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APC > Leasing/letting > Flashcards

Leasing/letting Flashcards

1
Q

What is the ultimate objective when leasing a property?

A

To advise your client to marketing strategy to achieve their goals – usually this is the highest rent to the strongest covenant for the longest lease

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2
Q

What RICS document is there that relates to leasing/letting?

A
  • RICS professional Standard: Code for Leasing Business Premises (2020)
  • Mandatory
  • Effective from 1st September 2020
  • Objectives of new Code:
    o To improve the quality and fairness of negotiations on lease terms
    o Promote the use of a new set of comprehensive HOTs to make legal drafting of leases more efficient
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3
Q

What is the structure of RICS professional Standard: Code for Leasing Business Premises (2020)?

A
  • Part 1: Introduction
  • Part 2: Mandatory Requirements
    o Negotiations must be approached in constructive and collaborative manner
    o Party who isn’t represented must be advised by the other party/agent about the existence of the Code and must be advised to get professional advice
    o HOT’s must include below as a minimum:
     Identity and extent of premises (Land registry compliant lease plan)
     Any special rights granted (e.g. car parking)
     Length of lease
     Inclusion/exclusion from 1954 LL&T Act
     Break clause
     Requirements for guarantor / rent deposit
     Rent, frequency of payment
     Whether exclusive of business rates
     If VAT is charged on rent
     Rent free periods / incentives
     RR basis of review and frequency
     Liability to pay SC and/or insurance premiums
     Rights to assign/sub-let/share
     Repairing obligations
     Permitted use and whether changes of use are allowed
     Alterations
     Reinstatement obligations
     Conditions
  • Subject to contract
  • Subject to surveys
  • Subject to board approval
  • Subject to planning permission
    o Lease renewal/extension, HOT’s must comply with above expert for any terms that are stated to follow the T’s existing lease subject to reasonable modernisation
  • Part 3: Lease negotiation best practice
    o Includes specific advice on lease terms to include rent deposits, RR’s, SC, repairs and alienation clauses
  • Part 4: Appendices
    o A: Model HoT’s
    o B: Guidelines for LL&Ts
     Detailed practical guidance for both parties on a range of lease terms and letting issues
  • Negotiation of HOT’s, rent deposit, SC etc.
  • Checklist of payment for occupancy costs
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4
Q

What is the purpose of the RICS Professional Standard – Code for Leasing Business Premises (2020)?

A
  • Leases should allow tenants to assign the whole of the premises with the LL’s consent NTBUWOD
    o LL’s may set out circumstances for refusal (should be reasonable and appropriate)
    o Requirement for AGA clause should be stated in lease
  • Leases should allow tenants to sublet the whole of the premises and may allow subleases of parts, if appropriate without security of tenure, with LL’s consent NTUWOD and at a rent not less than market rent
    o Subleases should be required to be on terms consistent with the tenant’s own lease
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5
Q

What are the key lease terms that affect the value?

A
  • Lease length / term certain
  • Alienation – subletting/assignment
  • Alterations
  • Repairing
  • Dilapidations
  • Insurance
  • User clause
  • Break clause
  • Rent review pattern and basis of valuation
  • Security of tenure provisions
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6
Q

What types of alienation provisions can you have?

A
  • Open – allowing alienation
  • Qualified – subject to some conditions
  • Absolute – not allowing a sub-letting or assignment
  • Usual clause is that the LL’s consent is NTBUWOD
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7
Q

What is the difference between an assignment and a sub-letting?

A
  • With an assignment, the new tenant (T2) has a direct relationship (privity of contract) with the landlord
  • Whereas, with a sub-letting, the new sub tenant (T2) has a direct relationship with the tenant (T1) and pays them the rent, who then pays rent to the landlord
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8
Q

Why would you want to sub-let rather than assign?

A
  • Requirement of the lease
  • For part of the demise and not the whole
  • If the market rent is higher than the passing rent which generates a profit rent
  • If the tenant wants to re-occupy in the future
  • The new party is of a lesser covenant strength
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9
Q

What would you do if you received an application for consent to assign/sub-let?

A
  • Read lease
    o Does it allow for sub-letting/assignment
    o Are there any reasonable grounds for withholding consent
  • Is proposed rent the market rent and/or same as the passing rent?
  • What will impact be on investment value?
  • What is covenant strength of new tenant?
  • LL’s remedies for illegal alienation: forfeiture, damages or an injunction
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10
Q

What is the LL&T Covenants Act 1995?

