Property Flashcards
In a lease of whole who is responsible for what?
- In a lease of whole, the tenant is responsible for repairing the whole building. The landlord insures the building and recovers the whole cost from the tenant.
In a lease in part who is responsible for what?
- In a lease of part, the tenant is responsible for repairing the demise, which will be defined in detail. The landlord insures the building and maintains the common areas and recovers a proportionate part of the cost from each tenant.
Qualified repairing obligation?
- A qualified repairing obligation limits the tenant’s repairing obligation to keeping the premises in the same state of repair as at the beginning of the lease term.
- Repair – who is responsible?
· A commercial tenant will almost always be responsible for the repair of their demise, ie the extent of the premises let to them. The first step is to look at the definition of “Premises”, “Demised Premises”, “Property” or similar in the lease.
· Lease of whole - the landlord’s title such as an office block, the definition of “Premises” will refer simply to the title and postal address of the office block. The tenant is responsible for the interior, exterior and structural repair.
· Lease of part - the definition of “Premises” will specify, for example, the fifth floor of the office block. But it will also go into much more detail of the demise, such as including the floor and ceiling coverings, but not the structure nor exterior of the building. The tenant is only responsible for interior repair.
· Lease of whole - the repairing responsibility is solely the tenant’s.
· Lease of part - other demises are the responsibility of their respective tenants. Areas of the building or estate used commonly by all tenants (“common parts”), such as hallways, lifts and staircases, communal car parking, etc, are the responsibility of the landlord.
· Although the landlord will bear responsibility for repairing the common parts, the landlord will recover the cost of doing so collectively from the tenants by way of service charge payments. An FRI lease typically contains extensive clauses setting out the services and how they are charged.
- Types of repairing covenant
· Full repairing obligation
· Qualified repairing obligation
- Limits of the repairing obligation?
· Unless the lease states otherwise, the tenant may generally choose whether to repair or replace an item of disrepair.
· Note that if the premises are damaged beyond repair; for example, if subsidence has caused the premises to be so damaged that they need to be rebuilt, this is renewal, not repair and the tenant is not responsible for doing this under a simple repairing obligation. A tenant may be asked to covenant to renew the premises, but this is onerous and should be avoided.
· If the lease refers to keeping the premises in good repair and condition, this is more onerous to the tenant (for example, condensation comes within condition, but not repair).
- Inherent and structural defects?
· If the property is newly constructed, it may have inherent or structural defects that only come to light over time. These may cause issues that the tenant would be obliged to repair under its repairing obligation.
· This is unfair, as the tenant is not responsible for them, and the landlord should have warranties from the contractors (the builder, structural engineer, architect, etc) that the landlord can rely on.
· A tenant taking a lease of a newly constructed property should ensure that inherent and structural defects are therefore excluded from the tenant’s repairing obligation and service charge contributions.
- Insurance?
· A commercial landlord will almost always be responsible for the insurance of the building (even where it is a lease of whole). In keeping with the principles of an FRI lease, the cost of insuring will be recovered from the tenant under the lease.
· In a lease of whole, the landlord will insure the whole, and the sole tenant will refund the landlord the whole of the insurance premium.
· In a lease of part, the landlord will insure the whole, and each tenant will refund the landlord a proportionate part of the insurance premium.
· The money that the tenant or tenants pay to the landlord will usually be referred to as “insurance rent”. The reason for this is covered in the element on termination of leases.
· A typical definition of insured risks in a lease might look like the following:
· fire, explosion, lightning, earthquake, tempest, storm, flood, bursting and overflowing of water tanks, apparatus or pipes, damage to underground water, oil or gas pipes or electricity wires or cables, impact by aircraft and aerial devices and articles dropped from them, impact by vehicles, subsidence, ground slip, heave, riot, civil commotion, strikes, labour or political disturbances, malicious damage
What are insured risks?
· These are the risks that will be covered by the insurance policy taken out by the landlord. The definition may allow for the landlord to add other risks to the list from time to time.
· They will also be excluded from the tenant’s repairing obligation, except in certain instances (eg, if the tenant’s negligence means that the insurance is not paid out).
- A full repairing obligation?
is typically expressed as an obligation to keep the premises in repair but extends to putting the premises into repair if they are not.
What could a covenant against alterations be?
- A covenant against alterations (and various other matters) may be absolute (not allowed), qualified (allowed with landlord’s consent) or fully qualified (allowed with landlord’s consent not to be unreasonably withheld).
What are alterations?
- Alterations are changes to the premises, such as reconfiguring the internal walls, opening up new windows, adding a mezzanine floor, etc.
What happens if a lease is silent on alterations?
- If the lease is silent on alterations, then the tenant is free to carry out alterations. The only restriction imposed by law is the doctrine of “waste” which means that the tenant cannot carry out alterations which reduce the value of the premises.
- An absolute covenant against alterations?
means that they are not permitted. Landlord can always consent but it doesn’t need to give it or act reasonably.
* If the tenant wants to make an alteration covered by an absolute covenant, they can ask the landlord, but the landlord has no obligation even to consider such a request.
- A qualified covenant against alterations
means that they are only permitted with landlord’s consent. The landlord does not have to give consent.
- A fully qualified covenant against alterations?
is similar to a qualified covenant, but in this case, the landlord must act reasonably in deciding to withhold consent or adding conditions when giving consent.
When is a qualified covenent against alterations upgraded to fully qualified?
- If the lease contains a qualified covenant against alterations, s19(2) LTA1927 converts it to a fully qualified covenant insofar as the tenant’s proposed alterations are improvements from the point of view of the tenant.
licence for alterations?
- If the landlord consents to alterations under a qualified covenant, then the consent will usually be documented in a licence for alterations.
- As well as details of the works consented to, and any time limit for carrying them out, it will contain various tenant’s covenants as below:
· carry out the works in compliance with the landlord’s requirements, typically with good quality materials and a high standard of workmanship
· pay the landlord’s costs in dealing with the tenant’s application for a licence for alterations (these will usually be the surveyor’s and solicitor’s costs)
· obtain all necessary consents, which could include planning permissions and building regulations approval
· reinstate the premises at the end of the lease term (ie, put them back in their original state without the alterations and put right any damage caused)
- Tenant’s statutory right to carry out improvements?
- If the tenant’s proposed alterations are improvements, then even if the lease contains an absolute covenant against alterations, the tenant may be able to circumvent this.
· Under s3, LTA1927, the tenant serves notice on the landlord of its intention to carry out improvements.
· If the landlord objects, the tenant can apply for the court’s permission to carry out the improvements. The court will give permission if the improvements: - add to the letting value of the property;
- are reasonable and suitable to the character of the property; and
- will not diminish the value of any other property belonging to the landlord.
· If the landlord does not object within three months, the tenant may go ahead and carry out the improvements.
· The landlord may offer to carry out the works itself and increase the rent, but the tenant does not have to agree to this. However, the tenant can then not ask the court for permission.
- User meaning in lease?
- User refers to what the lease allows the tenant to use the premises for.
- If the lease were to be silent on user, then the tenant is free to use the premises for anything they like. The lease will therefore control the use of the premises with a user clause.
- The user may be very specific (“as a tailor’s shop”) or more general (“as retail premises”) or may be by reference to the appropriate use class (“as a use within Class E(a) of the Town and Country Planning (Use Classes) Order 1987”).
- Generally, the tenant will want a more general use to allow them flexibility, and to make the lease more appealing if they want to pass the lease on.
- Conversely, the landlord may wish to keep the user very narrow. However, this can backfire on the landlord, as it limits the appeal of the premises. This could limit the market rent on rent review.
Covenant against change of use?
- As with alterations, the lease may prohibit changes of user (an absolute covenant), allow changes of user with consent (qualified covenant) or allow changes of user with consent not to be unreasonably withheld (fully qualified covenant).
· Note that unlike a qualified alterations covenant (regarding tenant’s improvements), statute does not convert a qualified user clause to a fully qualified user clause.
What happens if the landlord consents to change of use?
section 19(3) of the Landlord and Tenant Act 1927 does mean that if the landlord decides to give consent to a change of use, the landlord may not charge a lump sum or increase the rent for giving consent unless the change of use also requires structural alterations (in which case the landlord may charge a lump sum or increase the rent for giving consent).
- Code for Leasing Business Premises affect on alterations and change of use?
- The Code sets out some points of good practice on alterations and change of use such as the following:
· The lease should only restrict alterations and change of use insofar as necessary to protect the value of the premises and any adjoining or neighbouring premises of the landlord.
· The Code (subject to certain exceptions) requires a landlord to at least give the tenant a fully qualified covenant for internal non-structural alterations in a lease of part, and the tenant the ability to carry out internal non-structural alterations without consent in a lease of whole.
· If the landlord will require any alterations to be reinstated at the end of the lease, this should be made clear in the heads of terms. Otherwise, the lease may only require this if it is reasonable
Different types of leases?
