PP 2 Flashcards
Disadvantages of owning a lease instead of freeloading
For tenant:
- Depreciating asset
(end of term belongs to landlord) - Landlord can specify what they can do
- Usually repairing obligations
For landlord:
- Tenant may not be reliable at paying
- Tenant may not look after property, so depreciates in value
- Whether get income and capital depends on property market
Advantage of leaseholds
Landlord:
- Retain capital interest in freehold which usually means capital gain in value when sold
- Positive covenants easier to enforce against tenants than new owners. Esp useful in building with multiple occupants (eg to repair)
- Retains control of building to ensure capital value preserved
depending on lease, can recover all expenditure via service charge on tenant - Steady income by renting
Tenant (commercial):
-
flexible so can change based on needs
(eg bigger office if grow) - can often negotiate break clause so can terminate before end of fixed term
- although may need to pay a sum (aka a premium) at start of lease, their business is not tied up in premises
What leases need prescribed clauses?
leases on or after 19 June 2006
over registered land
which are compulsorily registrable
What are the standard clauses in a lease
- Prescribed clauses
(info needed to register at LR) - Commencement
date of grant, names and addresses of parties
if over registered title - usual Land Registry heading (inter alia inc landlord’s title number) - Interpretation
(definitions) - Grant of lease
(operative part - landlord grants for fixed, periodic or at will) - Ancillary rights
(tenant rights over other land to use property more effectively) - Rights excepted and reserved
(of landlord e.g. repairs) - Annual rent
(usually quarterly. may also require things like insurance paid as rent) - Rent review
(mechanism to increase rent in line with market) - Tenant’s covenants
(i.e. their obligations) - Landlord’s covenants
(e.g. obligation to insure) - Landlord’s right on breach of repair covenant
(gives right to enter, inspect, give notice to tenant to repair and if fails to, to do work themselves) - Re-entry and forfeiture
(bring to end if fails to pay annual rent or breaches other covenant)
Purpose of prescribed clauses?
All info re lease together in one place with al info Land Registry needs for registration of the lease
Why may landlord require that other amounts payable like insurance are paid as rent?
in past was easier to recover non-payment of rent than breach of other obligations
What will the term of a commercial lease usually be? Explain what this is.
Fixed term
Can be weeks, months or years but usually years
Sometimes 3 - 5 years
Longer leases sometimes have break clause
What’s a break clause?
clause in fixed term lease
allows either party to terminate before end of fixed term
could be one party or both has right to activate
may provide that need to give notice on fixed date or on rolling basis
eg office lease of 15 years with tenant’s right to terminate on 10th year
Advantages of fixed term tenancy?
At end, the lease expires or comes to automatic end
neither party has to serve notice
good if know exactly how long wish to occupy for and don’t object to being locked in for that period of time
What is a periodic tenancy and how can it be terminated?
rollinggg basis
Continues indefinitely for one period to another / no fixed period
Runs until either party terminates by giving other party notice
Notice should be length of one period of the lease
(e.g. one month’s notice for monthly tenancy, quarter for quarterly etc)
Unless yearly tenancy, then 6 months notice
Advantages of periodic tenancy?
If don’t know how long wish to occupy property for
If know it will not be for less than the initial period but after that wish to continue on periodic basis
What is a tenancy at will?
Tenant occupies with permission of landlord on terms that tenancy may be terminated at any time
Indefinite
Three types of tenancy?
- Fixed term
- Periodic
- Tenancy at will
When will tenancy at will often occur?
Not usually used for commercial properties as too uncertain.
Often when parties not expecting.
E.g. tenant remains in occupation at end of formal lease
Or parties want to create informal agreement e.g. between family members
Are tenants free to do as wish with leasehold property?
Yes - but subject to general law and absolute, qualified and fully qualified covenants in lease.
Explain the three types of covenants in lease
Absolute covenant
- tenant cannot carry out states action according to lease
- landlord total discretion to allow - either by one-off consent or permanent lease variation
Qualified covenant
- tenant carry out stated action if receive landlord’s consent first
Fully qualified covenant
- allows to carry out stated action if obtains landlord’s consent first
- landlord cannot withhold consent unreasonably
How should leases preserve the capital value of property?
