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APC > Leasing/letting > Flashcards

Leasing/letting Flashcards

1
Q

What is the key RICS Professional Statement on leasing/letting practices?

A

RICS Code for leasing business premises, 2020

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2
Q

When does RICS Code for leasing business premises, 2020 become effective?

A

1st September 2020

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3
Q

What is the aim of RICS Code for leasing business premises, 2020?

A
  • Improve the quality and fairness of negotiations on lease terms
  • Promote the issue of comprehensive heads of terms to make the legal drafting process more efficient
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4
Q

What are the FOUR sections of the RICS Code for leasing business premises, 2020?

A

Part 1: Introduction
Part 2: Mandatory requirements (Negotiations and heads of terms)
Part 3: Lease negotiation best practice
Part 4: Appendices
(Appendix A - Template heads of terms and checklist; Appendix B - Guide for landlords and tenants)

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5
Q

What does the RICS Code for leasing business premises, 2020 say with regards to the negotiations of heads of terms?

A
  • Must be approached in a constructive and collaborative manner
  • An unrepresented party must be advised about this code and must be recommended to obtain professional advice
  • The agreed terms of a lease must be recorded in written heads of terms and must summarise the position on a number of aspects
  • Negotiations should produce letting terms that achieve a fair balance between the parties commercial interests
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6
Q

What items must be addressed in the heads of terms according to the RICS Code for leasing business premises, 2020?

A
  • Identity and extent of the premises
  • Length of term and whether it is outside or inside the Landlord and Tenant Act 1954
  • Options for renewal or break rights
  • Requirements for a guarantor and/or rent deposit
  • Amount of rent, frequency of payment and whether exclusive of business rates
  • Whether the landlord intends to charge VAT on the rent
  • Any rent-free period or other incentive
  • Any rent reviews including frequency and basis of review
  • Liability to pay service charge and/or insurance premiums
  • Right to assign, sublet, charge or share the premises
  • Repairing obligation
  • Initial permitted use and whether any changes of use will be allowed
  • Rights to make alterations and any particular reinstatement obligations
  • Any initial alterations or fit-out (if known)
  • Any condition of the letting, such as subject to surveys, boards approvals or planning permission
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7
Q

What is contained within Appendix A of RICS Code for leasing business premises, 2020?

A

Template head of terms and a checklist, which can be used should the landlord wish to use their own form of heads of terms document

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8
Q

What is contained within Appendix B of RICS Code for leasing business premises, 2020?

A
  • Guide for landlords and tenants

* Supplemental to the professional statement and does not hold mandatory status

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9
Q

What is a lease?

A

A binding contract in law that sets out the terms and conditions of the tenancy between parties and their defined rights and obligations

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10
Q

What do rental guarantees typically cover?

A

Usually make the guarantor liable for the rent and the tenant’s other obligations, including service charge payments and repairs

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11
Q

Do tenants have to pay VAT on rental payments?

A

Depends if the property is ‘opted for VAT’ by the landlord

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12
Q

What does it mean to ‘assign’ a lease?

A

Transfer the lease to another party who takes over occupation and responsibility for the lease obligations

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13
Q

What does it mean to ‘sublet’ a property?

A

Existing tenant continues to hold the lease and pay rent to the landlord but sublets the space to another party, from whom the tenant will in turn collect rent

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14
Q

What is an AGA?

A
  • Authorised guarantee agreement
  • Requires the tenant who assigns a lease to guarantee the performance of the lease obligations by the party to whom the lease is assigned
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15
Q

What provisions can there be in the lease to mean that a tenant does not require an AGA to assign a property?

A
  • If the new tenant is financially strong enough

* If the new tenant pays an appropriate rent deposit and/or provides suitable guarantor

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16
Q

What is a ‘schedule of condition’?

A
  • Record of the condition of the property
  • Written description of the property or a set of photographs or both
  • Referred to in the lease and attached to it or kept with it
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17
Q

What should be the only condition on a tenant being able to exercise a break option, according to the RICS Code for leasing business premises, 2020?

A

Should only be conditional on the rent having been paid

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18
Q

What details with regards to the rent deposit should be included in the lease, according to the RICS Code for leasing business premises, 2020?

A
  • Amount (including whether it will include VAT)
  • Time it will be held
  • Whether it will be security for only the rent or all the tenant’s obligations under the lease
  • Circumstances under which the deposit will be returned to the tenant with any accrued interest
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19
Q

What details with regards to the rent review should included in the lease, according to the RICS Code for leasing business premises, 2020?