· There are also assured shorthold tenancies, which are common for letting out houses and flats on a six- or twelve-month basis. The tenant will pay a market rent for the house or flat. Although residential conveyancers will become familiar with these types of leases, they are not the primary focus of this course.
· Commercial leases are common, and can be for all kinds of different uses. For example, a commercial lease might relate to an office block, a factory, a warehouse or a shop, whether on the high street or in a large shopping centre.
· Unlike the residential long lease, a commercial leases is usually for a relatively short term (say, up to 15 years), and a market rent will be payable. In this respect it is similar to an assured shorthold tenancy, but in most other respects it is very different.
· The reversion?
- The reversion is the interest that the landlord holds subject to the lease. At the end of the lease term, the property reverts to the landlord.
- The term commencement date?
The term commencement date is the date on which the lease term (say 5 years) starts.
· The term commencement date may be the date of completion of the lease (when it is dated and becomes legally binding), but may also be before or afterwards.
· It is common for the term commencement date to be earlier than the lease is dated. A landlord may want all of the leases to start at the same time for simplicity. Note that if the term started in the past (whether a week ago or a year ago), the tenant is not generally expected to pay rent for the period they haven’t used!
· The term may also start after the lease is dated. This is called a reversionary lease. These may, for example, be used when the parties want to extend the letting in advance of the expiry of the current lease.
- Calculating the expiry of a lease term
· If the term of the lease is “from and including” a certain day of the year, the term expires on the day before that day of the year in the relevant year (more common in practice).
· If the term of the lease is “from” a certain day of the year, the term starts the day after that day, and so expires on that day of the year in the relevant year (less common in practice).
Break clauses?
· If the tenant is unsure about the commitment of a lease term, and the landlord is unwilling to grant a shorter term, a break clause can offer a compromise solution.
* Note that if the lease does not include a break clause, in general neither landlord nor tenant can bring the lease to an end before the end of the fixed term without the agreement of the other.
· A break clause can be a landlord break (meaning only the landlord can exercise it), a tenant break (meaning only the tenant can exercise it – the most common type), or a mutual break (either party can exercise it).
· The break clause may specify a date (eg, the fifth anniversary of the term commencement date) or it may be a rolling break (eg, any time after the fifth anniversary of the term commencement date).
· Key word: anniversary is used in leases to mean the same day of the year. For example, the fifth anniversary of 8 September 2030 would be 8 September 2035.
- Rent - what are the usual two ctaegories?
two categories: either a short lease with a market rent; or a long lease with a ground rent.
What is the usual rent for commericial leases?
· Commercial leases are usually short leases (up to 15 or 20 years) with a market rent (also known as rack rent). A premium (lump sum) is not usually charged on the grant of a commercial lease.
Usual lease for residiential leases?
· Residential leases may be long leases (say 99 or 999 years) with a ground rent (that may be a low sum, say £150 per annum or even a peppercorn each year).
· The first person to buy the property will pay a premium (say £200,000) to the landlord for the grant of the lease.
- Rent in a commercial FRI lease
· The rent is usually expressed as a yearly figure (eg, £80,000 per annum) but payable quarterly.
· The year is divided into approximate quarters, which may run from the traditional quarter days(in bold), based on religious festivals, as follows:
* 25 December to 24 March
* 25 March to 23 June
* 24 June to 28 September
* 29 September to 24 December
* These are still commonly used, but some leases now adopt the modern quarter days being 1 January, 1 April, 1 July and 1 October.
· Although the quarters under neither system are the exact same length, the rent is usually divided equally (so if the rent is £80,000 per annum, £20,000 would be payable for each quarter)
* Rent is usually due in advance on the quarter day – for example, on 25 March for the whole period up to and including 23 June
* However, the lease needs to state if the rent is payable in advance (which an FRI lease will) - if the lease is silent, the rent is payable in arrears. This is more often seen in a residential long lease.
· The lease will set out how the rent is to be paid (usually by standing order) and whether VAT is payable on it.
· The lease will usually describe other payments such as contributions to the insurance premium and service charge as “rent”. The reason for this is covered in the element on termination of leases. The rent proper is often referred to as the “annual rent” or “yearly rent”.
- Types of rent review
· There is no implied right for the landlord to be able to increase the rent. An FRI lease of 10 years or more will usually contain a rent review clause as an institutional investor will want to ensure that their rents are keeping up with the market.
* Stepped rent – the lease may set out, for example, a yearly rent of £25,000 for the first two years, a yearly rent of £30,000 for the next two years, and so on…
* Turnover rent – the rent may be calculated based on the tenant’s turnover at the property. This is mostly commonly seen with retail leases (eg, shops).
* Index-linked rent – the rent is increased by reference to an agreed measure of inflation, such as the retail prices index.
* Open market rent review – this is the most common type of rent review adopted by FRI leases, and involves ascertaining the rent based on comparable premises and certain principles.
- Open market rent review
· Commercial leases almost always have an “upwards only” rent review. This means that the rent can only increase. If market rents have fallen on the date of the rent review, the rent stays the same.
· Typically the rent review clauses will give the landlord and tenant the opportunity to agree the new rent between themselves. If they cannot agree, then the lease will set out a mechanism for a specialist valuer to be engaged to determine the new rent.
· The valuer will consider:
* The rent payable for comparable premises (ie, premises of similar size and location) plus
* The terms of the hypothetical lease – an imaginary lease based on the actual lease but assuming certain matters and disregarding others
Hypothetical lease in open market rent review?
· From the starting point of the actual lease (and premises), the rent review provision instructs the valuers on assumptions (matters to assume) and disregards (matters to be disregarded). The hypothetical lease differs therefore from the actual lease (and premises).
- Basic assumptions in open market rent review?
· The basic assumptions enable valuation to take place:
* the premises are vacant and available (as otherwise a prospective tenant would not be interested!)
* there is a willing landlord and a willing tenant
- Common disregards in open market rent review?
- Disregards generally operate to ignore what the tenant has done voluntarily, and not as an obligation of the lease.
- The rationale is that the tenant should not be penalised with a higher rent if, for example, the tenant has improved the premises for its own use.
- · The effect of the tenant’s occupation on the rent.
- Yes. The premises will be worth more to the tenant than a new prospective tenant, as the tenant has the convenience of not having to move.
· Goodwill attached to the tenant’s business. - Yes. Say the tenant is a restaurant business. If successful, the tenant will make that location more valuable to other restaurant businesses. It is unfair for the tenant to be penalised with a higher rent for this.
· Tenant’s improvements (other than as obliged under the lease) - Yes. If the tenant voluntarily improves the property, then it is unfair to the tenant if this is used to increase the rent, and unfair to the landlord if it limits the rent.
- Assumptions in open market rent review?
· The tenant has complied with all its covenants under the lease.
* Yes. If the tenant, say, lets the premises fall into disrepair, it should not be rewarded with a lower rent.
· The landlord has complied with all its covenants under the lease.
* No. Say that the lift in an office block never works. This would affect the rent that tenants would pay. From the tenant’s perspective, the assumption is unfair, as the landlord is not suffering the consequences of its inaction.
· On the terms of the actual lease other than the rent payable.
* Yes. If the actual lease, for example, has clauses that are very restrictive on the tenant’s use of the property, the tenant is stuck with those and should not have to pay a higher rent as if those clauses do not exist.
· The term of the hypothetical lease is the term remaining of the actual lease.
* Maybe! This is a tricky point, and can depend on the particular market, and whether prospective tenants favour short or long lease terms. Say that 5 years are left at rent review, and prospective tenants want 5 year leases. This would work against the tenant who initially took a 10 year lease.
· If damaged or destroyed, the premises have been repaired or rebuilt.
* Yes. This is because the lease will usually have detailed provisions for what happens in this instance (including suspending the rent). It would be unfair on the landlord if the tenant continues to pay a decreased rent as if the premises have been destroyed once they have been rebuilt!
- What happens after rent review?
· Once the parties have agreed the new rent, or failing that, the new rent has been determined by a valuer, the new rent is documented in a rent review memorandum. This is a short document (usually a single page) that records the new rent, is signed by the landlord and tenant and is kept with the lease for future reference.
· If the rent review is before the 5th anniversary of the term commencement date, the tenant may have to pay further Stamp Duty Land Tax or Land Transaction Tax (as this is calculated on the first five years’ rent).
· If the rent review is on or after the 5th anniversary of the term commencement date, the tenant will not have to pay further SDLT or LTT.
· If the new rent has only been agreed some time after the rent review date set out in the lease, the new rent is backdated to the rent review date. This means that the tenant will have to pay an additional sum plus interest at a rate set out in the lease (this should not be a punitive rate of interest).
Aim of Code for Leasing Business Premises?
· The Code aims to make commercial lease negotiations fairer and more transparent
Who does the Code for Leasing Business Premises apply to?
· The Code applies to RICS members and RICS regulated firms
* If the other party is a RICS member/firm, this should be considered by the other firm even though they are not a RICS member/firm
What does the Code for Leasing Business Premises contain?