Ensuring that:
1. building kept in good repair
- lease reserves a market rent and rent review clause
- lease itself acceptable to future buyers of freehold - usually means FRI
(so if someone buys, they will be prepared to take lease on)
What tenant covenant most sought after and why?
How to ensure that as tenant’s solicitor?
What should u warn landlord as their solicitor if want loads of absolute covenants?
Fully qualified
- so whilst must obtain consent, cannot reas withhold (balance)
- tenant’s solicitors try to use ‘reasonable’ throughout document
Not absolute - not commercially acceptable and detrimental to landlord when rent reviewed
Advantages and disadvantages of forfeiture
:)
may be able to rid selves of financially weak tenant
(sometimes) no formal demand needed
:(
T can apply for relief from court and is likely to get it if can pay rent
^ fact of applying may damage reli
When is a lease deemed not be of ‘investment quality’ or ‘institutionally acceptable’?
If does not make tenant pay for full repairs, maintenance and insurance contributions
(FRI leases - full repairing and insuring)
Because investment institutions have strict views on what is acceptable - must be a good investment
What are ‘FRI’ leases and impact of them on landlord?
Full repairing and insuring
Landlord protected from incurring any expenditure which cannot be recovered from tenants
Under FRI lease, how will responsibility USUALLY be divided between landlord and tenant where tenancy over:
- part
- whole
Usually
Leasing whole:
Tenant responsible for repairing whole
Leasing part:
- T usually over non-structural (of part they are renting)
- LL for structural and common areas.
But lease over part usually contains provision enabling landlord to pass over maintenance costs via service charge.
(dont need to know what a service charge is)
Explain requirement of a covenant to repair?
- when will T be in breach?
- what counts as repair?
- what goes beyond repair? would inherent defect count?
imp
(consider when will be breach, what constitutes repair, what will go beyond repair)
- Must be a disrepair before tenant can be in breach
- does not need to be perfect - fit for reasonable tenant
(new build doesn’t matter that will obvs deteriorate) - can make T repair inherent defect in design/construction
(if only way to repair) - works of renewal or improvement go beyond repair.
^ repair is restoration BY renewal or replacement of parts, but not the whole. - q of fact and degree depending on age/nature of property
(eg brand new = more work) - repairing cov does not oblige to give LL property wholly different property than one leased
checked all this no more textbook !
What does a covenant to ‘keep’ a building in repair require of a tenant?
PUT it into repair - even if involves putting into better state that when entered
KP keep put like the nuts
What does ‘KEEP a building in repair’ mean?
Keeping
= PUT in repair.
(esp imp if old building)
When a landlord insures a building, what should tenant ensure?
Try draft the clause for repair on this basis.
That they as tenant are not responsible for repairing damage arising from risks which have been insured
(since should be covered by insurance premium)
- Repair
10.1. The Tenant shall REPAIR the Property.
(nb not keep in repair)
10.2. The Tenant shall not be liable to repair the Property to the extent that any disrepair has been caused by an Insured Risk unless and to the extent that:
(a) the insurance policy is vitiated or insurance proceeds withheld due to an act or omission of the tenant or someone on the Property with the Tenant’s authority.
(b) insurance cover excluded, limited or unavailable as mentioned in LL’s cov to insure.
When will tenant be responsible for insurance?
Is this common practice?
If they are renting the whole of the property
More common that landlord takes out insurance and cost passed to tenant as separate insurance rent
(which is what do if lease of part)
Comm prop leasehold - what elements are usually considered in insurance provisions?
- Landlord’s covenant to insure property against defined risks (to full reinstatement value)
- Tenant covenant to pay insurance policy (often reserved as rent)
- Covenant by landlord to reinstate the property
(subject to necessary consents)
(use money other than for loss of rent)
(not obliged identical accom as long as reasonably equivalent) - Rent suspension
(up to date repaired or [3] years) - Termination
(both parties) (without prejudice rights of LL in respect T’s breach of covenants in lease)
(who proceeds payable to? usually LL)
How should provision re landlord’s covenant to insure property look in lease?