A
  • Proposed frequency of rent review
  • Method of rent review
  • Definitions of market rent should not result in a “headline rent” being adopted
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20
Q

What details with regard to the service charge and insurance payments should the landlord provide an indication of, according to the RICS Code for leasing business premises, 2020?

A

Should provide an estimate of service charges and other insurance payments

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21
Q

What is said with regards to assignment in RICS Code for leasing business premises, 2020?

A

Leases should allow tenant to assign the whole of the premises with the landlord’s consent, which is not to be unreasonably withheld or delayed

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22
Q

If a tenant’s repairing obligation are to be limited to the initial condition of the premises, what is required according to the RICS Code for leasing business premises, 2020?

A

Schedule of condition

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23
Q

Depending on the prevailing market conditions and strength of the tenant covenant, what can the landlord request for additional security if there is a tenant with a weak covenant strength?

A
  • Rent deposit

* Guarantor/personal guarantee

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24
Q

What should the landlord do when holding a rent deposit?

A
  • Personal to the tenant and attached to the lease as a separate deed
  • Legally documented in a rent deposit deed
  • Money held in a separate bank account
  • Interest retained by the tenant
  • Agreed terms for the release of the monies
  • Details of the release mechanism to be stated in the deed
  • Can include top up mechanisms for rent review uplift
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25
Q

What information would you typically request from a tenant when looking to assess their suitability?

A
  • Bank, accountant and two trade references
  • Previous/existing landlord’s reference
  • 3 years audited accounts
  • Business plan
  • Credit rating
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26
Q

What test can you use to assess the financial suitability of a tenant?

A

Profits test: net profit for the proposed tenant’s business 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)

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27
Q

What are the main lease terms that impact on the value of a property?

A
  • Lease length / term certain
  • Break clauses
  • Alienation
  • Repairing obligations
  • User clauses
  • Rent review pattern and mechanism
  • Security of tenure provisions (whether lease is inside or outside the Landlord and Tenant Act 1954)
  • Restrictive lease clauses
  • Planning use
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28
Q

What are the key things to consider when it comes to break clauses in a lease?

A
  • Whether it is mutual or in favour of one party
  • Whether time is of the essence
  • What the required notice period is
  • Whether there is a penalty to be paid if the lease is terminated
  • Whether the right to break the lease is dependent on preconditions being met
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29
Q

What are the typical conditions that are required to be met for a tenant to have the option to break their lease?

A
  • Compliance with their covenants
  • Payment of all rent and other sums due
  • Vacant possession
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30
Q

When is an occupier going to be more willing to consider a pre-let?

A
  • If there is a market shortage

* They need specific facilities

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31
Q

What is the main advantage of a tenant pre-letting?

A

They can have a bespoke building designed to suit their needs

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32
Q

What is the main disadvantage of a tenant pre-letting?

A

There is a level of risk in the event of the developer or contractor not performing

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33
Q

When a tenant pre-lets a building, what documents would typically be attached to an Agreement to Lease?

A
  • The Lease in a pre-agreed form, which shall be executed once the developer has fulfilled its obligations - usually Practical Completion of the work
  • Licence for Alterations - to allow the tenant to undertake fitting out works
  • Specification and plans of the proposed scheme
  • Developer’s guarantee/bond if dealing with a weak covenant
  • Warranties - any tenant taking an FRI lease will want collateral warranties form the professional team, main contractor and any sub contractors
34
Q

If a landlord is seeking to limit a tenant making changes to the property, what will they typically require?

A

Licence to Alter

35
Q

What did the changes in 2020 to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations require letting agents to do?

A
  • Letting agents have to register with HMRC within 12 months of May 2020 if they let individual properties for more than the equivalent of €10,000 per month
  • Where they undertake lettings of properties for more than €10,000 per month, they will have to undertake CDD check on landlords and tenants on any new letting or subletting
  • EDD will have to be undertake when any red flags occur
36
Q

Why might a freeholder not be supportive of a tenant subletting the property?

A
  • If they let it below market rent, it could set a new rental tone for the area. Leaseholder is simply trying to reduce their liability and so may accept below market rent
  • Sub-tenant may not perform the covenants of the lease e.g. repairing obligations
37
Q

What different types of alienation provisions can there be in the lease?

A

Assignment: transfer the lease
Sublet: under-let the premises
Sharing occupation: share occupation of the premises with a third party e.g. concession stand within a retail store
Charging: charging the lease to a lender i.e. used as security for a debtor

38
Q

When calculating what a property should be let for, would you do this on a headline basis or net effective basis?