A
  • Relates to assignment of leases
  • Act abolishes privity of contract for new leases
  • Pre 1995, all tenants had privacy of contracts which meant that they were responsible for the obligations under the lease even if they’d assigned or sublet
  • LL&T Covenants Act 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 LL&T
  • 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
  • Can only be one AGA at a time
  • AGA’s should be avoided if the new tenant is financially strong enough =, pays an appropriate rent deposit and/or provides a suitable guarantor
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11
Q

What is the current legal position of an AGA?

A
  • G1 may guarantee T1’s obligations in an AGA (and so indirectly guarantee T2’s performance of covenants)
  • G1 cannot direct guarantee the performance of T2’s obligations
  • G1 cannot take an assignment from T1
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12
Q

How might a landlord protect their position/investment if a tenant wishes to assign to a weaker covenant?

A
  • They can request an AGA as set out in the LL&T Covenants Act 1995
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13
Q

Does an AGA also affect sub-lettings?

A
  • No because the landlord doesn’t have a contractual relationship with the sub-tenant
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14
Q

What are alterations?

A
  • Alterations are carried out by a tenant during the lease
  • They must usually be approved in writing by the landlord prior to undertaking the works
  • They are usually subject to reinstatement at the end of the lease
  • Some works such as demountable partitioning or other non-structural works may not require LL’s formal consent so always read lease
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15
Q

What document is required before the tenant makes alterations?

A
  • License for alterations
  • To be completed before the works commence
  • Most licences require the tenant to reinstate the works at the end of the lease
  • Licence must clearly document the works agreed
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16
Q

What is the purpose of the license for alterations?

A

To protect parties at rent review and dilapidations at the end of the lease

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17
Q

What do you do if you receive an application for consent for alterations?

A
  • Read lease – do you need LL’s approval for changes/improvements to the demise (consent isn’t always required)
  • Ask for full set of plans and specification
  • All alterations need to be documented
  • Check long term impact (if tenant defaults)
  • Consider if reinstatement is required at the end of the lease
  • Check equality act 2010 and CDM 2015 compliance
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18
Q

What are the main points of the LL&T Act 1927?

A
  • If a lease doesn’t allow improvements being made to a property without LL’s consent, s.19 imposes a proviso that such consent cannot be UW
  • If the s.19 procedures have been followed, the LL may be obliged to pay compensation for alterations that may constitute improvements
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19
Q

What’s an implied covenant?

A
  • Relates to residential premises
  • Contract interpretation to ensure that the parties’ reasonable expectations are fulfilled
  • For business premises, if there are no express covenants, the tenant is required to use the premises in a tenant like manner
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20
Q

What’s an express covenant?

A
  • A covenant where there is a specific order (e.g. keep in repair, leave in repair, put in repair, fair wear and tear)
  • Most leases contain an express covenant stating “the tenant should not make any alterations or additions or improvements to the demised premises without the prior written consent of the landlord (NTBUW)”
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21
Q

On what grounds could the landlord refuse consent?

A
  • Poor Covenant
  • Poor or undesirable use
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22
Q

What could the landlord do if the tenant had a poor covenant strength?

A
  • Refuse consent
  • Request additional security such as a rent deposit or guarantee
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23
Q

What are the requirements of a rent deposit?

A
  • Must be personal to the tenant
  • Must be legally documented in a rent deposit deed
  • Money held in separate bank account
  • Interest to tenant
  • Agreed terms for release of money
  • Details of how the money will be released
  • Can include top up mechanism for RR uplifts
  • Rent deposit deed attached to lease is separate deed
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24
Q

What do you request from the tenant as a minimum to check their covenant strength?

A
  • 3 years audited accounts
  • Business plan
  • Credit rating (D&B)
  • Previous/existing LL reference
  • Bank, accountant and 2 trade references
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25
Q

What are dilapidations?

A
  • Always read lease and see if there is a SoC and any licenses for alterations
  • Tenant is usually required to return the building to its original state, or otherwise stated in the lease
  • These negotiations take place at the lease expiry to bring the property back to its condition at the start of the lease assuming that there is a repairing liability
  • S.146 notice must be served (usually draft version informally first)
  • Claim is limited to cost of works or in accordance with s.18 of LL&T Act 1927, the diminution in value of the reversionary interest
  • If LL proposes to demolish/substantially refurbish, the value of the reversion could be nil
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26
Q

What are the two options that tenants have before the lease expiry date?

A
  • Tenant can do the agreed works
  • Tenant can pay a sum to the LL to undertake works
  • Breach + loss + evidence = recovery
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27
Q

What types of dilapidation schedule are there?

