Leasing & Letting Flashcards
What are the objectives of the Code?
Improve the quality and fairness of negotiations on lease terms and promote the use of a new set of comprehensive heads of terms to make legal drafting of leases more efficient
How would you use a Profits Test?
Commonly used
The net profit for the proposed tenants business must be 3 times the rent for 3 consecutive year or the net asset value of the business must be 5 times the rent
Must consider the level of demand for the Property and current market conditions
How tenant selection impacts a letting?
Important relationship between the quality of the tenants covenant and the investment value of a Property
Additional security such as a rent deposit or guarantee can depend upon market conditions and the strength of the tenants covenant
Can add to the quality of the covenant by requesting sureties/personal guarantee or rent deposit
What are the major lease terms affecting value?
Lease length / term certain
Break clauses
Alienation
Repairing obligations
User clauses
Rent review pattern and basis of valuation
Security of tenure provisions
Impact of a restrictive lease clause upon value
Check planning use by visiting local authority planning office in person or online
Inside / outside the Act
What is the RICS guidance?
RICS Professional Statement: Code for Leasing Business Premises 2020
Mandatory professional statement which replaces the 2007 Code and is effective from 1st September 2020
What is included under Part 2 of the Code?
- Negotiations over the lease must be approached in a constructive and collaborative manner
- If a party is not represented by an RICS member or other property professional they must be advised by the other party or its agents about the existence of the Code and its supplemental guide and must recommend to obtain professional advice.
- The agreement as to the terms of the lease on a vacant possession letting must be recorded in written heads of terms, stating that it is subject to contract and summarizing as a mimimum the position on several aspects.
- At lease renewal or extension the HOTs must comply with the aspects except for any that are stated to follow the tenants existing lease subject to reasonable modernization
- Negotiations should aim to produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests.
Advantages and Disadvantages of a Pre-Letting?
+VE - The tenant has a bespoke building designed to suit their needs
-VE - Entering into length and complex process and a level of risk in the event of the developer or contractor not performing
Break clauses in Commercial Leases?
Always time of the essence with a strict timetable for serving the notice
What aspects must be identified through the HOTS?
- Identity and extent of the premises - requiring the LL to provide a Land Registry complaint plan if the lease is registrable
- Any special rights to be granted - parking or telecoms/data
- Length of term and where included or excluded under the Act
- Renewal options or breaks
- Guarantor and/or rent deposit
- Amount of rent, frequency of payment and whether exclusive of business rates
- Whether the Landlord will charge VAT on rent
- Any rent free period or other incentive
- Any rent review including frequency or basis of review
- Liability to pay service charge and or insurance premiums
- Right to assign, sublet, charge or share the premises
- Repairing obligations
- Permitted use and whether changes are allowed
- Rights to alter or fit out & reinstatement obligations
- Any initial alterations or fit out if known
- Conditions of the letting - surveys, board approval or planning permission
Structure of the Code?
Part 1 Introduction
Part 2 Mandatory requirements
Part 3 Lease Negotiation Best Practice
Part 4 Appendices
What does Part 4 of the Code Include?
Appendices
Model heads of terms - detailed template is included in Appendix A1 and a useful check list in Appendix A2
A guide for Landlords and Tenants
- Additional guidance is set out in Appendix B and it does not form part of the mandatory Professional Statement
- Provides detailed practical guidance for both parties on a range of lease terms and letting issues, such as the negotiation of heads of terms, the premises, service charges, rent deposits and insurance, and a checklist for the payment of occupancy costs.
What must be attached to the Agreement to Lease in a Pre-Letting?
The lease - in a pre agreed form which shall be executed once the developer has fulfilled its obligations under the Agreement to Lease - usually at Practical Completion of the work
Licence for Alterations - allow the tenant to undertake fitting out works
Specification and plans - of proposed scheme
Developers guarantee / bond - if dealing with a weaker covenant
Collateral warranty gives tenants a direct contract with the construction team (privty of contract) - rather than obtaining collateral waranties from the professional team, third party rights are increasingly popular as a cheaper, quicker and more certain way to give tenants potential recourse
Most developers are unwilling or unable to give guarantees for latent defects, and may put decennial insurance in place to cover this risk
What are typical conditions included as part of a break option?
Compliance with the tenants covenants
Payment of all rent and other sums due
Vacant possession
Who is responsible for ensuring that the HOTs comply with the provisions within the Code?
Landlord or its letting Agent where relevant
What does Part 3 of the Code include?
Specific advice on lease terms to include rent deposits, rent review, service charges, repairs and alienation clauses