A

Typically would calculate it on a headline basis but having regard to the tenant incentive granted

39
Q

On what grounds can a landlord reasonably refuse permission for a tenant to sublet or assign their interest?

A
  • Landlord must be satisfied that the assignee is able to pay the rent and comply with the lease covenants in the case of an assignment
  • Where a landlord owns numerous units, they are entitled to consider the type of business of the proposed tenant and whether it complies with their tenant mix policy
  • A landlord can refuse consent if the tenant will adversely affect the landlords existing rights and interest in the property
40
Q

After you have instructed solicitors, is there anything you would do to ensure that the leasing completes?

A
  • Ensure that conditions are met e.g. planning permission
  • Offer firms other services e.g. a building surveyor to conduct a schedule of condition
  • Answer any queries which the solicitor may have e.g. CPSEs
41
Q

What is an engrossment?

A

An engrossment is the final printed version of a lease that is then executed by the parties

42
Q

What typically occurs with the engrossment of the lease?

A

There will an engrossment of the lease and an engrossment of the counterpart lease. The tenant ends up with the lease executed by the landlord and the landlord ends up with the counterpart executed by the tenant

43
Q

Provide some reasons why you might sub-lease rather than assign a lease?

A
  • Requirement of the lease - (RTL!)
  • For part of the demise and not the whole
  • If the market rent is higher than the passing rent (face rent) then there is a profit rent
  • If the tenants wants to re-occupy in the future
  • The new party is of lesser covenant strength
44
Q

What should you always do when considering taking action against a landlord or tenant?

A

READ THE LEASE!!!

45
Q

What might you consider when dealing with an application for consent to assign or sub-let?

A
  • Read the Lease
  • Will the tenant give an undertaking for the surveyor’s and legal costs?
  • Is the proposed rent the market rent and /or the same as the passing rent?
  • What will be the effect on the investment value of the property?
  • What do the terms of the lease state regarding the grant of consent for assignment and sub-letting? Are there any reasonable grounds for withholding consent?
  • What is the strength of covenant of the proposed new tenant? Are there accounts and references to consider?
  • Has a rent deposit been agreed? Is there an AGA clause?
  • The client will need to be provided with a report setting out the surveyor’s recommendations
  • Obtain the client’s approval to proceed
  • If consent is to be granted, a license for assignment or sub-letting will be required.
46
Q

What is the aim of the Landlord and Tenant Act 1988?

A
  • To ensure that a statutory duty exists on the landlord to deal with consents (e.g. alienation) diligently and not to be unreasonably withheld or delayed (i.e. within a reasonable time)
  • Failure to do so can result in a successful claim for damages
47
Q

Tell me about the Landlord & Tenant (Covenants) Act 1995?

A
  • Relates to the assignment of leases
  • The Act abolished privity of contract for new leases
  • It gave landlords more scope for setting conditions regarding the approval of an assignee
  • It introduced AGA’s for the most recent former tenant only to guarantee the lease obligations of the immediate assignee as a voluntary arrangement to be agreed between the landlord and tenant
48
Q

Under the L&T (Covenants) Act 1995 what must a landlord serve to the guarantor if the tenant defaults on rental payments?

A
  • A Section 17 Notice must be served upon a guarantor within 6 months of the tenant defaulting to require the former tenant who has entered an AGA to pay the arrears
49
Q

How many AGAs can there be in place at one time?

A

One

50
Q

What does the Code for Leasing Business Premises, 2020 state on assignments and sub-lettings?

A
  • Leases should allow tenants to assign the whole of the premises with landlord consent, which is not to be unreasonably withheld or delayed.
  • Leases should allow tenants to sublet the whole of the premises and may allow subleases of parts, if appropriate without secuirty of tenure, and in each case with the landlord’s consent.
51
Q

Do alterations always need landlord consent?

A

No.

  • Alterations are usually approved in writing by the landlord prior to undertaking the works.
  • They are usually subject to reinstatement at the end of the lease.
  • Works such as demountable partitioning or other non-structural works may not require landlord’s former consent so always READ THE LEASE (RTL)
52
Q

What RICS document refers to licenses to alter?

A

RICS License for Alterations Guidance Note, 2013

53
Q

What does the L&T Act, 1927 state regarding tenant improvements?

A
  • If a lease prohibits improvements being made to a property without Landlord’s consent, section 19 of the Act imposes a proviso that such consent cannot be unreasonably withheld
  • If the Section 19 procedures have been followed, the landlord may be obliged to pay compensation for alterations that may constitute improvements
54
Q

When do dilapidations negotiations take place?