· The Code concerns itself with negotiations and heads of terms, and is divided into mandatory requirements and good practice.
* Mandatory requirements are indicated by the word “must”. RICS members and regulated firms must follow them.
* Good practice is indicated by the word “should”. RICS members and regulated firms must follow them unless there are exceptional circumstances (and they may need to be justified to the RICS).
* Although the Code’s introduction states that it is concerned with the process rather than the outcome, the section on good practice does concern itself with what lease provisions should and should not be included in the lease.
Mandatory requirements for the Code for Leasing Business Premises?
· The mandatory requirements include the following:
* Lease negotiations must be approached in a constructive and collaborative manner
* An unrepresented party must be advised about the existence of the Code and recommended to seek professional advice
* The landlord (or its letting agent) is responsible for ensuring that heads of terms compliant with the Code are agreed before the draft lease is circulated
* It is also mandatory to prepare written heads of terms, stating that it is subject to contract. The Code specifies certain areas which must be covered in the heads of terms. These include:
· extent of the premises
· length of term and break rights
· rent and rent review (including basis for rent review)
· repairing obligation
· rights to assign (transfer to a new tenant) or underlet the lease
· permitted use of the property (and whether tenant can change it)
· rights to alter the property and any obligations to put the property back in its original state
Good practice for the Code for Leasing Business Premises?
· The rest of the Code (which is much more detailed) indicates good practice. As RICS members and regulated firms are obliged to follow good practice unless there is justification not to, it is likely that the provisions of the Code will become standard in time.
· Some specific areas of concern are listed below:
* Premises
* The heads of terms should clearly define the demise, provide a lease plan and refer to all the rights that the tenant will need for its use of the premises (eg, the right of access to the premises, water and electricity, etc).
* Length of term, renewal rights and break rights
* The heads of terms should clearly specify the length of term and any break rights.
* The Code sets out basic conditions to exercising the break that are acceptable; others may be included but must be specified in the heads of terms. (This is an area where landlord-weighted drafting of the lease can make it very difficult for a tenant to exercise the break.)
* Rent and rent review
* The heads of terms should clearly state the initial rent, frequency of payment (eg, quarterly) and whether VAT will be charged. They should also state whether there is a rent-free period (for example, the tenant may not have to pay rent for the first three months while they are fitting out the premises for their purposes).
* If the landlord intends to review the rent, then the tenant should be advised how (eg, market rent, turnover, etc) and how often (eg, every fifth year).
* Landlord’s title
* The landlord should be responsible for obtaining any consent needed to grant the lease (such as from a superior landlord, mortgagee or any other third party).
* Repairs
* The tenant’s repairing obligation should be appropriate to the length of the term and the condition of the premises. (An extreme example might be that it would be unfair to ask a tenant on a 6 month tenancy to take a full repairing obligation of premises that are badly dilapidated!)
* If the tenant gives a qualified repairing obligation (ie, limited to the initial state of the premises), a schedule of condition should be required.
* Where the premises are newly built, the tenant should be given appropriate protection against inherent construction defects.
* Insurance and damage
* The lease should suspend the rent if the premises are damaged by an insured risk (unless the damage is due to something the tenant has done or not done) or an uninsured risk.
* Other provisions of the Code will be considered alongside the relevant elements.
When must SDLT be paid for a lease?
- SDLT must be paid within 14 days of “the effective date”. This is usually completion, but will be earlier if the tenant goes into occupation
- E.g. if tenant occupies the lease prior to completion they must pay sdlt 14 days from the date the undertenant went into occupation of the warehouse.
Stages of granting lease?
· grant of lease transactions commonly do not need an exchange, and there are then just two stages:
* Pre-completion
* Post-completion
What happens during the pre-exchange stage of granting a lease?
- Landlord’s solicitor’s tasks:
· Take instructions
· Prepare draft lease and, if relevant, agreement for lease (ie, if there is to be an exchange)
· Deduce title (and check that lender will consent to letting) and respond to any queries on title - Look for mortgages, covenants (especially restrictive covenants), that the landlord has full legal title and the power to grant the lease
· Answer pre-contract enquiries
· Once agreed, engross the agreement for lease, obtain landlord’s signature, and send counterpart to tenant’s solicitor
· Documents likely to send to tenant’s solicitor: - Official copy entries of the registered freehold title,
- replies to CPSE.1 and CPSE.3 enquiries,
- a draft agreement for lease,
- a draft lease and
- written consent from their lender to the letting.
- Tenant’s solicitor’s tasks:
· Take instructions
· Review draft lease and agreement for lease and amend as required - Need to make sure everything is ok – everything is prohibited unless said otherwise in lease
· Investigate title and raise any queries on title - Pre-contract searches and enquiries
· Raise pre-contract enquiries and searches
· Arrange for tenant to sign counterpart lease
Engross meaning?
means to print a copy for signature (a copy that is ready to be signed) (eg, on good quality paper and bound). The original of a lease or an agreement for lease is executed by the landlord; the counterpart is executed by the tenant.
- Pre-exchange – drafting the lease
· The landlord’s solicitor will draft the lease based on the heads of terms. The solicitor may use a generic precedent lease (eg, Practial Law or Encyclopaedia of Forms & Precedents). Alternatively, if there have been past lettings on the landlord’s estate, the solicitor may have a part-completed lease which just needs to be tailored to the individual letting.
· The tenant’s solicitor will go through the lease and amend anything that is onerous or unfair to the tenant, or simply to try to balance it more in favour of the tenant.
- Pre-exchange – agreement for lease
· An agreement for lease will often not be needed, in which case the parties’ solicitors will simply complete once the tenant’s solicitor is happy with their title investigations and the form of the lease is agreed.
· However, an agreement for lease is needed where the parties want to commit to completing the lease, but either are not yet ready, or there are conditions that need to be satisfied.
* E.g. when something needs to be repaired to mitigate an uninsured risk
· Similarly with the draft lease, the tenant’s solicitor will review the agreement for lease and amend any provision they feel appropriate in favour of the tenant.
- Pre-exchange – investigation of title, searches and enquiries
· The landlord’s solicitor will deduce their freehold title, and the tenant’s solicitor should investigate it. The tenant’s solicitor should ensure that the landlord has title to grant the lease, and will also need, for example, to consider any freehold covenants as they will also bind the tenant (even if the lease states something different).
· The tenant’s solicitor will raise CPSE1 enquiries (as does a buyer’s solicitor in a commercial freehold transaction) but will also raise CPSE3 enquiries which are specific to the grant of a lease.
· The tenant’s solicitor should raise the same searches as they would if they were buying the freehold.
· In general the tenant’s solicitor should ideally exercise the same care over their investigations with a leasehold transaction. In practice, the tenant may agree with their solicitor that the cost of full investigations are not justified for a very short lease with limited repair and other obligations. In this case, the tenant’s solicitor should ensure that the tenant is advised of the risks.
- On exchange of an agreement for lease:
- the landlord’s solicitor and tenant’s solicitor exchange in similar manner as for a freehold contract (usually adopting Law Society B)
- no deposit is usually payable
- the agreement for lease may set a fixed completion date, but more likely will set out what conditions need to be satisfied and by when for completion to take place
- the agreement for lease will usually have a draft of the agreed form of lease annexed to it, so it can only be exchanged once the terms of the lease have been agreed
- Pre-completion tasks?
- Landlord’s solicitor’s tasks
· Prepare original (what the landlord executes) and counterpart lease (what the tenant executes), obtain landlord’s signature to original and send counterpart to tenant’s signature
· Prepare and send completion statement, detailing the money due on completion (eg, any apportioned annual rent, service charge and insurance rent) - Tenant’s solicitor’s tasks
· Arrange for tenant to sign counterpart lease
· Obtain funds from client needed to complete as per completion statement
· Raise pre-completion searches
- Pre-completion steps
· The landlord’s solicitor prepares a completion statement. This can be a tricky calculation, as the solicitor must apportion the yearly rent, insurance rent (ie, contribution to the insurance premium) and service charge (for a lease of part) on a daily basis.
· Usually, the yearly rent will be paid quarterly. Although both the traditional and modern quarters are not exact quarters of the year, generally the rent is split as if they are. Therefore, for a rent of £80,000 plus VAT, a sum of £20,000 plus VAT will be paid each quarter.
· Apportionment involves counting the number of days for which the tenant is going to occupy in the current quarter, and calculating an appropriate proportion of the yearly rent (and other sums treated as rent). One method is to multiply the number of days by the daily rate, which is found by dividing the yearly rent by 365 (or 366 in a leap year).
· As with a freehold transaction, pre-completion searches are carried out. The appropriate search is an OS1 search with a lease of whole, an OS2 search with a lease of part.
· If the lease is not registrable, then an OS3 search could be used. This does not confer priority but will check that the landlord is free (or not) to grant the lease.