- should be insured to ‘full reinstatement value’
(so if property destroyed, will be enough to pay for its rebuilding - inc demolition/allowing for inflation etc) - usually contains list of risks which landlord insures against
- list often concludes with ‘such other risks as landlord may reasonable require’ in case new risks arise
- should exclude from landlord’s obligation to insure:
a) risks not commonly available to insure against
b) any exclusions/excesses etc imposed by insurer
If there is liability for shortfall of insurance proceeds, who does this fall on (in case of leasehold)?
Tenant
so will use insurance proceeds to pay but anything not covered by insurance tenant pays
What would covenant by tenant to pay for insurance policy contain in a lease?
Often covenant is to pay a sum reserved as rent (‘the insurance rent’), which includes:
- A premium for insurance policy; and
- associated policy covering landlord for loss of rent where tenant unable to use building due to insured risk
e.g. (in interpretations)
Insurance Rent: in each year the cost of the premium for the insurance of:
- The Property, for its full reinstatement cost (taking inflation into account);
- Loss of Annual Rent of the Property for three years; and
- Any insurance premium tax payable on the above.
What may be contained in covenant by landlord to reinstate property re proceeds?
What would tenant want?
Often to use insurance proceeds to reinstate property
(rather than absolute obligation to reinstate even if proceeds insufficient)
- Ideally tenant want extending so obliged make up any shortfall
ahh so will use insurance proceeds to pay but anything not covered by insurance tenant pays
Will rent be payable if property rendered unusable?
Implication of this?
Yes - unless express term to contrary
So tenant should try to ensure lease provides for rent suspended during such period if damaged due to insured risk
(Landlord usually agrees since can insure against loss of this rent - but often they try to limit for how long they can insure for)
If building is totally destroyed, will there be a right for either party to terminate?
Unless lease states otherwise, frustration only applies in LIMITED circumstances.
(no reported cases of it)
But lease often gives LL right to terminate the lease if impossible to reinstate
Tenant should try to ensure have same right
Esp if time-limited rent suspension - so that if not reinstated by end of that period, it is terminated
(otherwise risk paying double-rent, and one for property which can’t use)
What happens if damage caused by insured risk?
Will:
- LL receive rent?
- T get free property?
- What must LL do?
- What if T can’t resume occupation?
Reinstate property using insurance proceeds, as paid for by tenant as insurance rent
LL would not receive rent whilst reinstatement taking place but would be covered by separate insurance policy for loss of rent
T would have to find somewhere else but not paying rent and once rent payable again, will probably be able to resume occupation.
If they cannot, may be able to break the lease.
If no break clause, will have to start paying rent again for property which cannot use.
Why is break clause important for tenant if an insured risk has happened?
If the rent suspension period ends and they cannot yet resume occupation
Paying two rents
Break clause would allow to break lease and not pay
What happens if damage to LEASEHOLD property due to uninsured risk?
(may be uninsured because parties agreed not to insure, could not insure, risk was insured but tenant did something preventing payout)
Tenant liable to repair the property under the repairing covenant
(nb if tenant liable to repair property and landlord only has right to terminate lease, then no incentive for landlord to terminate)
Summary - what should lease should make clear re insurance?
- who is to insure it
- how insurance premium to be passed on to tenant
- what will happen to building itself and rent payable if building damaged due to insured risk
Summary - what should lease make clear re repairs?
- Who is responsible for repairing
- Who bears cost (usually tenant)
- What the repairing obligations are
(sometimes renewal AND improvement)
What is the position for tenant if there is no alterations covenant?
Tenant able to make any changes it wants
(so landlords try to restrict extent)
What do most alteration clauses make a distinction between?
Different types of alteration
e.g.:
- Alterations affecting structure and exterior
- non-structural interior alterations
- alterations affecting service media (e.g. heating, lighting, communication systems)
- demountable partitioning
(i.e. what separate floors into different rooms)
Effect of absolute covenant over alterations?
- May be over all alterations or certain types of alterations
- Limited effect as comm prop tenant can use s3 Landlord and Tenant Act to carry out improvements even if lease prohibits
How will s 3 Landlord Tenant Act allow commercial tenant to get around an absolute covenant prohibiting alterations?
If want to carry out IMPROVEMENTS, can serve notice on landlord detailing proposals
Landlord has 3 months to object
If objects, tenant right to apply court for authorisation
Court authorise if:
- adds to letting value of property
- reasonable and suitable to characte
- does not diminish value of any other property of landlord
When will court permit tenant to carry out improvements to property if landlord refused?