A
  • Interim schedule – served by LL/T during lease with at least 3 years remaining
  • Terminal schedule – served in last 3 years of lease
  • Final schedule – served at or after lease expiry/break when tenant is out of occupation and LL wants to agree a claim for damages
28
Q

What is the format of a dilapidations schedule?

A
  • Outline repairing obligations
  • State the remedy and cost of breach
  • Loss of rent, if appropriate, over period to do the works
  • Fees + VAT claim for surveyors and lawyers
  • Negotiations conducted on a without prejudice basis until agreement reached
  • If agreement not reached, LL’s surveyor may be required to prepare Scott Schedule for the court/ADR
29
Q

What RICS guidance is there on dilapidations?

A
  • RICS Guidance Note on Dilapidations (2016)
  • Aims to reduce claims between LL&T’s
  • Key points:
    o Substantial guidance on diminution valuations
    o Explores supersession (the provision that the LL can only claim the amount lost because of the T’s breach of the lease)
    o Relates to interim and final claims in commercial property
    o Parties should act reasonably and make genuine endeavours to settle
30
Q

Why might a dilapidations settlement not be agreed?

A
  • When the lease is not on full repairing terms
  • Reinstatement is not required by the LL
  • If a SoC limits the repairing liability
  • If building is to be demolished/substantially refurbished after lease expiry (if value of reversion is nil)
  • Tenant has gone into administration
  • When LL&T agree to roll over claim until end of next lease granted
31
Q

Who is usually responsible for paying the insurance in a commercial business tenancy?

A
  • The LL to arrange and re-change the tenant
  • Cover for reinstatement of the building for a range of insurance risks (such as fire, flood, loss of rent & SC, theft) + VAT + fees
32
Q

What actions should a property manager take if a building is empty?

A
  • Building insurance
  • Obtain EPC (and consider MEES)
  • Undertake H&S and fire risk assessment
  • Inform local rating authority for payment of empty rates
  • Arrange security
  • Decommission services and isolate power supplies
  • Maintain asbestos register
33
Q

What is a forfeiture clause?

A
  • A forfeiture clause in the lease allows the LL to re-enter the property and gain possession for a breach of the lease (by peaceful re-entry or starting court action), but procedures must be followed and relief offered to the tenant
  • There must be a forfeiture clause in the lease
  • Special procedure for tenant in administration
34
Q

Tell me about repairing obligations?

A
  • Key case: Ravenseft Properties v Davstone
    o The tenant covenanted to repair, renew and uphold
    o There was defective stone cladding due to thermal expansion and the tenant claimed that it was an inherent defect
    o It wasn’t their responsibility (the cost of the works being £55,000), the court found in their favour
  • Liability cannot arise in the absence of repair
  • An effective FRI lease is when the LL is responsible for repairs and re-charges via the service charge
  • Tenant may be responsible for inherent defects
  • Repair is not an improvement
  • Repair is distinct from renewal – a tenant cannot be expected to hand back wholly different premises
35
Q

What can the landlord do if a tenant has breached repairing obligations?

A
  • Serve a repair notice
    o S.146 of Law of Property Act 1925 served by LL, subject to repair works required by the lease
    o Notices are usually served to remedy one specific repairing or decorating breach
    o Must be in writing and comply with lease terms
    o Normally served by solicitor
    o Notice sets out:
     Details of repairing/decorating breach which has occurred
     Timescale to remedy the breach
     Action course proposed if tenant fails to remedy breach
  • Forfeit the lease
    o Must be a forfeiture clause in the lease
    o LL wishing to forfeit lease for disrepair will have to serve s.146 notice on the tenant
     Should state why tenant is in breach of the repair and outline what must be done to remedy the breach
     Tenant must be given reasonable time to undertake works
  • Serve an interim schedule of dilapidations
    o Instruct building surveyor to prepare draft/formal schedule to serve the tenant
  • Do the works and charge the tenant
    o Leading case: Jervis v Harris
     LL’s right to re-enter the property to undertake repairs and then claim to recover the cost of doing so from the tenant as a debt (not damages), in the event of tenant not complying with the repairing covenant of their lease
     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 LL
    o LL has right to pursue an effective remedy against defaulting tenants, to ensure that premises is kept are kept in good repair for the duration
36
Q

How long would a tenant have to remedy the breach as per the section 146 notice / how long does the landlord have to wait before they can actually forfeit the lease for failure to repair?

A

6 months

37
Q

What is a schedule of condition?