- On completion of the lease
- the tenant’s solicitor sends the landlord’s solicitor the completion monies
- Would ask the landlord solicitor to hold the money to order until completion
- the landlord’s solicitor and tenant’s solicitor agree over the telephone to complete and date the executed leases that they are holding
- the landlord’s solicitor and tenant’s solicitor send the completed original and counterpart to each other
- Post-completion tasks?
· Landlord’s solicitor’s tasks
* Send summary of main provisions of lease to client
· Tenant’s solicitor’s tasks
* Arrange to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary
* 14 days from completion of grant
* Register lease if necessary
* Form AP1 and certified copy of the lease including prescribed lease clauses, consent from the lender and SLDT5 (need to prove you paid SDLT)
- Procedure for registering lease?
- If a lease is registrable, then an OS1 (lease of whole) or OS2 (lease of part) search should have been carried out before completion to give priority.
- The tenant applies to register the lease using form AP1 (if the landlord’s title is registered) or FR1 (if the landlord’s title is unregistered).
- A certified copy of the lease may be scanned and submitted electronically.
- If the landlord’s freehold title is charged, then a letter of consent from the lender will also be needed.
- On completion of the application, the tenant’s solicitor will receive two official copies (the new leasehold title and the updated landlord’s title)
· Note that if the tenant is a company, then usually the lease will not be charged, and so there is no need to register the transaction at Companies House.
- Net present value?
- With a freehold or long leasehold (say 999 years) where a premium is paid, it is quite simple to take that premium as the basis of the SDLT or LTT calculation.
- It is a little more complex with a short lease with market rent payable. The first step is to calculate a lump sum equivalent of the rent over the years it is payable, called the Net Present Value (NPV).
- This calculation uses a complicated formula, but both HM Revenue & Customs and the Welsh Revenue Authority offer an online calculator that can be used. The NPV, once calculated, forms the basis of the SDLT or LTT calculation.
- SDLT on commercial leases
- SDLT is assessed on the NPV, and different percentage rates apply to the slices of the total purchase price.
· Up to £150,000, there is no SDLT payable.
· Over £150,000 up to £5 million, SDLT of 1% is payable
· Over £5 million, SDLT of 2% is payable - SDLT is rounded to the nearest pound.
- LTT on commercial leases
- LTT is also assessed on the NPV, and different percentage rates apply to the slices of the total purchase price. The rates are currently different from SDLT:
· Up to £225,000, there is no LTT payable.
· Over £225,000 up to £2 million, LTT of 1% is payable
· Over £2 million, LTT of 2% is payable - Unlike SDLT, LTT is not rounded to the nearest pound.
- An FRI lease has the following features:
· The tenant is responsible for keeping their demise in full repair – if they have a lease of part, then the landlord will recover the costs of repairing any common areas from the tenants collectively
· The landlord will normally insure the property, but will recover the costs of doing so from the tenants in the form of insurance rent
· If there are any services, then these will be paid for by the tenant by way of service charge.
· Although the landlord will meet their own costs of finding a tenant and granting a lease, any costs during the lifetime of the lease (such as applying for consents) are met by the tenant.
· It will tightly control alienation, whom the lease can be assigned or sublet to
· It will contain upwards only rent reviews
* In typical investment properties, such as shopping centres, industrial estates and office blocks, the landlord will want the leases to be in FRI form. The landlord’s solicitor will usually draft the lease heavily in favour of the landlord, with the expectation that the tenant’s solicitor will negotiate it back in the tenant’s favour.
* This negotiation will depend on the bargaining strength of the parties, and whether the market at the time favours landlords or tenants. If the landlord has struggled to fill a unit, then they are more likely to be amenable to letting some points go to the tenant.
* In shopping centres and retail parks, there will usually be a tenant who will bring customers to the site regardless of the other shops available; for example, M&S. If a landlord can sign a retailer like this up to an agreement for lease, then other retailers will have the confidence to follow.
* It is therefore very important for the landlord to secure such a tenant, which is known as the anchor tenant. An anchor tenant will be aware of this, and will have a stronger negotiating position than other tenants to negotiate their lease.
- Covenant strength
- The FRI lease aims to maximise the income stream from investment property. However, the FRI lease will only achieve this if the tenant is in a position to pay the rent and comply with its obligations. This ability is referred to as the tenant’s covenant strength.
- In a similar way that a bank will do a credit check before offering you a loan or mortgage, a landlord will carry out checks on prospective tenants to ensure that they are good for the obligations they are undertaking.
- A well-established company with good references from the bank and other landlords is likely to be acceptable. A newly started company with no assets to its name will not.
- If the tenant’s covenant strength is not sufficient, then the landlord may nonetheless be prepared to accept the tenant with additional safeguards, which may be:
· A rent deposit (documented by a rent deposit deed). This is usually between three and six months’ rent. If the tenant falls behind with rent or other obligations, the landlord can dip into the fund.
· A guarantor. In the case of a company, this could be a personal guarantee from the directors or a guarantee from a parent company. In either case, the guarantor will then need to be assessed for their covenant strength.
- Drafting the lease
- Once the property agents have agreed the terms of the lease, then they will send heads of terms to the landlord’s and tenant’s solicitors.
- The landlord’s solicitor will draft the lease and send it to the tenant’s solicitor. There will likely be a precedent lease already prepared for other lettings on the property, and this will be used as the base, making the necessary changes.
- Agreement for lease
- Unlike in freehold transactions, where it is usual to have a contract, in the grant of a commercial lease, it is only usual to have an agreement for lease where there is a good reason to do so.
- Agreements for lease are used when the parties want to bind themselves to granting/taking the lease, but are not yet ready to do so. For example, if a retail park is being developed, then the landlord will find retailers early on, and they will enter into agreements for lease. The terms will be that the landlord will finish building the development, and the tenant will complete the lease once the retail park is ready for them to move into.
- There is not usually a deposit payable, because there is not usually a premium payable on a commercial lease. However, the agreement for lease will be exchanged in similar fashion to a contract for the sale of freehold land.
- The agreement for lease will contain a final form of the draft lease, so will only be exchanged once the lease negotiations have been finished.
- Completing the lease
- The landlord’s solicitor will send a completion statement showing the rent, insurance rent and service charge (if appropriate) payable on completion. These figures may be apportioned if the tenant’s lease starts part way through a quarter. In other words, if the tenant is due to pay rent only for the third month of the quarter, then they would pay a third of the full quarter’s rent.
- The lease itself is usually prepared as an original (to be executed by the landlord) and a counterpart (to be executed by the tenant). The parties will need to return the executed leases to their respective solicitors.
- On completion, the landlord’s solicitor acknowledges receipt of the completion monies, and they agree to date and send each other the executed original and counterpart lease. The tenant therefore holds the original lease executed by the landlord, and the landlord holds the counterpart lease executed by the tenant.
- Post-completion
- The landlord’s solicitor will send the money to the landlord or their agents. Institutional investors will likely also want a standard summary or short form report setting out the important terms. Otherwise, the landlord’s solicitor can raise their bill, and their work is finished.
- The tenant’s solicitor, however, now has to attend to payment of Stamp Duty Land Tax and registration of the lease. This should not be complicated if the landlord’s title is registered, as it almost always would be.
Privity of estate?
- Privity of estate exists between any current landlord and current tenant of the property and lasts only for the period while the lease is vested in the tenant.
Difference between assisgnement of ‘new leases’ and ‘old leases’?
- The LTCA 1995 changed the principle of original tenant and original landlord liability for ‘new leases’. The original landlord and the original tenant are no longer liable for the leasehold covenants for the full duration of the lease term.
- Upon assignment of a new lease, the LTCA 1995 provides for the automatic transmission of the benefit and burden of the covenants to the new owner of the reversion / the lease.
- The only exception is that the benefit and burden of covenants which are expressed to be personal will not pass to a third party.
If a lease is assigned in breach of an alienation covenant….
this is an ‘excluded assignment’ and the defaulting tenant will not be released from its obligations under the terms of the lease.
- Original Parties – privity of contract
- Privity denotes the legal relationship between two or more parties to a contract. When a landlord grants a lease to a tenant, the arrangement is a contract, and privity of contract exists between them. The terms of the lease are enforceable under the rules of contract law.
- All the terms, regardless of their nature, can be enforced by the original landlord against the original tenant and vice versa.
- The current landlord and tenant– privity of estate
- A lease is not only a contract. Provided the formalities are complied with, a lease gives the tenant a legal estate in the land.
- Where the landlord and the tenant are each owners of a legal estate in the same property, there is said to be privity of estate between them.
- Privity of estate exists between any current landlord and current tenant of the property and lasts only for the period while the lease is vested in the tenant.
- Upon assignment of either the lease or the reversionary interest, privity of contract will remain between the original landlord and the tenant, but there will no longer exist privity of estate between them. This is because the leasehold or freehold estate has passed upon assignment from the original contracting party to their successor in title. Consequently, privity of estate will now exist between whomever is the current landlord and tenant.