(s5 LLTA)
add to letting value of property
reasonable and suitable to character of property
does not diminish value of any other property of landlord
If tenant submits notice under s 5 LLTA on landlord detailing intention for alterations, what options are available to landlord and how could tenant respond?
Landlord offer to do themselves for a reasonable increase in rent.
Tenant does not need to accept.
Can withdraw notice.
If does, landlord no right to carry out works.
But if tenant rejects, court cannot give tenant authority to do works themselves.
What happens if landlord fails to respond to tenant’s notice to carry out improvements within ___ months?
3 months
Can lawfully carry them out
(can also lawfully carry out if court authorises obvs)
What many a qualified covenant regarding alterations to leasehold property look like?
i.e. what may LL allow?
what may they require if do allow?
where may contain these covs?
Landlord allows non-structural alterations and changes to media
But only with landlord consent
So they can impose conditions on how works done/whether need to be removed at end of term
Conditions likely contained in separate document called a licence to alter.
What is a qualified covenant against alterations?
Prohibits alterations without landlord’s consent
Statute implies that LL cannot unreasonably withhold consent for making improvements
Improvements = increase value or usefulness of property to tenant (even if reduce the value of freehold to LL)
Difference between fully qualified and qualified covenants regarding alterations and which is better for tenant?
Qualified = prevents from making alterations w/o landlord consent
(it is implied by statute that won’t reas withhold for IMPROVEMENTS)
Fully qualified = requires landlord’s consent to alterations but makes clear won’t be unreasonably withheld
(better for tenant due to clarity)
- and also means if alteration but not improvement, can still do it
What is the difference between an absolute, qualified and fully qualified covenant in a lease?
absolute covenant is an absolute bar/prohibition against doing something.
e.g. a covenant not to assign the lease
qualified covenant requires the landlord’s consent.
e.g. cov to assign the lease without the landlord’s consent is an example of a qualified covenant against assignment.
A fully qualified covenant is a covenant that requires the landlord’s consent but states that the landlord’s consent will not be unreasonably withheld.
What alteration generally will landlord’s not require their consent for?
Erect or remove demountable partitioning
(ie non permanent walls / segregate building)
Entitlement of a tenant who has successfully used s 3 Landlord Tenant Act to make improvements?
(ie served notice etc)
i.e. court gave permission
Compensation for those improvements at end of term if they inc letting value
Provided claim made within time limits
However leases often contain tenant’s covenant to remove all alterations and reinstate premises at end of term so may be no improvements left to claim compensation for
How can a landlord control how a lease property is USED?
(eg may own loads of properties on retail park and want to make sure that there is a mix of businesses)
- Restrict use to single purpose
(e.g. restaurant)
:( put off some tenants who want the option
- Allow change within use class
- Qualified covenant
- change within use class if LL consent
- can unreas withhold but can’t charge fine/higher rent - Fully qualified
- can only use as something within same use class with landlord’s consent which cannot be unreasonably withheld
Where there is a qualified user covenant, can landlord always withhold consent for changing use?
Can u charge a fine or increased rent as condition?
Yes - can withhold unreasonably
STATUTE DOESN’T IMPLY
BUT
Can’t charge fine or increased rent as condition for giving consent, unless there is structural alteration involved
additional considerations aside from covenants if tenant seeking to change use of property?
planning permission
if there are any other covenants on the property
What is alienation in context of leases?
Refers to the different ways of creating an interest in property for benefit of third party
How can a tenant dispose of their interest in a lease?
Any way they like
- so could dispose of interest to a random third party
(via alienation)
Unless there is a restriction in the lease
(landlord will usually want so they control new occupants)
What does alienation include in lease context?
(alienation is the methods of disposing interest in a property to a third party)
- assignment
- underletting (aka subletting)
- charging (aka mortgaging)
- sharing occupation (allowing a TP in while continuing to occupy, perhaps under a licence or concession arrangement)
- parting with possession (catch-all term covering assignment, underletting but also informal arrangements which may be difficult to classify).
How are alienation provisions usually structured in lease?
(i.e. tenant to create interest over leased land in some way to a TP)
Usually ABSOLUTE covenant against ALL types
But then go on to permit certain types of alienation on controlled terms
What forms of alienation do leases rarely vs sometimes allow?
