Procedural Steps for the Grant of a Lease or Underlease Flashcards
Which party drafts the lease?
LL’s solicitor drafts the lease and submits it to T’s solicitor for approval – they will likely make amendments
An underlease won’t have much negotiation, as it is common that the terms mirror the headlease
What is the landlord’s major concern when considering whether to grant a lease?
Major consideration for LL is the reliability of the potential T and their ‘strength of covenant’ (ability to pay rent and perform other covenants)
LL may want references from a prior LL, guarantee from parent company or bank or a rent deposit
What is an ‘agreement for lease?’
Common to bypass contract and proceed right to completion and grant of lease
However, a contract is usually called an ‘agreement to lease’ and is useful when there is a delay between agreeing the lease/underlease and granting it, but one or both parties requires the other to be bound to the transaction
- Drafted by LL’s solicitor and should attach final agreed form of lease/underlease with an obligation on T to take it in that form on completion
- Incumbrances on superior title must be disclosed + attached lease should have an indemnity in respect of future breaches of any covenants affecting the title
When might an agreement for lease be needed?
(a) the landlord is in the process of constructing the property and wants to know that the tenant is bound to take the lease on completion of the works so that there will be rental income to help offset the building costs
(b) the landlord is carrying out works of repair or refurbishment at the request of the tenant (in which case the landlord may not be able to secure funding for the works unless there is a legally enforceable commitment from the tenant)
(c) the tenant is carrying out major works to the property prior to the grant of the lease
(d) the landlord requires the consent of a lender or a superior landlord to the grant of the lease
(e) the landlord is negotiating a surrender from a current tenant and wants to tie in the surrender with the grant of the new lease
(f) the tenant needs to obtain planning permission for the proposed use
How does deduction and investigation of title work in relation to a head lease?
Investigation of title is done the same way as for a freehold transaction
LL’s solicitor will need to investigate LL’s title to ensure that are entitled to grant it and to anticipate any problems with it + to draft any agreement for lease
- May need to contact a lender before granting a lease for permission
Unless the freehold is already registered, the absence of the freehold title will usually prevent the tenant from obtaining an absolute leasehold title on the subsequent registration of the lease
- Even when the freehold title is registered with absolute title, the tenant will still want to see whether there is anything on the freehold title which will bind the new leasehold title.
T is not entitled to call for deduction of the freehold title unless the transaction is the grant of a lease for a term of more than 7 years
- Where this is the case and there is to be an agreement for lease, SC 8.2.4 (SCPC 11.2.4) requires the landlord to deduce such title as would enable the tenant to obtain registration with an absolute title at the Land Registry
How does deduction and investigation of title work in relation to an underlease?
1) If HL is registered with absolute leasehold title, only the HL and the official copies for the HL must be reviewed, not the freehold title
2) Where the HL is unregistered:
- the general law entitles the undertenant to call for the headlease and all subsequent assignments under which the headlease has been held for the last 15 years
- under the general law, the UT is only entitled to call for deduction of the freehold title where the transaction is the grant of a lease for a term of more than seven years
How do pre-contract searches and enquiries work for leasehold?
LL’s solicitor should provide T’s solicitor with the following information:
- (a) draft agreement for lease (if applicable);
- (b) draft lease/underlease;
- (c) evidence of the freehold/headlease title;
- (d) copies of any relevant planning consents; and
- (e) evidence of the lender’s consent to the grant of the lease/underlease (where relevant)
T’s solicitor will undertake the same searches and enquiries as if the client were buying the freehold + some additional ones, like seeing LL’s insurance policy
T’s solicitor should explain obligations to T and risk of losing lease through forfeiture for breach of covenant
What is a ‘licence to underlet?’
Head landlord, HT and UT enter a licence to underlet – HL gives consent to HT to underlet property to UT and LL’s consent must be obtained before or on completion of underletting
- Usual condition of this consent is that UT enters a direct covenant with HL to perform the covenants of the underlease and headlease, except to pay rent twice
- The direct covenant creates a contractual relationship between HL and UT which enables HL to sue UT for breaches of HL or UL
What are the pre-completion formalities for a lease?
Lease executed by LL and counterpart by T – counterpart is identical
On completion, these are exchanged so each party has a copy of the lease signed by the other
LL should sign lease in readiness for completion and the counterpart should be sent to T’s solicitor for execution by T at least 5 working days before contractual completion date if SC or SCPC apply
Lease is a legal estate, so needs to be created via valid deed - the lease itself is the document of title
What happens on completion of a lease?