- When the tenant assigns its interest to a successor in title, there is no contractual relationship between the landlord and the new tenant (the assignee) - privity of estate exists but no privity of contract.
- Likewise, where the landlord sells its reversionary interest, there is no contractual relationship between its successor in title (the reversioner) and the tenant - privity of estate exists but no privity of contract.
- Old leases
- All leases created before 1 January 1996 (‘old leases’) (the date when the Landlord and Tenant (Covenants) Act 1995 (‘LTCA 1995’) came into force) are governed by the old system of rules.
- In old leases, the liability of the original landlord and the original tenant continues for the full duration of the lease term. This is the case even after an assignment of either the reversion (landlord’s interest) or the lease (tenant’s interest). This means that the original tenant and the original landlord of an old lease remain liable for the covenants they entered under the lease long after the leasehold/reversionary interests have been sold or given away to others.
- This continuing liability of the original contracting parties led to both absurdities and hardships for the original parties. For example, many original tenants were held liable for rent payments or for the costs of repairs years after they had assigned their leases.
- Privity of contract means the original landlord and tenant are liable for breaches of covenant by their successors for the entire lease duration. The impact of this is greatest for tenants.
- Privity of estate allows the tenant covenants that ‘touch and concern’ the land in an old lease to be enforceable by and against successor landlord and tenants.
- Enforceability of leasehold covenants – new leases
- The LTCA 1995 made some fundamental changes to the running of leasehold covenants on assignment of a lease / the reversion. In relation to a lease granted on or after 1 January 1996, these new rules govern whether an assignee of the reversion or the lease can sue or be sued for a breach of covenant.
- LTCA 1995, s 3 provides for the automatic transmission of the benefit and burden of all landlord covenants to the new owner of the reversion, and of the benefit and burden of all tenant covenants to the assignee.
- This means:
· when a tenant assigns a lease, the assignee acquires the benefit and burden of all the covenants in the lease.
· when a landlord assigns the reversionary interest, the incoming landlord acquires the benefit and burden of the covenants. - The only exception to this rule in LTCA 1995, s 3(6) is for those covenants which are ‘expressed to be personal to any person’. The benefit and burden of covenants which are expressed to be personal will not pass to a third party.
- ‘Expressed to be personal’ is not defined in the LTCA 1995, but it appears to mean that the covenant is expressly stated to be between two named parties to the lease.
- Under LTCA 1995, s 23(1) the parties remain liable for the breaches which occur during their period of occupation.
- Suing a former tenant
- An assignee of the lease becomes liable from the date of assignment for all covenants in the lease under LTCA 1995, s 3 (other than those expressed to be personal).
- It makes sense that a landlord will seek to enforce any breach of covenant against the current tenant; the current tenant should be easy to locate and the landlord may be able to obtain an equitable remedy, such as specific performance.
- However, should the assignee be unwilling or unable to comply, the landlord may look to other parties for compensation in respect of breaches of covenant committed by a subsequent assignee.
- If the outgoing tenant has been automatically released from its obligations under the lease on assignment under LTCA 1995, s 5, it will not be liable. However, if the outgoing tenant has provided an authorised guarantee agreement (‘AGA’) under LTCA 1995, s 16 on assignment, the landlord could sue the former tenant who is guaranteeing the obligations of their immediate successor.
Authorised gurantee agreement?
An AGA is the guarantee by an outgoing tenant of the obligations of the incoming assignee. It can be required by the landlord as a condition of giving its consent to an assignment of a new lease.
What choices does AGA give landlord?
- The presence of an AGA provides the landlord with a choice. It could sue the current tenant and may be able to obtain an equitable remedy, such as specific performance. If the current tenant is not worth suing, the landlord could sue the outgoing tenant who is acting as guarantor for the assignee.
· Exception for new leases - If the landlord sues the former tenant under the AGA, its remedy is limited to damages because the former tenant is not in control of the premises anymore. Such damages may be extensive.
- The former tenant may be able to recoup damages paid out on behalf of a defaulting assignee using an indemnity.
- Under an AGA a tenant can only be required to guarantee the obligations its immediate successor, when that successor assigns then that AGA must fall away
· But only if the assignment was made with the tenants consent - Without the landlord’s consent the AGA does not fall away when the next assignment happens
- Indemnities?
- Under a new lease, an outgoing tenant should ensure that their assignee enters into an express indemnity covenant on assignment whereby the assignee agrees with the assignor to pay the rent and to perform all the covenants for the remainder of the lease. The former tenant may then sue the assignee for breach of the indemnity covenant and recoup the damages paid to the landlord.
- Alternatively, in the absence of an express indemnity covenant, the assignor could claim an indemnity at common law under the rule in Moule v Garrett (1872) LR 7 Exch 101.
- The former tenant has the benefit of a quasi-contractual course of action under the rule where if one person is compelled to pay damages because of the legal default of another, the former is entitled to recover those damages from the defaulting party. This means that a former tenant can theoretically sue directly a subsequent assignee in respect of breaches committed by that assignee. (This rule can only be used to take action against assignees, and not sub-tenants.)
- These methods of indemnity are of limited practical value. If the assignee in possession were worth suing, the landlord would have sued it in the first place! The outgoing tenant ought to make sure that it assigns to a financially sound and trustworthy assignee.
- Subleases
- When there is a sublease in place, there is no direct relationship between the (head) landlord and the subtenant. The landlord is not the direct landlord of the subtenant. This means that the landlord, who is usually the owner of the land, might not be able to enforce the covenants in the head lease directly against the subtenant, the occupier of the land.
- Despite the lack of direct relationship, LTCA, s 3(5) allows restrictive covenants in new leases to be enforced against any owner or occupier of the premises.
- However, landlords will not be able to enforce directly against a subtenant any positive covenants.
- The effect of this is as follows:
Any tenant (whether the original tenant or an assignee) knowing they are responsible for breaches of the subtenant is likely to include a provision in the sublease in which the subtenant covenants to observe and perform the covenants contained in the head lease. This makes it easier for the tenant to control the actions of the subtenant and it indirectly protects the landlord;
If the landlord forfeits the head lease, the sublease is also automatically terminated, subject to a claim for relief. The threat of this should be a strong incentive to a subtenant to observe the covenants in the head lease.
· In addition, a prudent landlord will, as a condition of consent to the subletting, insist on any subtenant of the property entering into direct covenants with it to observe and perform the covenants in the lease. This will create a contractual relationship between the landlord and the subtenant, enabling enforcement of the covenants based upon the law of contract.
Difference between old lease and new lease for assignment?
- For an old lease, the outgoing tenant remains liable, but the incoming tenant only becomes liable if it gives a direct covenant to the landlord.
- For a new lease, the outgoing tenant is released from liability unless it enters into an authorised guarantee agreement. The incoming tenant automatically becomes liable.
Assignment?
- Assignment means the existing tenant passing the lease to a new tenant.
Does a qualified covenenant get upgraded for assignment?
- A qualified covenant against assignment is automatically upgraded to a fully qualified covenant, and it is also implied that the decision whether to grant consent is made within a reasonable time.
o Reasonable time is days and weeks but not months
- documents that the assignee will be a party to in an assignment:
- TR1 and
- Licence to assign.
Landlord relationship with assignee?
the landlord becomes the landlord of the assignee
Assingor and assignee relationship?
- The new tenant is now entitled to exclusive possession of the premises, and is obliged to pay the rent and perform the other tenant covenants.
- The assignor is no longer entitled to use the premises, and generally need not pay the rent or perform the other tenant covenants. However, the assignor may still have liability for them, as we will see.
- Why an assignment?
- A tenant may want to assign the premises if they no longer need them for the purposes of their business or cannot afford to keep paying the rent (perhaps following a rent review).
- If the premises are right for the assignee, conversely, they may be only too happy to take the lease.
- If the lease is silent, then the tenant is free to assign. In practice, a commercial lease will likely require that before assignment, the tenant apply to the landlord for consent. The landlord will want to be able to vet potential assignees.
- A tenant’s covenant against assignment may be drafted as absolute, qualified or fully qualified.
- An absolute covenant means that assignment is not allowed. A commercial lease will usually contain an absolute covenant against assignment of part of the premises. The landlord will not want a letting split into parts, which creates various problems (that are beyond the scope of this course).
- Qualified covenants against assignment
- A tenant’s covenant against assignment of whole may be qualified, meaning that assignment is only allowed with the landlord’s consent.
- However, s19(1)(a) of the Landlord and Tenant Act 1927 converts a qualified covenant into a fully qualified covenant, meaning that the landlord must act reasonably if deciding to withhold consent. This restricts the landlord’s discretion.
- Furthermore, s1 of the Landlord and Tenant Act 1988 goes a step further, and states that the landlord must give its decision on consent within a reasonable time.
- Again, note that statute affects different provisions differently. Alienation is the area where the law comes down most heavily in favour of the tenant. This is because it is unfair to bind a tenant to the lease and premises where there is a willing and suitable prospective tenant to take over.