A
  • These negotiations take place at the lease expiry to bring the property back to its condition at the start of the lease assuming there is a repairing liability
  • Check the lease terms to understand the repairing responsibilities of both parties and whether there is a schedule of condition
  • Also check if any licenses to alter were granted
55
Q

How are dilapidations handled in terms of paying for the works?

A
  1. Tenant can do the agreed works, or
  2. Tenant can pay a sum to the landlord to undertake the works
56
Q

What notice must be served for dilapidations?

A

A Section 146 notice must be served in accordance with the 1925 Law of Property Act

57
Q

How are dilapidations costs limited?

A
  • Claim is limited to either the cost of the works or, in accordance with Section 18 of the Landlord and Tenant Act 1927, the diminution in value or the reversionary interest - i.e. the difference in value of the property upon possession had the covenants to repair and decorate not been undertaken.
  • If a landlord proposes to demolish or substantially refurbish the value of the reversion could be nil.
58
Q

What are the three forms of schedule of dilapidations?

A
  1. Interim Schedule - served by the landlord or tenant during the lease, with at least 3 years remaining
  2. Terminal Schedule - served normally in last 3 years of the lease
  3. Final Schedule - served at or after the lease expiry/break clause date when the tenant is out of occupation and the landlord wants to agree a claim for damages
59
Q

What is the format of a schedule of dilapidations?

A
  • Outline repairing obligations
  • State the remedy and cost of the breach
  • Loss of rent, if appropriate, over period to do the works
  • Fees + VAT for the claim for surveyors and lawyers
  • Negotiations conducted on a without prejudice basis until agreement reached
  • If agreement not reached, landlord’s surveyor may be required to prepare a Scott Schedule for the Court/ADR, setting out a summary of the landlord’s and tenant’s position
60
Q

Name the RICS document on dilapidations?

What is the aim of the document?

A
  • RICS Guidance Note on Dilapidations, 2016
  • Aims to reduce claims between landlords and tenants.
  • Key points include:
  • Substantial guidance on diminution valuations
  • Explores supersession the provision that the landlord can only claim the amount lost because of the tenant’s breach of the lease
  • Relates to interim and final claims in commercial property
  • Emphasises the importance of a careful and considered estimate of loss
  • Both parties are to keep to agreed timescales
  • Parties in a dispute are expected to act reasonably and make genuine endeavours to settle
  • Separates the role of a surveyor as ‘adviser’ prior to litigation and ‘expert witness· in any litigation
  • The ‘quantified demand’ is the complete statement of costs that are sought in damages - to include construction costs and other ancillary and consequential costs
61
Q

Why might a dilapidations claim not be settled?

A
  1. When the lease is not on full repairing terms
  2. Reinstatement not required by the landlord
  3. If a schedule of condition limits the repairing liability
  4. If the building is to be demolished or substantially refurbished after the lease expiry (If the value of ,
    the reversion ls nil)
  5. Use of the diminution in value cap
  6. Tenant has gone into administration
  7. When it is agreed between the landlord and tenant to roll over the claim until the end of the next
    lease granted
62
Q

How is insurance dealt with for a letting?

A

It is usually the responsibility of the landlord to arrange insurance and then re-charge back to the tenant.

63
Q

What would insurance usually cover?

A

It will cover for reinstatement of the building for a range of insurance perils (such as fire, storm, floor, subsidence, loss of rent & service charge, theft, terrorism, public liability etc.) plus VAT and fees, site clearance/ fencing/ demolition and inflation and loss of rent cover.

64
Q

When you have an empty building what should you consider?

A
  • Building insurance - tell the insurers it is empty and note their requirements
  • Maintaining the fabric of the building
  • Obtain an EPC, and consider MEES
  • Clear the building and remove any combustible material
  • Undertake and record regular inspections (for insurance purposes)
  • Undertake a health and safety and fire risk assessment of the building
  • lnform the local rating authority for the payment of empty rates
  • Arrange security and decommission services and isolate power supplies
  • Seal up the letterbox to help prevent arson and secure the property
  • Planned maintenance programme to include servicing of plant
  • Set frost controls and drain down the water
  • Agreement of a disposal strategy and marketing initiatives
  • Maintain the asbestos register
  • Landscaping/gardening
  • Residential squatting is a criminal offence which can be subject to police action (Legal Aid, Sentencing & Punishment of Offenders Act 2012). Commercial landlords must rely on common law powers to use ‘reasonable force’ to remove trespassers from land usually with the use of a certified bailiff or civil legal proceedings in the County Court
65
Q

Tell me about your understanding of ‘Repairs’?

