Leasing and Letting Flashcards
Why was the RICS Professional Standard: Code for Leasing Business Premises (2020) introduced?
- To improve the quality and fairness of negotiations on lease terms
- To introduce a new set of comprehensive heads of terms to make the legal drafting of leases more efficient
What is the structure of RICS Professional Standard: Code for Leasing Business Premises (2020)
- Introduction
- Mandatory Requirements
- Lease Negotiation Best Practice
- Appendices
Talk me through some of the mandatory requirements under the RICS Professional Standard: Code for Leasing Business Premises (2020)
- Negotiations must be approached in a constructive and collaborative manner
- You must inform other parties of the existence of the code and recommend that they obtain professional advice
- As a minimum, HOTs must include the following:
- Identity and extent of the premises
- Length of the term, any incentives, break clauses, whether the lease is inside or outside the ‘54 Act, rent review basis and frequency, alienation provision, whether VAT is payable on rent, alteration rights, initial permitted use, any requirements for deposit/guarantor
What is included in part 3 of RICS Professional Standard: Code for Leasing Business Premises (2020)
Best Practice for Lease Negotiation - includes advice on clauses including rent reviews, alienation, service charge and repairs
What is included in part 4 of RICS Professional Standard: Code for Leasing Business Premises (2020)
Appendices - Model HOTs; guidance for landlords and tenants
Why is tenant selection important for landlords?
To ensure that they have a tenant who will be able to meet their lease obligations in relation to paying rent. If there is finance in place at a property, the repayments can be reliant on receiving rent.
Furthermore if a landlord wanted to sell an asset, the strength of the tenant covenant could significantly impact the sale price. A property with a weak tenant in place creates higher risk and therefore the price paid reflects this due to the increased likelihood of tenant default and void periods etc..
What are the requirements for a lease deposit?
It must be personal to the tenant and legally documents in a rent deposit deed
- money must be held in a separate bank account
- interest goes to the tenant
- terms for the release of the monies must be agreed and stated in the rent deposit deed
What other information would you request from a prospective tenant before agreeing to a lease on behalf of a client?
-Last 3 years’ audited accounts and a credit rating (e.g. D&B/S&P)
- Current/previous LL’s reference
- Can also do profits test
What is the profits test?
- A test to determine the affordability of rent for a prospective tenant
- Carried out by determining whether the business’ net profit is 3x the rent for 3 consecutive years or whether the net value of the business is 5x the rent
- You should consider the market conditions; if, for example, there is limited occupier demand, you may have to agree a lease with a tenant who does not pass the profits test. For additional surety, you could request a deposit.
what lease issues affect the value of a property?
The lease lengths / term certain
Break clauses
Alienation
Repairing obligations
User clauses (might be restrictive i.e. industrial if it’s not B8)
Rent review pattern (fixed uplifts, Inflation linked, OMV)
Security of tenure provisions
Inside the act or outside of the act.
If no mention of being inside the act then it is protected
Are there any pre-conditions to a break clause or is it open?
Yes there typically are pre-conditions to include:
o Full payment of rent and service charge payments
o Condition of the property (returning in good order)
o Leaving property with vacant possession
What is the difference between a sub-lease and an assignment?
A sub-lease is a relationship between the existing lessee and a new one. The sub-lessee has no relationship with the landlord and pays rent to the original tenant.
Assignment creates a direct relationship with the landlord and the new Tenant and payment of rent is directly to the landlord.
Are tenants able to assign or sub-let to whoever they want?
This depends on the individual wording in each lease. Leases can have absolute, open or qualified alienation clauses. Typically is says that consent is not to be unreasonably withheld but may include clauses that the tenant covenant has to have a similar covenant strength to the existing tenant or better etc.
what does the Landlord and Tenant Act 1988 say in relation to Alienation?
The aim of the legislation is that he landlord has a duty to deal with consents diligently and not be unreasonably withheld or delayed. Failure to do so can lead to a claim for damages from the tenant.
What does the Landlord and Tenant (Covenants) Act 1995 cover?
This relates to the assignment of leases and introduced AGA’s for the most recent former tenant to a guarantee the lease obligations.
Only one AGA in place at a time
Code for Leasing Business premises states that if a new tenant coming in is of strong financial status, a rent deposit is paid or a guarantor is provided, an AGA should not be sought by a landlord.