- Case law suggests that a “reasonable time” is dependent upon circumstances but should be measured in days or weeks instead of months.
- When is it reasonable to withhold consent?
· The would-be assignee’s proposed use of the premises may be reasonable grounds to withhold consent. For example, in a shopping centre, the landlord may have a policy on mixing different types of shops. If the prospective assignee’s proposed use does not fit this, then it may be reasonable to withhold consent.
· The landlord cannot withhold consent on grounds not related to the landlord/tenant relationship, such as a personal dislike of the prospective tenant or their business. Nor can they discriminate on grounds of race, sex or disability.
· It is likely reasonable to withhold consent if the landlord has justifiable concerns about the assignee’s ability to pay the rent; for example, if the tenant cannot produce satisfactory references. Another example would be if the assignee is newly incorporated and cannot produce accounts.
· If the landlord does not act reasonably in withholding or delaying consent, then the tenant may be able to claim damages (including costs for agents and solicitors).
· The landlord will, however, have various concerns regarding assignment. A commercial lease, therefore, will contain:
* circumstances that the parties agree will be reasonable grounds for withholding consent and
* conditions that may be imposed on assignment.
· Both conditions and circumstances are recognised by s19(1A) Landlord and Tenant Act 1927. If valid, they provide the landlord with specific grounds on which consent may be reasonably withheld.
· Example: a lease’s assignment covenant includes a circumstance that all yearly rent is paid up to date, and a condition that the assignee provides a guarantor of the rent and other obligations. The landlord may reasonably withhold consent to the assignment if the tenant is behind with rent or if the assignee refuses to provide a guarantor.
Assignment
Pre-exchange tasks for the differrent solicitors?
- Landlord’s solicitor
· Takes instructions
· Confirms receipt of application, sets out any requirements
· If client wishes to proceed in principle, drafts licence to assign and sends to tenant’s solicitor - Tenant’s solicitor
· Takes instructions
· Applies for consent
· Prepares draft contract (if applicable) and deduces title. Forwards licence to assign to assignee’s solicitor.
· Answers pre-contract enquiries.
· Once agreed, engrosses the contract, obtains tenant’s signature and sends engrossment to assignee’s solicitor. - Assignee’s solicitor
· Takes instructions
· Assists tenant’s solicitor if anything needed for consent.
· Reviews draft contract (if applicable) and investigates title. Reviews and reports on lease. Reviews the licence to assign.
· Raises pre-contract enquiries and searches.
· Arranges for assignee to sign contract.
- Pre-exchange – consent application
- The tenant’s solicitor will usually apply to the landlord for consent early on in the transaction, as the whole transaction hinges on this being successful.
- The landlord’s solicitor will ask the tenant’s solicitor to give an undertaking for costs. The tenant’s solicitor will want to ensure that they are in funds (ie, have money in client account from the client to cover the undertaking).
- The undertaking will typically cover the landlord’s solicitor’s and surveyor’s costs in considering the application. It will be capped at a certain amount (say up to £850 plus VAT for each of the solicitor’s and surveyor’s costs).
- Once the undertaking has been provided, the landlord’s solicitor will draft a licence to assign (this will be covered in a separate element). Although a short document, both the tenant’s solicitor and assignee’s solicitor may have amendments that they wish to make, so it may take time for all three parties (landlord, tenant and assignee) to agree its final form.
undertaking for costs?
An undertaking for costs is a promise by a solicitor to pay costs. Breach of the undertaking may lead to disciplinary action by the Solicitors’ Regulation Authority, and as a solicitor is an officer of the court, their undertaking is also enforceable in the courts.
Assignment
- Pre-exchange – draft contract and lease
- The tenant’s solicitor will draft a contract if it is intended to exchange (for example, if the parties are anxious to bind themselves to the assignment subject to the landlord’s consent).
- The tenant’s solicitor deduces title by providing official copies for the leasehold title, or if it is not a registered interest (ie, a term of 7 years or less), then the landlord’s title. In either case, a copy of the lease will be provided to the assignee’s solicitor.
- The assignee’s solicitor will review the draft contract and amend if they feel appropriate in the assignee’s interests. The landlord is not normally a party to this contract.
- An important difference between the grant of lease and assignment procedure is that whereas a new tenant will have the opportunity to negotiate the lease, an assignee generally takes the lease as it is.
- Only in rare instances (eg, if the landlord would prefer to have the assignee over the tenant) might the landlord agree to vary the lease (this would require a deed of variation).
Assignment
- Pre-exchange – investigation of title, searches and enquiries
- The tenant’s solicitor will deduce their leasehold title, and the assignee’s solicitor should investigate it. If the lease is unregistered, this would include investigating the landlord’s title, but if the lease is registered, then the assignee’s solicitor can rely on the leasehold official copies.
- The assignee’s solicitor will raise CPSE1 enquiries (as does a buyer’s solicitor in a commercial freehold transaction) but will also raise CPSE4 enquiries which are specific to the assignment of a lease.
- The assignee’s solicitor should raise the same searches as they would if they were buying the freehold.
- In general the assignee’s solicitor should ideally exercise the same care over their investigations with a leasehold transaction. In practice, the assignee may agree with their solicitor that the cost of full investigations are not justified for a very short lease with limited repair and other obligations. In this case, the assignee’s solicitor should ensure that the assignee is advised of the risks.
Assignment
- Exchange?
- On exchange of a contract for assignment
o the tenant’s solicitor and assignee’s solicitor exchange in similar manner as for a freehold contract (usually adopting Law Society B)
o no deposit is usually payable for assignment of a rack rental lease (for an assignment of a long residential lease, a 10% deposit would be usual, just like for a freehold)
o the contract may set a fixed completion date, or may specify that completion is conditional (eg, on the landlord’s consent)
- Pre-completion tasks - assignment?
- Landlord’s solicitor
· Engrosses licence to assign in triplicate (three copies), arranges for landlord to execute one copy - Tenant’s solicitor
· Arranges for tenant to execute one copy of the licence to assign
· Prepares and sends a completion statement detailing the money due on completion (eg, any apportioned annual rent, service charge and insurance rent)
· Responds to requisitions on title
· Approves deed of assignment and arranges for tenant to execute - Assignee’s solicitor
· Arranges for assignee to execute one copy of the licence to assign
· Obtains funds from assignee needed to complete as per completion statement
· Raises requisitions on title
· Raises pre-completion searches
· Drafts deed of assignment
- Pre-completion steps - assignment?
- The tenant’s solicitor prepares a completion statement for the assignee. This involves calculating what proportion of the rents due under the lease are attributable to the tenant and the assignee.
- As with a freehold transaction, pre-completion searches are carried out if the lease is registered. The appropriate search is an OS1 search of the whole of the tenant’s leasehold title. Note that it does not matter here if it is a lease of part or whole, as it is not the landlord’s title being searched.
- The landlord will prepare the licence to assign in triplicate, as each of the landlord, tenant and assignee will want a signed copy at its completion.
- The assignee will draft the deed of assignment. If it is a registered lease, this will be in form TR1, as for a registered freehold. If the tenant’s solicitor is happy with the draft, then they will arrange for the tenant to execute it. The landlord is not involved in this.
- On completion of the assignment…
o the assignee’s solicitor sends the tenant’s solicitor the completion monies
o the landlord’s solicitor, tenant’s solicitor and assignee’s solicitor agree over the telephone to complete and date the licence to assign
o the tenant’s solicitor and assignee’s solicitor agree over the telephone to complete and date the deed of assignment
- Post-completion - Assignee’s solicitor
· Arranges to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary
· Registers assignment if necessary
· Sends formal notice of assignment to landlord’s solicitor
What does underletting involve?
- Underletting involves the tenant creating an underlease to the undertenant
o The tenant takes a landlord role – but their landlord is the superior landlord
o Undertenant is likely paying market rent if this is a residential property
Can a qualified covenenant against underletting be upgraded?
- A qualified covenant is converted by statute to a fully qualified covenant with the additional requirement that the landlord make its decision in a reasonable time.
Who is liable in an underletting?
- After underletting, the tenant remains liable to the landlord for its covenants.
- After underletting, the undertenant is liable to the tenant for its covenants, but will generally be required to give the landlord a direct covenant, as otherwise it is not liable directly to the landlord.
Can the underlease the for the same length of time as the lease?
- The underlease must be for a shorter term than the lease itself, even if only a day shorter otherwise it would be an assignment.
Can a tenant underlet if the lease is silent about it?
- If the lease is silent, then the tenant is free to underlet. However, a commercial lease will impose a requirement of consent, and will want to vet prospective undertenants. Underlettings of part may be permitted if it is practical to separate the premises.
- Qualified covenants against underletting?
- A tenant’s covenant against underletting of whole may be qualified, meaning that underletting is only allowed with the landlord’s consent.
