Leasing and Letting - L2

Question 1

What is the difference between a lease and a licence

Answer 1

Fundamentally, whether the occupant has exclusive possession or not, as per Street vs Mountford 1985. Mrs Mountford occupied two rooms with exclusive possession under a licence, however the court deemed that she actually had a Rent Act 1977 lease.

Question 2

What did the Landlord and Tenant (Covenants) Act 1995 change?

Answer 2

The act was introduced following numerous cases were a lease had been assigned and the original tenant was liable for breach of covenant of the new tenant, years later. The act abolished this (privity of contract) and introduced Authorised Guarantee Agreements (AGA’s) instead, where the original tenant acts as the new tenants guarantor. This makes tenants think more carefully about who they are assigning to, as they are liable if they default.

Question 3

How does the Landlord and Tenant (Covenants) Act 1995 relate to security of tenure?

Answer 3

Where a lease isn’t contracted out of the LTA 1954 Act s24 - s28, the landlord can require the original tenant to continue as guarantor under the statutory continuation of the lease.

Question 4

What are the requirements of a commercial Landlord when letting premises?

Answer 4

LTA 1985 = obtain an EICR
MEES = obtain EPC of minimum Band E
Gas = ensure it is safe at the commencement of a lease, however then refer to terms of lease during the term for responsibility.

Question 5

What is a service charge?

Answer 5

A service charge is a means by which a landlord can recover from tenants the cost of maintaining and repairing a building and providing certain services. Service charges in commercial property (September 2018) sets out they must be in accordance with the lease, can be no more than 100% of the actual cost, budgets and accounts should be submitted to the tenants annually and should be appropriate value for money. Examples = WC, kitchen facilities or utilities.

Question 6

What does the RICS Code for leasing business premises (Feb 2020) enforce?

Answer 6

Heads of Terms are mandatory, and must be marked SUBJECT TO CONTRACT. Sets out what must be included, such as extent of premises, length of term, renewal and break options, amount of rent, payment dates, deposit, service charge, whether the lease will be contracted out.

Question 7

What tenancies / occupancies are excluded from the Landlord and Tenant Act 1954?

Answer 7

Service occupancies
Short tenancies (6 months or less)
Agricultural Tenancies
Contracted out tenancies
Licences
Tenancies at Will
Residential Tenancies (s43ZA)

Question 8

What is security of tenure?

Answer 8

Covered under sections 24 - 28 of Part II of the LTA 1954, a commercial tenant has the right of statutory continuation and right to renewal.

Question 9

How do you contract out of security of tenure provisions?

Answer 9

Under section 38, you can contract a lease out of s24-28 -
If more than 14 days prior to the start of the lease = simple declaration
If less than 14-days prior to the start of the lease = statutory declaration signed in the presence of a solicitor of commissioner of oath (to ensure the tenant understands what they are signing).
The lease must also be explicit that it is contracted out.

Question 10

What is the difference between assignment and sub-letting?

Answer 10

Assignment is the legal transfer of the lease to a third party, usually used when the tenants has to sell the business. Sub-letting is an arrangement between the tenant and a third party for part or all of the premises to be used by them. Both require consent from the landlord.

Question 11

If a tenant wants to vacate the premises, what should they do?

Answer 11

They can merely vacate the premises on or just before the term date of the lease.
Serve a s27 notice, giving three months notice to bring the lease to an end on the contractual expiry, or where the lease has continued after that date too.
s27 cannot be served following a s26 request, nor can a s26 request be served after a s27.

Question 12

If the landlord wants to evict or renew the tenancy on or after the term date, what should they do?

Answer 12

Serve a section 25 notice, giving 6-12 notice to come into affect on or after the term date.
Form 1 = Does not oppose new lease, but wants to negotiate terms
Form 2 = Opposes new lease being granted and must state on what terms
Tenant has until the term date to serve s29 notice, applying to the court to resist.

Question 13

If the tenant would like a new lease at the end of the contractual term, what should they do?

Answer 13

Serve a section 26 notice, giving 6-12 months notice to come into affect on or after the term date, proposing the terms of a new tenancy.
Prescribed Form 3.
Landlord can serve counter-notice (no prescribed form) within 2 months and state on what s30 grounds they oppose the new lease on. Must also serve s.29 notice to refer to the courts.
If no counter-notice is served, Landlord can then not oppose the new lease, but can still negotiate terms.

Question 14

What is a section 29 notice?

Answer 14

A notice served by the Landlord or Tenant, referring the matter to court. The notice will lead to a preliminary court hearing.

Question 15

What are the s30 grounds for opposition?

Answer 15

7 grounds of which the Landlord can oppose the grant of a new lease -

A.) Tenant breach of obligation to repair (Discretionary)
B.) Tenant persistently late paying rent (Discretionary)
C.) Other substantial breaches of covenant (Discretionary)
D.) Landlord provides suitable accommodation (Mandatory)
E.) Property is uneconomically subdivided, were Landlord has inherited sub-tenants which prevent the Landlord selling or letting the whole premises (Discretionary)
F.) Landlord intends to demolish and/ or reconstruct premises (Mandatory)
G.) Landlord needs to occupy the premises (Mandatory)

Question 16

What happens if the court doesn’t grant Landlord vacant possession?