A
  • These limit the tenant’s repairing obligations in respect of agreed items of disrepair for the duration of the lease
  • It is agreed by negotiation between LL&T prior to commencement of the lease and attached to lease
  • Often used for new lettings where LL not prepared to undertake repairs
  • Must be carefully recorded – often with supporting photos and plans
38
Q

What is the service charge?

A
  • These are charges to tenants of multi-tenanted properties or estates of costs incurred by a LL to maintain and manage a property
  • No specific legislation covers commercial SC (only for residential)
  • Many prospective tenants aim to negotiate SC caps, fixed increases or link increases to Retail Price Index (RPI) or Consumers Price Index (CPI) to limit their future liability
  • Check provisions of the lease and remember that LL’s must be liable for voids
39
Q

What are the usual arrangements for service charge?

A
  • service charge budget should be agreed with tenant prior to commencement of the service charge year
  • quarterly billings are based on this estimate
40
Q

What is a user clause?

A
  • Relates to planning use of the property and/or how the property can/can’t be used
  • 2 types of clauses – refer to planning use and specific uses
  • Change of use is usually subject to LL consent NTBUW
  • There is now an E category which opens up a lot of uses
  • Restrictive user clause can depress market rent (e.g. restriction on hours of working for offices)
    o Case law:
     Plinth Property Investments v Mott Hay & Anderson – substantial reduction in rent was given at rent review because user clause relating to its use as offices used by consulting engineers
     Co-op v Argyll Stores – Coop owned a shopping centre in Sheffield with Safeway as a tenant but Safeway were making losses and decided to close the store. Lease stated that they had to keep shop open and trading. Court held that they did not have to re-open
41
Q

What are the user classes?

A
  • Class B – Industrial
  • Class C – Residential
  • Class E – Commercial, Business and Service
  • Class F – Local Community and Learning
42
Q

If a tenant client says that they want to get rid of their liabilities of their lease because of the general state of the economy, pandemic, war, etc, what would you suggest?

A

Surrender the lease back to the landlord

43
Q

What is the process of surrendering the lease?

A

You would look at all the current liabilities including the dilapidations and then produce a surrender premium which you could negotiate with the landlord. The landlord is under no obligation to accept a surrender

44
Q

Why might the landlord accept a surrender?

A

If they are able to find another tenant with a stronger covenant or higher rent or if they want to redevelop the property

45
Q

What do you need to check for if there is a break clause?

A
  • Time is of the essence – strict timetable for serving notice
  • Is it mutual or LL/T only?
  • Is there a penalty rent?
  • Is clause personal to original tenant?
  • Are there any pre-conditions for the option or is it an open break clause?
    o Pre-conditions can include full payment of rent/returning premises in good order
  • Tenant’s right to break is often condition upon having complied with certain lease obligations
    o Compliance with tenant’s covenants
    o Payment of all rent and other sums
    o Vacant possession
46
Q

Why would occupiers consider pre-lets?

A
  • Delivery of a bespoke building designed to suit their needs
  • If there is a market shortage
  • They need specific facilities
47
Q

What is the disadvantages of pre-lets?

A
  • Entering a lengthy and complex process
  • Level of risk in event of developer or contractor not performing
48
Q

What is the legal framework required to be attached to an agreement to lease for pre-lets?

A
  • Lease
    o In a pre-agreed form, which will be executed once developer has fulfilled obligations under Agreement to Lease – usually at practical completion of work
  • Licence for Alterations
    o to allow tenant to undertake fitting out works
  • Specification and plans of proposed scheme
  • Developer’s guarantee/bond
    o if dealing with weak covenant
  • Warranties
    o any tenant taking an FRI lease will want collateral warranties from the professional team and contractors with any design input
  • Collateral warranty
    o Gives tenants a direct contract with the construction team (privity of contract)
    o Rather than obtaining collateral warranties from the professional team, 3rd party rights are more popular as a cheaper, quicker, more certain way to give tenants potential recourse
    o Most developers are unwilling/unable to give guarantees for latent defects and may put decennial insurance in place to cover this risk
49
Q

What is the core material published by the RICS for Estate Agency?

A
  • RICS Global Estate Agency and Brokerage Professional Statement, 2016
  • RICS are working on reviewing and refreshing existing body of standards and guidance
50
Q

What is the UK mandatory professional statement for RICS members involved in agency and real estate management work?

A

RICS Professional Statement – UK Commercial Estate Agency (2016)

51
Q

What are the 12 key principles which agents must observe from the RICS Professional Statement – UK Commercial Estate Agency (2016)?