- As with assignment (see the relevant element), a qualified covenant against underletting is automatically converted to a fully qualified covenant and the decision must be made within a reasonable time.
- A commercial lease may contain an absolute covenant against underlettings of part, except for a permitted part (such as the floor of an office building in the previous example), and a fully qualified covenant against underlettings of the whole or a permitted part.
- The considerations for what constitutes reasonable withholding of consent are similar to that for assignment. The landlord is equally concerned with the ability of the undertenant to pay the rent and perform the obligations of the lease as in certain instances the undertenant may become the direct tenant of the landlord.
- Unlike assignment, lease covenants regulating underletting do not talk in terms of conditions and circumstances on which consent may be reasonably withheld. The transaction is somewhat less risky for the landlord in that the tenant remains primarily liable for observing the covenants under the lease.
- However, the landlord is able to restrict the underletting, and will normally do so in a commercial lease. These restrictions are concerned with what would happen if the undertenant becomes the direct tenant of the landlord.
- Typically the lease will prevent the tenant from underletting the premises:
together with property that do not belong to the landlord
on payment of a lump sum (as doing so likely means that the tenant is not paying a full market rent)
with a rent free period beyond what is normal in that market
· and may require that the underlease: - is at a rent no lower than that in the tenant’s lease (but this makes it difficult for the tenant to underlet in a falling market)
- contains covenants no less onerous than in the tenant’s lease
- Privity of contract - underletting?
- At common law, privity of contract is the ability of the original parties to a contract to enforce the obligations against each other, even after the contract has been assigned.
· Privity of contract exists between the landlord and the tenant.
· It also exists between the tenant and the undertenant.
· However, it does not exist between the landlord and the undertenant.
- Privity of estate - underletting?
- By contrast, privity of estate is the ability of the landlord and tenant for the time to enforce the provisions of a lease against each other. However, not all obligations are enforceable under privity of estate.
· Privity of estate exists between the landlord and the tenant.
· It also exists between the tenant and the undertenant.
· However, it does not exist between the landlord and the undertenant.
- The undertenant’s liabilities to the landlord
- As there is neither privity of contract nor privity of estate between the landlord and the undertenant, the landlord is not able to enforce covenants against the undertenant.
· The landlord will therefore usually want the undertenant to covenant directly with the landlord.
· A direct covenant can be given by the undertenant to the landlord in the licence to underlet (for detail, see the element on licences to assign and underlet).
· There is no equivalent of an authorised guarantee agreement for underletting, as the tenant remains liable to the landlord in any case.
- Pre-exchange - grant of underlease - solicitor tasks?
- Landlord’s solicitor
· Takes instructions
· Considers application to underlet
· If landlord is happy in principle to give consent, requests undertaking for costs and issues draft licence to underlet to tenant’s solicitor - Tenant’s solicitor
· Takes instructions
· Applies for consent to underlet
· Prepares draft lease and, if relevant, agreement for underlease (ie, if there is to be an exchange)
· Reviews draft licence to underlet and sends copy to undertenant
· Deduces title and responds to any queries on title
· Answers pre-contract enquiries
· Once agreed, engrosses the agreement for underlease, obtains the tenant’s signature and sends counterpart to undertenant’s solicitor - Undertenant’s solicitor
· Takes instructions
· Reviews draft lease and agreement for lease and amends as required
· Reviews draft licence to underlet
· Investigates title and raises any queries on title
· Raises pre-contract enquiries and searches
· Arranges for undertenant to sign counterpart lease
- Pre-exchange – consent application - underlettings
- As with assignment, the tenant’s solicitor will usually apply to the landlord for consent early on in the transaction, as the whole transaction hinges on this being successful.
- The landlord’s solicitor will require the tenant’s solicitor to give an undertaking for costs before beginning work. Once the undertaking for costs is in place, the landlord’s solicitor will prepare the draft licence to underlet.
- The landlord’s solicitor will also want to see the draft underlease to ensure that it will comply with the tenant’s obligations under the lease.
- Pre-exchange – drafting the underlease
- The tenant’s solicitor will need to draft the underlease.
- Unlike a freehold owner granting a lease, a tenant granting an underlease is usually very limited in what provisions they can offer. For example, the tenant’s lease will usually require the underlease to contain obligations no less onerous than the tenant’s (eg, if there is a full repairing covenant in the lease, there must also be a full repairing covenant in the underlease).
- The underlease may be a full form lease, which will look similar to the tenant’s own lease, or it may be a lease by reference, which incorporates sections of the tenant’s lease by reference (eg, it may define the “tenant’s covenants” as the tenant’s covenants in the tenant’s lease, and then contain a covenant for the undertenant to observe the tenant’s covenants).
- The term granted by the underlease must be less than the remaining term of the tenant’s lease, even if only one day less.
- Pre-exchange – agreement for underlease
- As with a grant of lease, it is not always necessary to have exchange at all. If exchange does take place, then the tenant’s solicitor will draft an agreement for underlease.
- As with an agreement for lease, this may set the completion date in the future and may make the completion conditional on various matters.
- They may exchange an agreement for underlease conditional upon the landlord’s consent, allowing them to complete as soon as the landlord is ready to give it.
- Pre-exchange – investigation of title, searches and enquiries - underlettings?
- The undertenant’s solicitor should generally carry out the same investigation of title, searches and enquiries as the tenant’s solicitor in a grant of lease (see the element on grant of lease procedure).
- However, one important difference is that rather than the landlord deducing its freehold title, the tenant will need to deduce its leasehold title as follows:
o if the lease is over 7 years, then the tenant need only provide an official copy of its registered leasehold title;
o if the lease is 7 years or under, then the tenant will need to provide an official copy of the landlord’s freehold title together with a copy of the lease. - As with the grant of lease, it is possible that the undertenant may not want their solicitor to do full scale investigations if it is a short term letting.
- Exchange - underlettings?
- Between the tenant and undertenant
- On exchange of an agreement for underlease:
o the tenant’s solicitor and undertenant’s solicitor exchange in similar manner as for a freehold contract (usually adopting Law Society B)
o no deposit is usually payable
o the agreement for lease may set a fixed completion date, but more likely will set out what conditions need to be satisfied and by when for completion to take place
o the agreement for underlease will usually have a draft of the agreed form of underlease annexed to it, so it can only be exchanged once the terms of the underlease have been agreed
- Pre-completion - underlettings?
- Landlord’s solicitor
· Engrosses agreed form of licence to underlet and circulates for execution
· Obtains landlord’s execution to licence to underlet - Tenant’s solicitor
· Prepares original and counterpart underlease, obtains tenant’s signature to original and sends counterpart to undertenant for signature
· Prepares and sends a completion statement, detailing the money due on completion (eg, any apportioned annual rent, service charge and insurance rent)
· Obtains tenant’s execution to licence to underlet - Undertenant’s solicitor
· Arranges for undertenant to sign counterpart underlease
· Obtains funds from client needed to complete as per completion statement
· Raises pre-completion searches
· Obtains undertenant’s execution to licence to underlet
- Pre-completion steps - underletting?
- A completion statement will be prepared, just as with a grant of lease. Note that it is the rent under the underlease that is payable, however, not the rent under the tenant’s lease.
- The underlease will likely require an appropriate sum from the undertenant for service charge and insurance rent to cover the corresponding obligations of the tenant.
- If it is an underletting of the whole of the tenant’s interest, then an OS1 search is carried out against the tenant’s registered leasehold title. If it is an underletting of part of the tenant’s interest, then an OS2 search is carried out against the appropriate part of the tenant’s registered leasehold title.
· Updates your official copies and gives you a priority period - Where the underlease is not registrable, an OS3 search may be carried out against the tenant’s interest to check whether any adverse entries have been made since the date of the last copy of the tenant’s title register. It would not be appropriate to carry out a search with priority against the landlord’s freehold interest, as the underlease is not granted out of the freehold.
- Completion - underletting?
- On completion of the underlease
o the parties’ solicitors agree to date and complete the licence to underlet
o the undertenant’s solicitor sends the tenant’s solicitor the completion monies
o the tenant’s solicitor and undertenant’s solicitor agree over the telephone to complete and date the executed underleases that they are holding
o the tenant’s solicitor and undertenant’s solicitor send the completed original and counterpart underleases to each other
- Post-completion - underletting?
- Tenant’s solicitor
· Sends notice of underlease to the landlord’s solicitor - Undertenant’s solicitor
· Arranges to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary
· Registers underleases if necessary
Liscence to assign/underlet - purpose?
· Landlord’s consent to assignment or underletting is documented in a formal deed being a licence to assign or licence to underlet respectively
· Residential conveyancers do not often deal with licences to assign. Why not?
- Because most long leases do not require landlord’s consent to an assignment.
Common provisions in licence to assign and underlet?
