempt in some circumstances
- An “Action Plan” must be prepared by an accredited adviser prior to marketing and made available to prospective buyers and tenants
- The buildings energy and emissions performance must be:
o Improved within 3.5 years of the date of issue of the Action Plan, or
o Formally reported in an annual Display Energy Certificate
- Enforcement will be by the local authority
- Fines of £1,000 will be issued for non-compliance
The Scottish Government has signalled an intention to review energy efficiency regime for all buildings, potentially to introduce a MEES style approach
is it mandatory to have an epc for marketing a property
Yes, it is mandatory to have an Energy Performance Certificate (EPC) before marketing a property for sale or rent in the U.K., as stated in the Energy Performance of Buildings (England and Wales) Regulations 2012. An EPC provides potential buyers or tenants with information about the property’s energy use and costs, along with recommendations on how to improve its energy efficiency
is it mandatory to have an asbestosis report for marketing a property
it is not strictly mandatory before marketing a property. That said, the Control of Asbestos Regulations 2012 does require that any non-domestic property, which includes the common parts of blocks of flats and houses in multiple occupation (HMOs), built before 2000 should have an asbestos survey. If asbestos is found, a management plan has to be in place. When it comes to residential properties, although an asbestos survey is not explicitly required by law to sell or let, it would be considered good practice especially for older properties. This is particularly so given that asbestos was commonly used in building materials up until 2000 and if disturbed, it can be a significant health hazard. In some circumstances, such as significant refurbishment or demolition, a more detailed asbestos survey may be required.
What is the legislation that refers to money laundering?
Money Laundering, Terrorist Financing and Transfer of Funds Regulations, 2019
Money Laundering, Terrorist Financing and Transfer of Funds Regulations, 2019
Estate Agents Legal Obligations
- Act was amended in 2019 to require letting agents to register with HMRC within 12 months of May 2020 if they let individual properties for more than equivalent of 10,000 euros pcm.
- Government guidance: Estate agency guidance for money laundering supervision, June 2021. Includes requirements for sales agents as well
- CDD checks on vendors, purchasers, landlords and tenants will have to be undertaken on new sales or any letting or reletting
- EDD undertaken if red flags occur (e.g. involving high risk countries or non-face to face business relationships)
- Firms must have policies to identify and scrutinise transactions which are:
o Complex
o Unusually large
o Unusual patterns of transactions
o Without apparent economic or legal purpose - Firms must have group-wide procedures to share relevant information, and to train anyone capable of identifying or preventing money laundering or terrorist financing risks
Customer Due Diligence (CDD)
- Identify the client with passport or driving licence
- Identify the beneficial owners of the client
- For a company, its name, company number and register address
- The name of the directors (unless on London Stock Exchange)
Enhanced Due Diligence (EDD)
- Additional procedures required for business relationships with ‘Politically Exposed Person or a PEP family member / business associate
- PEP is a term describing someone who has been entrusted with a prominent public function
- PEP presents higher risk for potential involvement in bribery and corruption by virtue of their position and influence they may hold
Money Laundering, Terrorist Financing and Transfer of Funds Regulations, 2019
Other key requirements of the regulation:
- Firms must register with HMRC annually
- Limit of 10,000 euros for acceptance in cash
- Monitor ongoing business relationship
- A nominated person must be appointed to report any suspicions to the National Crime Agency
- Maintain records for a minimum of 5 years
Money Laundering, Terrorist Financing and Transfer of Funds Regulations, 2019
Penalties
- Maximum 14 years prison sentence and or unlimited fine for assisting
- Maximum 5 years prison sentence and or unlimited fine for tipping off a person by informing them they are under suspicion or for failing to report suspicion
When must a letting agent register with HMRC?
· If involved with lettings with rents greater than EUR10,000 per month
Do you need planning permission for marketing boards?
· No, if a flat board is under 2 sq m or under 2.3 sq m for V-board
· Must be removed within 14 days of completion
What RICS GUIDNACE IS THERE FOR LL
RICS UK Commercial Estate Agency Professional Statement, 2016
what does RICS UK Commercial Estate Agency Professional Statement, 2016 involve
Standards that provide comprehensive advice in all areas of commercial estate agency work. 12 core Principles:
1. Act in an honest, fair and professional manner
2. Carry our work with due skill, care and diligence
3. Terms of business that are fair and clear
4. Avoid conflicts of interest
5. Not to discriminate
6. All communications to be clear and timely
7. Marketing material to be honest and truthful
8. Clients’ money to be held in separate accounts
9. Hold appropriate PII
10. Make clear your obligations to your client / each party
11. Realistic assessments of prices / rents
12. All meetings, inspections and viewings to be carried out with clients wishes and safety
What does RICS Professional Statement on the Code for Leasing Business Premises (2020).
Professional Statement 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.
Provides an accompanying template HOT and checklist to be used for negotiation before the grant of a new lease.
red flags
- Inability or unwillingness of parties to provide identity documents
- Changes to parties involved in transactions
- Unusual transaction features e.g. unexpected urgency required by parties, potential loss-making or an unusual transaction for a client
- Payment of fees, purchase, or rental monies in unusual currencies
What is a Grade A industrial specification?
· 8m eaves
· 1 x loading door per 10,000 sq ft
Led Lighting
· 10-15% roof lights
· 5-10% office content
· 37.5 kN/m2 floor loading
· 3 phase power (415v)
· 40% site coverage
What is Grade A office specification?
· Full access raised floors with floor boxes
· 2.6 – 2.8m ceiling height
· Ceiling void of 350mm and raised floor void of 150mm
· Natural light of 300-500 lux average
· Floor loading of 2.5 – 3.0 kN/sq m
· Air conditioning and double glazing
· Planning grid of 1.5m x 1.5m
· 1 cycle space per 10 staff and 1 shower per 100
· 8m2 to 10m2 workspace density
What is the definition of Market Rent?
The estimated amount for a property may be lease between a willing lessor and lessee on appropriate lease in an arm’s length transaction, after a period of property marketing after both sides have acted knowledgeably, prudently and without compulsion
What do you understand about Asbestos?
· Covered by the Control of Asbestos Regulations 2012
· Three types (white, brown and blue)
· Duty of care is with landlord
· Risk assessment must be place and management plan
· No risk if undisturbed
What is MEES?
· Minimum Energy Efficiency Standards, 2015
· New leases from 1st April 2018 require an EPC – E or above
· Existing leases from 1st April 2023 require an EPC – E or above
· Exemptions for making improvements include:
o Greater than 7 years payback period
o 5% loss in value
o Lack of consent
· Does not apply to places of worship, listed buildings or for lease of less than 6 months and properties less than 50sq m
· Plan is to increase this to B for 2030, EPC needs to be commissioned 7 days after marketing begins, needs to be procured within 28 days
What did you mark your correspondence with?
“WITHOUT PREJUIDCE – so the tenant couldn’t rely upon any documentation or discussions held where representations made in litigation to a judicial or quasi-judicial body. The information is there privileged and cannot be used against the party that sent the email/letter
SUBJECT TO CONTRACT – proposed contract not legally binding “
How big was the unit in Livingstone
The Net Internal Area (NIA) of the Retail Unit extends to 1,290.7 sq ft (119.91 sq m).
Included in this, there is a separate Storeroom, which provides approximately 192.57 sq ft (17.89 sq m) of space.
What was the successful offer from WH Smith
Year 1 of £25,000 and we will also pay 8% on sales up to £400, 9% on sales over £500k, 10% over £600, and 12% over £700k
10 years break at end of Year 5