A
  1. Act in an honest, fair, transparent and professional manner
  2. Carry out work with due skill, care and diligence and ensure all staff have the necessary skills to carry out their work
  3. Ensure that clients are provided with terms of business that are fair and clear, with details of the firm’s CHP
  4. Avoid COI and where they do exist, deal with them openly and fairly
  5. Do not discriminate
  6. All communication with clients is fair, clearly, timely and transparent
  7. All advertising and marketing is honest and truthful
  8. Any client money is held separately and is covered by adequate insurance
  9. Hold appropriate PII/errors or omissions insurance to ensure a customer doesn’t suffer loss because of negligence act
  10. Make it clear the identity of your client and ensure all parties are clear of your obligations to each party
  11. Give realistic assessments of selling prices/rents/financial costs having regard to market evidence and using best professional judgement
  12. Ensure all meetings, inspections and viewings are carried out in accordance with the client’s wishes having due regard to security and personal safety
52
Q

What other advice does the statement provide?

A
  • Acting ethically
    o Duty of care
    o Gifts and incentives
    o Dealing with COI
  • Securing instructions
    o Legal requirements
    o AML checks
    o Types of agency
    o H&S
  • Marketing the property
    o Legal requirements
    o Market appraisal
    o Preparing brochure
  • Implementing the disposal
    o Methods of sale
    o Legal requirements
  • Acquisition of the property
    o COI
    o Client communication
    o Progressing purchases
53
Q

What RICS document is there for property marketing of residential property?

A
  • RICS Professional Statement – UK Residential Real Estate Agency (2017)
  • Provides a summary of code of practice in all aspects of property marketing for residential property
  • Contains:
    o Relevant estate agency legislation
    o Standards and ethics
    o Before securing instructions
    o Property marketing
    o Acting for the vendor, purchaser and LL
    o Ending the instruction
54
Q

What are business rates?

A
  • National taxation collected locally
  • An assessment of the annual amount the property would rent if it were available to let on the open market at a fixed valuation date
  • Estimate is made by the Valuation Office Agency (VOA)
55
Q

What is the current uniform business rate for 2023/2024?

A
  • £0.499 for RV’s of less than £51,000 (small business multiplier)
  • £0.512 for RV’s of £51,000 or more
  • Different multipliers apply to different geographical areas such as City of London, Wales and Scotland
56
Q

Do you have to pay rates if a building is empty?

A
  • Yes but you get:
    o 3 months relief for offices/shops
    o 6 months relief for warehouses/industrial
  • Exemptions:
    o Vacant listed buildings
    o Charities
    o When RV is less than £2,900
    o Properties held by companies in administration/receivership
    o Properties where owner is prohibited from occupying it
     E.g. closing/demolition order
57
Q

What about if an empty property is reoccupied for more than 6 weeks and becomes empty again?

A

It will qualify for 3/6 month relief

58
Q

Is there a relief for small businesses?

A
  • Yes – Small Business Rates Relief
  • RV up to £12,000 – no rates payable as 100% relief
  • RV between £12,000 and £15,000 – tapered relief between 100% and 0%
59
Q

Where is Uxbridge? What was your client’s requirement? What term did you agree?

A

West London near Heathrow.

They wanted 15,000 sq ft of office space in West London. A ground floor unit with modern facilitates and at least 20 car parking spaces.

15 year lease with a break a tenant only break option at year 10 at a rent of £30 psf. They were quoting £32.50 psf. Outside Act.

60
Q

Where is Fulham?

A

Central London, north of the River Thames, next to Hammersmith, Chelsea and Kensington.

61
Q

What was in your marketing strategy report for your Fulham disposal?

A

Location and typical lease terms and rent for other offices in that area with
comparable evidence to help establish was the quoting rent should be. I advised quoting £50 psf. I also advised on the condition and leasing prospects.

62
Q

In your industrial acquisition in Battersea, you said that you advised your client on the price differentials in various sub markets, can you please give some examples?

A

South West London
Battersea - £35-£45
Wandsworth - £45
Merton - £25
Kingston - £40

63
Q

What terms did you manage to agree on the industrial acquisition in Battersea?

A

10 year term with a tenant only break option at year 5 and a rent review at year 5 at £39 psf. 6 months rent free if the tenant does not exercise their break option.

64
Q

Where is Battersea?

A

It is located in London, South of the River Thames, near Chelsea, Clapham and Wandsworth

65
Q

What was your company’s covenant strength?

A

The company is owned by WPP who are a FTSE 100 company

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