Leasing and Letting Flashcards
What are the objectives of the code - RICS Professional Standard: Code for leasing business premises (2020)
To improve the quality and fairness of negotiations on lease terms and promote the use of a new set of comprehensive HoTs to make legal drafting leases more efficient
Are all parts of the code mandatory?
No, it provides mandatory requirements and guidance which is best practice
what other standard is there any how many points does it have?
RICS UK Commerical estate agency, 2016
What other key estate agency legislation applies?
Misrepresentation Act 1967
Estate agents act 1979
Consumer protection regulations 2008
What is the structure of the code for leasing
- Introduction
- Mandatory requirements
- Lease negs and best practice
- Appendices
Explain in the mandatory requirements how you must approach lease negotiations?
Constructive and collaborative manner
Mandatory requirements: What must you do if a party is unrepresented?
Advise them of the existence of the Code for Leasing Business Premises. You would also advise them to obtain professional advise
Mandatory requirements: how must you label HOT?
Subject to contract
Mandatory requirements: what are in hot?
The identify of the premises, the length of the term, whether it is in the 1954 act, break options, the rent, any incentives, , signs to assign / sublet, etc
if you are dealing with a lease renewal, do the HOT change?
You would include all of the same sections that are in the tenants existing lease
What should negotiations aim to achieve?
A letting term that is a fair balance between the parties having regard to their commercial interests
Best practice lease negotiations: what part of the code supports advice on lease terms, rent reviews, sc, etc?
3
describe section 3 - of the code?
It sets out different sections which can be found within the HOT and then guidance on how it should be dealt with. For example, in the 1954 act section, it says that upon finding out that the LL wishes to remove this, the tenant should be informed so they can obtain further legal advice
Where can you find model hots?
Appendices of the code.
Are the appendices mandatory?
no its guidance
Why might the landlord be concerned with the tenant?
Relationship between tenant covenant strength and investment value. Higher risk will mean a higher yield
How might a Landlord protect themselves against this?
Rent deposits or guarantee
How would a landlord decide on an appropriate level of deposit?
Depend on the risk of the tenant, personal.
Where would it be documented?
Legally documented rent reposit deed or separate bank account
What would happen to the interest on a deposit?
Payable to the tenant
how would you agree the release of the monies?
Release mechanism agreement to be stated in the deed
is the rent deposit deed part of the lease?
no, it is separate but attached to the lease
What might a Landlord look at to assess a prospective tenant?
bank, accountant and 2 trade references, previous Landlord reference, 3 years audited accounts, D&B ratings
What is the profits test? When would you use this?
Net Profit of the tenant must be 3 times the rent for 3 consecutive years OR the net asset value of the business must be more than 5 times the rent.
Also might want parent company.
are you qualified to comment on the accounts of a tenant?
I am not so I would inform whoever is asking to seek professional accountancy advice
What lease terms might affect value?
Length, term certain, break clauses, alienation, repairing, rent review, security of tenure, inside or outside the act.
How do you know if outside the act?
If there is no mention in the lease of it being contracted outside s.24-28 then it is protected
If there is an option to terminate at the break clause, what must you check?
Is it mutual? Do I need to serve notice if 1954 act, notice period, penalty?
What might a tenants right to break be conditional upon?
Complied with certain lease obligations, such as compliance with the tenants covenants, payment of all rent and other sums due, VP.
Why might occupiers consider pre-letting?
Market shortage or if they specific facilities. The main advantage is a bespoke delivery of a building.
What are the disadvantages of preletting?
Lengthy and complex process and level of risk in the event the developer or contractor does not perform.
What might you agree on a prelet?
agreement to lease
Wha’ts included in an agreement to lease?
The lease (to be completed once the developer has fulfilled the obligations) / License to Alterations / Specification and plans for the proposed scheme / Developer’s guarantee / warrantees / a collateral warranty
Whats a collateral warranty?