Rarely:
- charging (mortgage) as if they default, lender may take possession/sell
- parting with possessions, other than by assignment or underletting
Sometimes:
- sharing occupation, only with companies in same group and on terms that no tenancy created
What is assignment and underlease/sublease?
When lease granted, possible (subject to terms of lease) to transfer it to someone else (ie assignment)
Or allow someone else to occupy building on what is known as a sublease (aka underlease).
(e.g. lease granted A to B, assigned B to C, underleased C to D)
Headlease vs underlease
Underleast must always be what - otherwise would be an assignment?
Original lease = headlease - with head landlord
Underlease = between original tenant (new landlord) and new tenant (under tenant) / created out of headlease.
Underlease = an estate in the land.
Underlease must be for shorter term than headlease, even if one day - otherwise would be an assignment.
What will commercial lease usually allow for in terms of an assignment re whole vs part?
Usually allows assignment of whole property but not of part
Relevant statutory provisions to assignment of a lease?
ASSIGNMENT:
S19(1)(a) LLTA 1927
- implies into a qualified covenant not to assign without landlord’s consent that will not be reasonably withheld
- nb CA guidelines on reasonableness
S19(1A) LLTA 1927
- LL and tenant CAN agree in advance conditions / circumstances in which reasonable for LL to refuse consent
(can’t then argue they are unreasonable)
Section 1 LLTA 1988
- qualified covenant, tenant can make written application for consent
- if does, landlord must give consent unless reasonable not to and written notice of decision
What is S19(1)(a) LLTA 1927
(relates to assignment of lease)
implies into a qualified covenant not to assign without landlord’s consent that will not be reasonably withheld
therefore converts qualified into fully qualified
S19(1A) LLTA 1927?
When drafting lease, what can commercial parties agree regarding ASSIGNMENT covenants?
(inc examples)
Agree CONDITIONS and CIRCUMSTANCES where reasonable to refuse consent
Not subject to CA reasonableness test
(that relates to s 19(1)(a) only)
Conditions often:
- assignor gives AGA
- assignee provides guarantors
Circumstances:
- assignor up-to-date with rent
- assignee sufficient financial strength to comply with tenant’s covenants
so if required to enter AGA as pre-condition, can require to enter, even if it is not reasonable. if no condition, can only require if reasonable.
explain s1 landlord tenant axt
if qualified covenant on alienation (of any form - assignment/sublease etc)
- T can make written application for LL consent
LL must then give consent unless reasonable not to; and
- written notice of decision, also specifying:
- if consent subject to conditions and what they are
- if consent withheld, reasons for this
Section 19(1)(a) LLTA 1927 - Court of Appeal guidelines on reasonableness of landlord withhold consent to assign a lease?
do they need to provide reasons?
would rejecting on intended use - which is permitted in lease - be reasonable?
applies only to s19(1)(a)
not 19(1A)
- can refuse if undesirable use or undesirable tenant
- can’t refuse on grounds irrelevant to reli with W considering subject matter of lease
- ** not need prove reasons**, if reasonable person may have reached too
- may be reasonable to refuse on intended use, even if that purpose not forbidden by lease
- generally only needs to consider own interests - but unreasonable not to consider detriment if extreme and disprop to benefit
(so Q of fact on circumstances)
Examples of situations where LL found to have REASONABLY withheld consent to assignment of lease?
Would reducing value of reversion be reasonable?
s19(1)(a)
- assignee’s references unsatisfactory
- long-standing breach of repairing covenant by assignor and not satisfied assignee would remedy
- assignee could compete with LL business
- would reduce value of the reversion (their estate), but unreasonable if no intention selling
- usually if assignee proposes to use in way which breaches terms of lease (eg user covenant) (consider reas landlord)
- intends use in way detrimental to premises or in a way inconsistent with the landlord’s ‘tenant mix’ policy
- assignee would acquire protection under Part II LLTA (and assignor doesn’t)
Examples of situations where landlord found to have UNREASONABLY withheld consent to assignment of lease?
s19(1)(a)
- refused to gain advantage for self
- minor breaches of repair cov
- premises:
a) been on market for 18 months,
b) rent was significant and
c) slight harm to landlord outweighed by prejudice to tenant - defo if due to race, sex or disability
Would landlord be acting unreasonably if refused to permit assignment of lease because anticipated breach of user covenant by assignee?