Answer 16

The court will grant a new lease with -
A term of 14 years maximum
With a market rent
The other terms will be guided by the original lease
The new lease will commence a maximum of 3 months after the court order

Question 17

What is the difference between Mandatory and Discretionary grounds for possession?

Answer 17

Mandatory - the court must order the tenant to leave if the landlord can prove that the ground applies
Discretionary - the court can only order the tenants to leave your property if the landlord can prove the facts which correspond with the ground and the judge considers it reasonable to make an order

Question 18

When could a tenant be entitled to compensation?

Answer 18

When a landlord has regained possession under the mandatory grounds (E, F or G). If the tenant has been in occupation for less than 14 years, they are entitled to 1x rateable value. If they have been in occupation for more than 14 years, they are entitled to 2 x rateable value.
Compensation for improvements is only available where it was authorised and there is an absence of a reinstatement clause. The amount payable is the lesser of the cost of the improvement at the end of the lease, or the increase in value to the reversion due to the improvement.

Question 19

Is there ADR specifically for commercial letting?

Answer 19

Yes, PACT (professional arbitration on court terms), where instead of making a s29 notice, the matter is referred to an independent third party expert who makes a legally binding decision. It is quicker and more flexible than court, also you are guaranteed to get an industry expert.
Set up by Law society and RICS.

Question 20

How would you review the rent under a commercial lease?

Answer 20

Firstly, refer to the tenancy agreement to ascertain what provisions had been set out, e.g. review dates and basis of review (open MR, linked to RPI, fixed increases).
The lease should set out what notice / procedure you must follow to review the rent, however the final agreed amount should be documented in a memorandum.

Question 21

What should you consider if the lease is over 7 years?

Answer 21

Under the Land Registration Act 2002, the lease must be registered with the Land Registry.
Also consider SDLT, however this is responsibility of the tenant and can be payable if the lease is less than 7 years also, dependant on the value of the lease.

Question 22

Can you agree a variation of the terms of a lease, during the term?

Answer 22

Yes, by Deed of variation, as drawn up by a solicitor.

Question 23

Who can draw up a Deed?

Answer 23

Under the Legal Services Act 2007, only authorised professionals are permitted to prepare Deeds.

RICS surveyors can only execute a Deed which creates, or relates to FBT’s. But cannot do the same for AHA’s, LTA 1954 and HA 1988 tenancies of over 3-years.

Question 24

What is a reversionary lease?

Answer 24

A lease that commences in the future.

Question 25

What things should you consider / check before accepting instruction to let a commercial property?

Answer 25

1.) Ensure I am competent enough and there are no conflicts of interest
2.) Comply with MLR (DD / is the rent over £10,000 per month?)
3.) Draw up Terms of Engagement

Question 26

What should you have in mind throughout the marketing and letting process?

Answer 26

Consumer Protection 2008
Business Protection from misleading marketing regulations 2008
RICS Real estate agency and brokerage professional statement - Aug 2016
Code for leasing business premises - Feb 2020

Question 27

When considering an applicant, how do you make your recommendations to the client?

Answer 27

I review the applicants audited accounts, complete general due diligence on the company, speak to the existing landlord and review third party referencing which can shows things like bankruptcies.
I then make my recommendation, along with whether a larger deposit should be obtained, a guarantor is required or payment in advance should be requested.

Question 28

What does the Real Estate Agency and Brokerage professional statement set out?

Answer 28

12 fundamental points -
1.) Honesty, fairness and transparency
2.) Skill, care and due diligence
3.) Terms of Engagement
4.) Avoid conflicts of interest
5.) Do not discriminate
6.) Communication is fair, timely and transparent
7.) Marketing material is honest and truthful
8.) Client money is held separately and under insurance
9.) Have proper PII
10.) Make clear scope of obligations to each party
11.) Give realistic assessment on MR or MV if requested
12.) Ensure safety when carrying our viewings and meetings

Question 29

What factors affect market rent?

Answer 29

Rent, location, nature of use / planning permission, size, business rates, terms of the lease, VAT, age and condition of the property, layout, asbestos, accessibility and parking.

Question 30

What planning permission did the let storage barn have?

Answer 30

B8

Question 31

What was the asking rent for the storage barn and how did you ascertain this?

Answer 31

£800 per calendar month - 215 sqm
Established through estate comparables as open market comparables were scarce. Obtained a high rent due to location of the barn.

Question 32

Why did you recommend a licence to bridge the gap for the old milking parlour and where there any other options?

Answer 32

A licence allowed the agreement to be of a definite term, as I ensure the maximum period was for 2 months, or upon the signature of the lease. A tenancy at will could have been used, however these are more for indefinite periods of time, at a low rent, whereas the tenants were paying the full rent during the licence period.

Question 33

If you had an licencee occupying a garage and you discovered that they were using it to carry out business activity, what would you do? The licences states that no business use is permitted.

Answer 33

The Landlord and Tenant Act 1954 does not cover licences, therefore in theory, security of tenure cannot be established.
However, I would open discussions with the licensor to establish what the use is and explain that notice needs to be served on the licence, but a commercial lease can be offered simultaneously to protect the landlords position.
Also, would need to consider if the landlord now needed to obtain commercial insurance, as it may currently be solely residential.