Gives tenants a direct contract with the construction, third party rights are increasingly popular as cheaper, quicker and more certain.
What are latent defects?
Not often covered, developers may put decennial insurance in place to cover risk.
What are warranties>
Any tenant who wants an FRI lease will want
What is alienation?
assignment / subletting
what is an assignment?
when the new tenant has the direct relationship with the landlord
What is a sublease?
when the new tenant has the direct relationship with the previous tenant, who pays the landlord rent
Do all leases allow alimentation?
no, you have to read the lease to find out. It may be subject to conditions. Some may allow one and not the other
Why might a landlord prefer to sub-let rather than assign a lease?
If it is not for the whole demise, if the tenant wants to reoccupy, or if the new tenant has a worse covenant
What would you consider?
read the lease, what will the effect on Investment value be, is there an AGA clause,
What do you need if you do give consent to assign or sublet?
a license. Including to sublet?
in terms of assignments: What is the advise in the RICS Professional Standard: Code for Leasing Businesses, 2020
landlords should allow tenants to assign the whole of the premises with consent, not to be reasonably withheld or delayed.
What does the RICS Professional Standard: Code for leasing Business Premises, 2020 advise in regards to refusal?
Landlords can refuse but these should be reasonable and appropriate
What is an AGA
authorised guarantee agreement. It is when the out going tenant agrees to guarantee the incoming tenants
In terms of Subletting: What does the RICS Professional Standard: Code for leasing Business Premises, 2020 advise?
leases should allow tenants to sublet, and may allow subletting in parts with landlords consent. Not less than the market rent, and on terms consistent with the tenants own lease
What is a cap and collar?
What are alterations
alterations carried out by the tenant during the lease
How must they be approved?
by the landlord in writing
what happens at the end of the lease?
they must be reinstated
Do all works require permission from the landlord?
depends on the lease, but it is likely that demountable partitions may not require formal consent
what is a license for alteration?
a license which is required by the tenant prior to commencing works
what is the purpose of a license to altar?
to protect the tenant at rent review and during dilapidations at the end of the lease
What are dilapidations?
a negotiation that occurs at lease expiry to bring the property back to its original condition
what is repairing liability?
where would you find a schedule of condition?
in the lease
What is building insurance and what does it cover?
usually arranged by the landlord and charged to the tenant, it covered reinstatement of the building in case of something like terrorism, but a range of things
Who is responsible for repairs on an FRI lease?
check
what factors impact MR? (L1)
location, specification, age, supply and demand levels
Level 2: explain the overview of the schedule of condition scenrio
1 Gresham Street
1,433 sq ft
£67.50 psf
6 months rent free
5 year term
Outside the act
What is a schedule of condition?
A schedule of condition limits a tenant’s repairing obligation in respect of agreed items of disrepair for the duration of the lease. Reinstatement at the end of the lease by the tenant will be limited by the terms of the schedule of condition
How is a SOC agreed?
Agreed by negotiations between the landlords prior to the commencement of the lease
Where should a schedule of condition be attached?
lease
When are schedules of conditions usually used?
Often used for new lettings where the landlord is not prepared to undertake the repairs
How should a schedule of condition be recorded?
Must be carefully recorded- often with supporting photographic records and plans
Was this an agreement for lease?
Because the grant of the lease was conditional on the landlord having completed the required fit out works, the transaction was structured as an Agreement for Lease and this was set out in the Heads of Terms, along with a layout plan of the fit out and the specification and timeline of the works.
What is always included in an agreement for lease?.
In an Agreement for lease there is always a longstop date which is the date by which time the works must have been completed by and if not the Tenant has the right to walk away. You exchange an Agreement for Lease (exchange is legally binding) and the lease then completes on completion of the works. Pre-lets, when a tenant commits to a building before it is finished, are also structured in this way
What is in an agreement for lease and how does it work?