1) In addition to matters relevant to a freehold transaction, the landlord will receive
- (a) the counterpart lease/underlease executed by the tenant/undertenant;
- (b) any premium payable for the grant (less any deposit paid on exchange of contracts);
- (c) an apportioned sum representing rent payable in advance under the lease/underlease.
2) The landlord should give to the tenant:
- (a) the lease/underlease executed by the landlord;
- (b) if not already done, properly marked or certified copies of the freehold title deeds (unregistered land only);
- (c) where relevant, a certified copy of the consent of the landlord’s lender to the transaction
3) For a UL, head landlord must have given consent to grant of UL on or before completion
On what elements can SDLT be paid for a lease and how is this calculated?
SDLT is potentially chargeable both on any capital sum being paid (referred to on the grant of a lease as a ‘premium’) and on the amount of the rent
For non-residential property, the SDLT on the premium is calculated on the same basis as for sale of freehold land
For the rental element, SDLT is chargeable on the net present value (NPV)
- NPV = how much rent is payable over the term (including VAT) + discounting rental payments in future years by 3.5% per annum
SDLT is payable on the VAT inclusive amount of premium and rent
What are the SDLT rates for NPV?
£0-£150,000 = Zero
Portion from £150,001 - £5 million = 1%
Portion above £5 million = 2%
When must SDLT be paid for leases?
SDLT1 and payment must be submitted to HMRC within 14 days of completion of grant of lease
On what elements can LTT be paid for a lease and how is this calculated?
Charged on premium and rental element using the NPV of rent
LTT on premium is calculated on the same basis as for sale of freehold land, except that the 0% band for premiums extending to £225,000 is not available where the ‘relevant rent’ exceeds £13,500. The rate of 1% will apply instead. Relevant rent is usually the highest rent payable in any year across the entire term of the lease
What are the LTT rates for NPV?
£0-£225,000 = Zero
Portion from £225,000 to £2 million = 1%
Portion above £2 million = 2%
When must LTT be paid for leases?
Land transaction return and LTT payment must be submitted to Welsh Revenue Authority within 30 days of completion of grant of lease
How does registration work for a lease of exactly 7 years or less?
In registered land, it is not capable of being registered with its own title at the Land Registry – takes effect as overriding interest, whether or not T is in actual occupation
In unregistered land, legal lease is binding on all subsequent owners, irrespective of notice
How does registration work for a lease exceeding 7 years?
Registrable after completion under separate title, even if freehold title is not registered
If freehold title unregistered, T’s application to LR is for first registration and application must be made within 2 months of completion
If freehold is registered, T’s application must be made within priority period conferred by OSR1 search result (pre-completion search)
How can leasehold title be classed on first registration?
Leasehold can be classed as absolute, possessory, qualified or good
‘Good’ is awarded where the Registrar is satisfied that the title to the leasehold interest is sound but, having no access to the superior title, they are not prepared to guarantee the lease against defects in the freehold title or guarantee that the freeholder had the right to grant the lease - can register leasehold without any evidence of freehold title
Good leasehold title will therefore be given where the title to the freehold reversion is unregistered and the applicant for first registration of the leasehold title does not submit title to the freehold reversion with the application, or where the freehold is registered with less than absolute title
Give a summary of the steps that the landlord’s solicitor needs to take before grant of lease
Take instructions
Supply Energy Performance Certificate
Draft lease
Send draft lease and deduce title to tenant’s solicitor
Reply to enquiries and requisitions on title
Consider tenant’s amendments and return second draft
Obtain lender’s consent to grant of lease – only possible once terms of lease are finalised
Engross lease and counterpart
Get lease executed by landlord client
Complete lease
Give a summary of the steps that the tenant’s solicitor needs to take before grant of lease
Take instructions
Commission survey
Do searches and enquiries
Investigate title and raise requisitions on title
Consider and amend draft lease
Approve second draft of lease
Check engrossed counterpart
Get counterpart executed by tenant client
Do pre-completion searches
Pay apportioned rent for quarter – lease not granted on a quarter day
Complete lease
Pay SDLT – cannot occur until completion
Register lease at Land Registry because lease is for a term of 15 years – cannot occur until SDLT paid