A
  • ‘The meaning of repair is found in case law. Key principles which have emerged from cases such as
    Ravenseft Properties v Davstone (Holdings) Ltd (1978) are as follows:
  • Liability cannot arise in the absence of repair
  • Repair is distinct from renewal - a tenant cannot be expected to hand back wholly different premises
  • Tenants may be responsible for inherent defects
66
Q

What was stated by P. Roberts in the Estates Gazette in 2007 on repairs?

A

Repairs is not an improvement

67
Q

What is an effective FRI lease?

A

When the landlord is responsible for repairs & re-charges back to the tenant via the service charge.

68
Q

What are the four options a landlord has when dealing with a tenant who is not fufilling their repair obligations?

A
  1. Serve a repair notice
  2. Forfeit the lease
  3. Serve an interim schedule of dilapidations
  4. Do the works and charge the tenant
69
Q

What is involved with a Notice to Repair?

A

A Notice to Repair, served under Section 146 of the Law of Property Act 1925 may be served by the landlord during the lease, subject to terms of the repair works required required of the lease. Such notices are usually served to remedy one specific repairing or decorating breach. The notice must be in writing and comply with the terms of the lease.

The notice set out the following information:
* Details of the repairing or decorating breach which has occurred
* The timescale allowed to remedy the breach
* A course of action proposed if the teannt fails to remedy the breach

70
Q

What is the forfeiture process?

A
  • Firstly, there must be a forfeiture clause in the lease
  • A landlord wishing to forfeit the lease for disrepair will have to serve a Section 146 notice on the tenant
  • This should state why the tenant is in breach of the repair covenant and outline what must be done to remedy the breach
  • The tenant must be given a reasonable time to undertake the works
71
Q

What is involved in serving an interim schedule of dilapidations?

A

Instruct a building surveyor to prepare a draft or formal schedule to serve upon the tenant.

72
Q

What case law is there on a landlord entering a premises to do works and re-charge the tenant?

A

The leading case is Jerkis v Harris (1996) in respect of the landlord’s right to re-enterthe property to undertake the repairs, and then claim to recover the cost of doing so from the tenant as a debt, in the event of the tenant not complying with the repairing covenant of their lease. The clause requiring the tenant to reimburse the landlord for the cost of undertaking repairs was a debt and not damages. It was not a claim for compensation for the breach of the tenant’s covenant to repair, but reimbursement of the sum spent by the landlord.

73
Q

What did the Jerkis v Harris (1996) case give landlords the right to do?

A

This case gives the landlord a right to pursue an effective remedy against defaulting tenants, to ensure that the premises are kept in good repair for the duration of the term of the lease.

74
Q

Tell me about the Leasehold Property (Repairs) Act 1938?

A
  • The Act applies to leases granted for a term of 7 years or more, and has at least 3 year until the lease expiry.
  • It aims to protect tenants against onerous interim schedules of dilapidations.
  • The Act requires landlords to serve a Section 146 notice on the tenant.
75
Q

What four points must a landlord have to prove before a court can permit enforcement of a repairing covenant in line with the Leasehold Property (Repairs) Act 1938?

A
  1. Immediate remedy is necessary to prevent substantial diminution in the property reversion’s value
  2. Immediate remedy Is necessary to comply with current legislation
  3. If the tenant does not occupy the whole property, immediate remedy is required in the interests of another occupier
  4. The breach Is capable of immediate remedy at a relatively small cost compared with the consequences of postponement.
76
Q

What is used to limit a tenant’s liability to repair at the end of a lease?

A

A schedule of condition

77
Q

What is a schedule of condition used for?

A

They limit the tenant’s repairing obligation in respect of agreed items of disrepair for the duration of the lease.

78
Q

What do user clauses relate to?

A

The planning use of the property and/or how the property can be used.

79
Q

What are the types of user clause?

A
  • Planning use clause
  • Specific use clause
80
Q

Provide an example of a restrictive user clause.

A
  • Restriction on hours of working for hours or hours of use for industrial
81
Q

What is the difference between a license and a lease?

What is the key case law on this?

A
  • A lease grants exclusive possession of the property whereas a license does not.
  • Street vs. Mountford [1985] - In Street v Mountford the Court described this as follows: “The tenant possessing exclusive possession is able to exercise the rights of an owner of land, which is in the real sense his land albeit temporarily and subject to certain restrictions.

APC (20 decks)

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