S19(1)(a)
What reasonable landlord would do in the circumstances
usually reasonable to withhold where assignee proposed to use in breach of terms of lease
But refusal on this ground alone sometimes unreasonable in circumstances
(court not say what circumstances)
Falls on facts
If landlord only prepared to assign if got financial standing, what should landlord do?
Seek accounts and carry out insolvency searches
Against tenant and any guarantor
(checked and is LL that needs to do this)
What is an underletting/underlease?
Lease created by someone who is already a tenant
When granted, there will then be two leases over same property: headlease and underlease.
When may tenant want to underlet?
- Property temporarily in excess of what they need.
- Strong property market - may make a profit if charging more than paying
- Better than assignment if want back in future or only want to dispose part of the property
- LL won’t consent to assignment but will consent to underlease bcos financial concerns of undertenant
(since would fall to headtenant to pay rent to landlord) - Tenant concerns of financial strength
- If assigned, would likely give AGA so liable
- But if underlease, can exercise control as if landlord
(better and may prevent from defaulting) - Can’t find anyone to assign to
- usually cos lease too expensive
- even if underlease at lower rent, some rent covered and undertenant will take on some costs
(e.g. insurance and repair)
When may undertenant become new tenant?
- head tenant’s lease forfeited and undertenant, whose lease would usually come to end at same time, successfully applies to court for relief from forfeiture
- headtenant’s lease surrendered or disclaimed by liquidator
- both leases expire and undertenant exercises their right to stay / apply for new lease under LLTA but headtenant doesn’t
Main reasons landlord will be concerned about underletting?
- Possible undertenant ends up as their direct tenant
- Will have limited day-to-day control over property
- all the rights reserved to landlord will be exercisable by headtenant
- e.g. inspection/serving notices to repair
- so will have to go through headtenant to get anything done
How may a landlord protect itself when underletting a lease?
Advantages of latter option.
In lease:
- Absolute prohibition on underletting
(u can absolute prohibit assignemnt but not comemrcially acceptable to tenants and may mean high rent review) - Permit of whole but absolute prohibition of part
(more common)
- esp apt if:
a) building physically unstable for sub-division
b) don’t want to manage multiple Ts
If underletting for whole or part, will still require tenant to obtain landlord’s consent
(ie qualified cov - which will be implied fully qualified)
What could happen to lease if conditions for underletting have been breached?
(either those in alienation covenant in lease itself or conditions attached to underlease)
Lease is at risk of forefetirure and any underlease created out of it could be too
Guess its a breach of cov!
Statutory provisions impacting landlord’s ability to consent/refuse to underletting of whole or part?
imp
So S19(1A) does not apply - but often conditions imposed in lease.
- S19(1)(a) LLTA 1927
implies into qualified cov not to underlet that won’t unreas withhold - S 1 LLTA 1988
where qualified cov re underletting and tenant makes written application for consent, landlord must within REASONABLE TIME:
A) give consent, unless reasonable not to
B) serve on tenant written notice of its decision, also specifying:
- any conditions
- any reasons for withholding
^ same as for assignemnt
Common conditions attached to landlord’s permission to underlease?
(sorry so long!)
- terms of underlease mirror terms of headlease
(assures not watered down) - annual rent at least as high as headlease
- rent reviewed at same time and on same terms as headlease.
(so if underlease becomes main lease, no lost income) - Underletting must exclude s 24 - 28 part II Landlord Tenant Act
(so won’t get stuck with undertenant) - ‘direct covenant’ to perform headtenant’s covenants, except headlease rent
- No further underletting permitted
What is the main thing lease should reserve re rent?
An annual rent and tenant’s covenant to pay it
Aside from annual rent being payable, what info should lease include about rent?
- When it is payable
(although call it ‘annual rent’, usually spread across the year in quarterly instalment) - if rent should rent be paid in advance or arrears
(arrears if silent) - how instalments will be apportioned
(esp where rent payable from completion, which is between rent due dates) - how rent paid
(e.g. direct debit) - VAT
if / how arises and who will pay - Review of rent
(rent can’t change unless express provision permits)
Issues with condition that underlease at lease as high as rent in headlease?
