Level 1 Flashcards
What is the profits test?
A test to determine whether the rental deposit can be returned by the tenant providing 3 years audited accounts showing a net profit of 3 times the annual rent consecutively
What legislation should be adhered to when creating HoTs
RICS PS Code of Leasing Business Premises 2020
Is tax payable on rental property?
Yes, have to be exempt if not
What is freehold ?
Freehold is a tenure where the owner own the building and land it’s built upon. The freeholder will be named on the land registry and own the title absolute
Don’t have to pay occupational charges
Responsible for maintaining
What is leasehold?
A type of tenure where the leaseholder had a contract with the freeholder with terms stated within the lease
Freeholder less responsibility - has to pay occupational costs
Requires permissions to change/ assign property
How would tenure have an impact on property value?
It would dependable on the landlords use of the property. If the L wanted to occupy it, a property with an attached leasehold may be unattractive due to the costs associated with serving notice on the tenant if the lease is protected
What is an FRI lease?
Full Repairing and insuring lease
Tenant is responsible for maintenance and repair of the whole building, inside and out, including structure and roof. The landlord insures the building but the tenant pays a premium
What is an IRI lease?
Internal Repairing and Insuring lease
Tenant only takes responsibility for the maintenance and repair of the interior of the property
Pays a S/C and insurance fee to cover costs of exterior, maintenance for common parts, security, cleaning
What is the difference between and FRI and IRI lease?
An FRI gives the tenant responsibility to repair and maintain the whole building, whereas an IRI only gives T responsibility on inside. Landlord pays insurance on FRI but tenant pays premium
In practice, T’s want to limit liability and often a schedule of condition is enforced so T isn’t responsible for putting property into any better state of repair
What is a schedule of condition
A schedule of condition is a document often in report form outlining the condition of the property, both internally and externally, often including photographic evidence.
To ensure T has to return property in no worse state than the start of the lease
What is the legislation for leasing and letting?
RICS Professional Standard: Code for Leasing Business Premises 2020
What is the legislation objectives?
Code for Leasing Business Premises 2020
Improve quality and fairness of lease negotiations and promote new set HoTs to make legal drafting more efficient
What is the structure of the legislation?
Code for Leasing Business Premises 2020
Part One- Intro
Part Two- Mandatory requirements
Part Three- Lease negotiations best practice
Part four- Appendices
What are the requirements of part 2 of the legislation?
Mandatory requirements:
Negotiations must be constructive and collaborative
Party not represented must be advised about code and supplementary guidance- recommending prof advice
Terms must be agreed in written HoTs stated subject to contract
What are the requirements within written HoTs?
Identity and extent of premises
Length term and LTA 1954 provisions
Renewal options and break rights
Guarantor or rent deposit
Amount rent, freq, excluding or including business rates
VAT payable
Rent free and incentives
Rent reviews, freq and basis
S/C and insurance
Rights assign, sublet
Repairing obligations
Permitted use
Alterations
Fit out
Conditions - subject to board approval etc
Special rights- parking, telecoms access
What does part three of the legislation include?
Lease negotiation best practice advice
Includes advice on lease terms - rent deposits, RR, S/C, repairs, alienation charges
What does part four of the legislation include?
Appendices:
Model HoTs- detailed template and useful checklist in A1&2
Guidance for L&Ts - appendix B
Negs on HoTs, issues, premises, S/C, deposits, insurance, checklist occupancy costs
What may a Landlord evaluate when selecting a tenant?
Quality of covenant strength as it affects the investment value of a property
Whether a rent deposit or guarantee is required depending on market condition and T covenant strength
What are the requirements for a rental deposit?
Personal to T
Must be legally documented in rent deposit deed and money held in separate bank accounts
Agree interest to tenant
Details of release mechanism stated in deed
Rent deposit deed attached to lease as separate deed
Usual reqs info- bank, accountant, 2 trade references, previous or existing LL ref, 3 yrs audited accounts or credit rating (Dunn and Bradstreet)
What is the profits test?
A test which evaluates whether a Ts rental deposit can be returned subject to it being stated in the lease and the net profit being 3 times the rent for 3 consecutive years
Or net asset value being 5 times rent- consider demand for prior and market conditions
Lease terms affecting value
Lease length/ term
Break clauses
Alienation
Repair obligation
User clauses
RR pattern and basis valuation
Security of tenure (LTA s.24-28)
Impact of restrictive clause
Planning- local authority
Break clause termination considerations
Is time of the essence ?
Mutual break or one party
Services of LTA notices
Notice period
Break penalty
Personal to original T?
Preconditions- rent and returning premises in good working order
Compliance with lease obligations- T covenants, payment rent or other sums, vacant possession
Why would a Landlord impose a pre letting?
If a particular market shortage or a Tenant required specific requirements e.g white box unit
Advantages and disadvantages to T of AFL
Advantage- delivery of bespoke building designed to meet needs. Discretionary within lease terms if L paying works
Disadvantage- can be lengthy and complex process, level of risk in event of contractor or developer not performing
Requirements for Agreement for Lease
The lease- pre agreed form executed once developer has fulfilled obligations under Agreement for Lease
Licence for alterations - allow T to undertake fitting out works
Specification and plans of proposed scheme
Developer guarantee did dealing with weak covenant
Warranties/ third party rights
Within an AFL what may a tenant request for if FRI lease?
Warranties- if FRI lease, T will want collateral warranties from prof. team, contractors
Or
Third party rights- becoming more popular than collateral warranties as cheaper, quicker and more certainty
In practice- LL unwilling/ unable to give guarantees for latent defects- may but decimal insurance in place to cover risk
What is a latent defect?
A fault in the property that could not have been reasonably discovered through inspection prior to lease completion or sale
UK Commercial Real Estate Agency 2016
Standards and ethics
Securing instructions - ToE
Disposals and marketing
Acquisitions
Ending the instruction
Town and Country Planning Regulations 2020
Introduced Class E to commercial leases including shops, offices, restaurants and cafes. Explaining change of use is not a development.