An Agreement for Lease is a separate document to a lease and will contain all the conditions of lease grant, each party’s rights and generally lots of specification documents will be annexed to the Agreement for Lease. Once exchanged you are committed to the building unless one party does not comply with their obligations in the AFL.
Solicitors are responsible for drafting the agreement for lease and at heads of terms all we would do is reference that grant of the lease is contingent on X,Y and Z (in this case the landlord modifying the fit out) and include a date which both parties agree the work must be done by
What is the difference between fitting the space and furniture?
What is a formal photographic schedule of condition?
Photographs of all parts of the property on or before taking the lease. They must be dated and agreed by the landlord, keep a set within the lease documents. Should be prepared in sufficient time before the grant of the lease to allow parties to check for accurate records.
Why are fitted options more suitable for speed?
Meant the tenant could move straight in without having to fit the space.
What are the limitations of just issuing RFP on one option?
Not creating competitive tensions however, they really liked the unit and I managed to negtioate a good rental level.
Was it a mutual break clause? (L2) STB
Tenant only but no break penalty. If they don’t break a further 8 months rent free was agreed. - CHECK
Explain employee disruption?
In terms of commute times, the employees were happy at their current office so a key objective was staying close to x.
level 3: explain the the SC scenerio?
- 48-54 Moorgate
- 5th floor
- 1,855 sq ft
- £58.50 psf NIA
- EPC D
Was the cap subject to increase?
Annual CPI increase.
What is best practice when it comes to landlords and works?
Under best practice a landlord cannot enhance the building and put the cost through the service charge, they should only replace items at end of life or items when replacing them would be more economical than repairing them.
What was the service charge and what was the cap?
£17.50 psf SC and cap £19.25 psf. The reason it was quite high was due to the building being older and lift repairs.
What code is in place to follow?
RICS Service Charge Code
What are the differing rental values in the City compared to the West end?
West end £150 psf prime and City core £90 psf and docklands £57.50psf
Why does a straight 5-year term reduce the overall net effective rent?
Provides more security for the landlord.
level 3: explain scenerio for separate leaseS?
- SHARK NINJA 50 electric Boulevard London
- New building, agreement for lease
- £68.50 psf
- 10 year 5 year break
- 14 months rent free, 12 months if break not exercised
how much space did SN take?
30,000 sq ft across 8th and 9th floors.
Explain the alienation rights agreed for SN?
Assign or sublease, either whole of part of the lease at open market rental value subject to the lessors consent.
What else did you check for the duty of care for client? SN
This included ensuring the commercial terms were reflected in the lease and liaising with the client’s legal counsel. Ensuring the measured survey was correct and checking the service charge budget and the level of business rates payable.
What were the market conditions at the time?
We managed to agree a quite good deal because there was new developments, increasing the local supply.
Why was their headcount uncertainty?
The time in the market was till volatile due to the impact of Covid-19.
Why did they need furniture if the landlord was fitting the space?
this was an agreement between the landlord and tenant so reduce the fit out costs.
What is reinstatement liability?
legal obligation of a party, usually a tenant in a lease agreement, to return a property to its original condition before leaving, meaning they must repair any damages or alterations they made to the property, essentially “reinstating” it to its previous state as per the lease terms; this can include costs associated with fixing any damage or restoring the property to its original condition upon lease termination
Whats contained in an RFP?
CHECK
What is typically included in a service charge?
costs associated with maintaining and managing shared areas of a building, like building insurance, cleaning and maintenance of communal spaces, repairs to common areas, management fees, and contributions to a reserve fund for future major repairs, all as outlined in a lease agreement between the landlord and tenant
What do you mean by net effective rent? How is this calculated?
GROSS RENT – LANDLORD COSTS (EG. Incentives, top-ups). More accurate picture of what the vendor will receive.
What are the risks and benefits of taking two separate leases?
Risks – having to find a tenant to take over your current lease, this may involve costs. The benefits are flexibility.