How to resolve?
headlease rent might be rly high / falling property market
issue for headtenant who wants to underlease and undertenant who would have to pay
so instead condition that must be at market rent
Difference between paying rent in advance or arrears and which is better for landlord?
Arrears (after period it relates to i think)
Advance (before period relates to i think)
Advance is better because LL gets it earlier and avoids risk of discovering at end of period when a bit too late really that tenant can’t pay
What is a rent review clause and diff types?
Mechanism where annual rent payable under lease is periodically assessed.
- fixed increase
- index-linked
- tenant’s receipts
- open market rent review
- upwards-only market rent review
Explain fixed increase rent review clause and adv/disadv
provides that at various set dates throughout rent term, it will increase to a set amount
(eg will be 30k for first five years, 35k for next five)
:)
certainty and simplicity
:(
difficult to predict what levels will be in future
What is index-linked rent review clause and adv/disadv?
Rent linked to external index, e.g. retail prices index
Often have ‘cap and collar’ - limits percentage increase but ensures a minimum increase
:)
Alter rent in line with inflation
:(
Doesn’t track specifically property market so may not be accurate
What is ‘tenant’s receipts’ rent review and adv/disadv?
Link to tenant’s receipts from use of property
Usually re their turnover but could also link to other receipts e.g. profits or sums received from subletting
:)
LL incentive to help tenant’s trade
tracks financial health
:(
bad for LL if business slow
Explain open market rent review clauses and upwards-only rent review?
(inc under open market how often considered)
Open market - most common of all rent reviews:
- Rent adjusted at regular intervals
(usually every 3 - 5 years) - Based on the open market rental value of premises at time of review
Upwards-only open market rent review market norm
- checks market value but rent will only go up or stay same
- will be higher of rent review or current rent
(so can never reduce)
How is property valued for purposes of open market rent review?
Valuer conducts hypothetical assessment (i.e. assuming vacant)
what property would be valued at on open market on rent review date.
Considers:
- physical property; and
- terms of lease
(e.g. lower if onerous)
Well-drafted rent review should make certain assumptions/disregards. (e.g. vacant - sep queue card)
What common assumptions should be included in lease for open market rent review valuation?
(in summary - see OneNote for detail)
- ‘willing LL to willing tenant’
- tenant ‘vacant possession’
- ‘on the TERMS of this lease other than as to amount of annual rent but including provisions for annual rent review’
(T would pay more for no rent review) - ‘for a term of {x} years’
(lease specifies how many years)
(may be unfair to review as if say 15 years left when only 5 - certain market conditions would inc value / others would diminish)
(could say it is for same term which is remaining on actual lease, but provide a minimum term in case close to expiry of lease) - ‘on the assumption that tenant fully complied with their obligations’
(so can’t profit from breach) - ‘on assumption that if property been destroyed or damage, has been fully repaired’
Common disregards when open market valuation?
- ‘any effect on rent of the fact that the tenant has been in occupation of property’
(disregard tenant’s occupation - so can’t argue would pay higher rent to avoid relocation) - ‘any GOODWILL attached to the property by reason of any business carried out there by tenant’
(eg regular flow of customers/good reputation should not result in higher rent) - Any effect on rent attributable to physical IMPROVEMENT by tenant (with consent/not pursuant to obligation of landlord)
(i.e. VOLUNTARY works)
What points will lease need to deal with in setting out process for how each open market rent review will be carried out?
- Level of rent
- usually includes that rent can only stay same or go up after review, never down
- often provides that rent will be whichever is higher, the rent before the review or the open market value - Frequency of review
- Instigating the review
formal vs informal
- usually via sep valuers
(see sep queue card) - Independent determination
- if parties fail to agree revised rent, lease should contain provision to refer to independent TP
- usually (RICS)
Explain methods for instigating rent review?
important
- informal (traditional)
- ping-pong of notices / counter-notices
- would eventually agree
- often disputes and unfairness
e.g. LL makes initial high offer and T doesn’t respond in time, stuck with that offer - formal (more common)
- negotiate via specialist valuers
(e.g. RICS)
- time not of the essence: do not have to sort before new rent is due
- usually provision that pay existing rent with interest for any delayed increase once sorted