- Common to both licence to assign and licence to underlet
· Consent for limited time (say 3 months) and limited to specific transaction
· Tenant agrees to pay landlord’s costs - Covenant
· Assignee or underlessee covenants directly with the landlord to observe lease obligations (not necessary in a licence to assign a new lease, but landlord may request anyway)
- Different provisions for different types of licence:
· Tenant guarantees assignee’s performance of tenant obligations (authorised guarantee agreement) – licence to assign new lease only
· Tenant not released from outstanding obligations – licence to assign new lease only (not necessary for old leases or underlettings)
· The draft licence to underlet will have a draft of the underlease attached
- Notice of dealing?
- Following an assignment, the assignee, and following an underletting, the tenant, will be required to give the landlord formal notice within a month that the transaction has been completed.
- There will usually be a fee for the landlord’s solicitors receipting this notice.
- For a long residential lease, it is often the case that the lease may be freely assigned (eg, on a sale of the house or flat), or underlet on short tenancies, without landlord’s consent.
· For a long residential lease they would likely pay a large sum and nominal rent - However, there will usually be a requirement to give notice of dealing for assignments of the lease. This is mainly so that the landlord for the time being knows to whom they should address the ground rent demands!
- Different forms of alienation?
- Assignment and underletting are not the only forms of alienation. There are other ways in which the tenant may be able to deal with their interest.
- Charging the lease
· A tenant may create a charge over their lease, just as a freeholder owner charges their interest to a mortgage lender.
· A commercial tenant may do this as part of a floating charge over their business generally. The bank taking the charge will want the benefit of the lease if taking the business into administration.
· A residential leaseholder will do this when taking a mortgage. - Share occupation
· A tenant may want to share occupation with a third party without creating an underlease.
· Usually a commercial lease will allow sharing with group companies.
· This is because from the landlord’s point of view, they can regard the tenant and its group companies as one entity – the landlord can still enforce the covenants against the tenant.
- 2020 Code for Leasing Business Premises affect on alienation?
- The Code has various requirements on alienation. Some important ones:
o Lease should allow tenants to assign or underlet the whole of the premises with the landlord’s consent not to be unreasonably withheld or delayed
o Leases should allow tenants to share with group companies without consent.
o Leases should allow tenants to charge the lease to a bank or reputable lending institution without consent (with a limited exception). - Licence will also contain a covenant for the tenant to undertake the landlord’s cost
Prescribed clauses?
eases that are dated on or after 19 June 2006 which are granted out
of registered land and are compulsorily registrable (see 7.8.3) must contain a standard set
of clauses (‘prescribed clauses’) at the beginning of the lease, or immediately after any
front cover sheet and/ or front contents page. The prescribed clauses are a summary of the
important details in the lease and bring together, in one place, all the information that the
Land Registry needs in order complete registration. This saves time for the Land Registry which will prepare the register entries to complete registration of the lease from the information in
these clauses.
How is a commencement clause written?
the lease starts with the words ‘This lease’, followed by the date of its grant
and the names and addresses of the parties. Where the lease is created out of a registered
title, the document will carry the usual Land Registry heading (county and district, landlord’s
title number, brief description of the property, and date) at the top of its first page.
Interpretation clause?
definitions are required to avoid having to repeat detail. Definitions will
appear with a first capital letter.
Ancillary rights?
these give the tenant rights over other land to enable them to use the leased
property more effectively, eg a right to use roads, car parking spaces or an area for loading/unloading.
Rights excepted and reserved?
these are rights in favour of the landlord over the leased
property, such as a right to enter to do repairs to service media and other parts of the
building.
tenancy at will?
This is where a tenant occupies the property with the
permission of the landlord on the terms that the tenancy may be terminated by either party
at any time. So, it is different from a fixed- term tenancy (which is for a specific fixed period)
and a periodic tenancy (which is one that runs from one period to another). A tenancy at will
is indefinite and might last any number of days, weeks or years. They are not often used for
commercial properties as they are too uncertain, but tenancies at will can occur where the
parties are not expecting them, eg where a tenant remains in occupation at the end of the
formal lease, or where the parties want to create an informal agreement, such as a tenancy
between family members.
Many arguments have arisen over the precise meaning of a covenant ‘to repair’. Case law
has established the following:
*
There must be disrepair first, before the tenant can be in breach of covenant to repair.
The physical condition of the property must have deteriorated from some previous
physical condition (Post Office v Aquarius Properties Ltd [1987]).
*
This is a problem if the building is brand new and will inevitably deteriorate from its
original pristine condition. However, the property need not be kept in perfect repair: ‘It
need only be put into such a state of repair as renders it fit for the occupation of a
reasonably minded tenant of the class likely to take it’ (Esher LJ in Proudfoot v Hart
[1890]).
*
Works of renewal or improvement go beyond repair. Repair is restoration by renewal
or replacement of parts of a whole, not renewal or replacement of the whole (Lurcott v
Wakeley [1911]). It is a question of fact and degree and the work that the tenant has to
carry out depends on the age and nature of the property at the date of the lease.
*
A repairing covenant does not oblige the tenant to give back to the landlord a property
that is ‘wholly different’ from that leased to them, but it can oblige the tenant to remedy
an inherent defect in the design and/ or construction of the building if that is the only way
to effect the repair (Ravenseft Properties Ltd v Davstone (Holdings) Ltd [1980]).
The tenant should beware of repairing covenants with additional wording. A covenant to
‘keep’ a building in repair also means ‘put’ it into repair, even if that involves the tenant
putting the building into a better state of repair than when they entered into the lease.
A covenant to ‘keep the property in good condition’ is more onerous than a plain covenant to
keep it in repair. It can mean that the tenant is obliged to carry out some works, even though
there is no actual disrepair (Welsh v Greenwich LBC [2000]).
A covenant by the tenant to pay for the insurance policy?
Often this covenant is to pay a sum reserved as rent (the ‘insurance rent’), which includes the
premium for the buildings insurance policy and an associated policy covering the landlord for
loss of the annual rent (ie the income stream) during any period where the tenant is unable to
use the building following the occurrence of an insured risk.
A covenant by the landlord to reinstate the property?
Often this is expressed as a covenant to use the insurance proceeds to reinstate the property
(rather than an absolute obligation to reinstate even if the proceeds are insufficient). Ideally,
a tenant would like this extended to include an obligation for the landlord to make good any
shortfall in the insurance proceeds from its own resources as there will have been a failure to
insure the property to its full reinstatement value.
There may also be a provision to deal with the situation where reinstatement is impossible.
Many leases provide for the insurance monies to be retained by the landlord, whose building
it is, but a tenant in a strong negotiating position (or when it is a long lease for which the
tenant has paid a premium) may have agreed that the proceeds will be passed over to the
tenant who has been paying the premiums, or that the proceeds will be shared between
landlord and tenant proportionate to their respective interests in the building.
Rent suspension?
In the absence of an express term to the contrary, rent will continue to be payable even if the
property is rendered unusable. The tenant should therefore ensure that the lease provides for
the payment of rent to be suspended during any period that the property cannot be occupied
following damage by an insured risk. The landlord will normally be happy to allow such rent
suspension, as they can insure against loss of rent in such circumstances. However, usually
such insurance is limited in duration (often to three years) and the landlord may attempt to
limit the rent suspension accordingly.
Termination clause?
Unless the lease states otherwise, if the building is totally destroyed, the doctrine of frustration
will only apply in exceptional circumstances. Therefore, the lease will often give the landlord
the right to terminate the lease should reinstatement prove impossible. The tenant should try
to ensure that they have the same right, particularly where the rent suspension is time- limited.
The tenant should be able to terminate the lease if the property has not been reinstated by
the end of the rent suspension period; otherwise they will be paying rent for a property they
cannot use, as well as the rent on alternative premises.
Compensation for improvements?
A tenant which has obtained prior authorisation to make the improvements by using the s 3
statutory procedure is entitled to claim compensation for improvements at the end of the term
that ‘add to the letting value of the holding’ under s 1 of the Landlord and Tenant Act 1927,
provided the claim is made within certain statutory time limits. In practice, these provisions are
rarely used. Tenants usually obtain consent to carry out the alterations without using the s 3
statutory procedure, and in any event most leases contain a tenant’s covenant to remove all
alterations and reinstate the premises at the end of the term (so there are no improvements
left in respect of which to claim compensation).
Assignment
Section 19(1)(a) Landlord and Tenant Act 1927*:
implies into any qualified covenant
(not to assign without the landlord’s consent) that it be deemed to be subject to a proviso
that such consent is not to be unreasonably withheld. The effect, therefore, is to convert a
qualified covenant into a fully qualified covenant.
Assignment
Section 19(1A) Landlord and Tenant Act 1927*
this allows for the landlord and the
tenant to agree in advance conditions and circumstances in which it would not be
unreasonable for the landlord to refuse consent. Conditions are often that the assignor agrees to give an authorised guarantee agreement (‘AGA’ – see 8.4) for the assignee and/ or that the assignee agrees to provide guarantors.
Circumstances can include that
the assignor is up- to- date with the rent and/or that the assignee is of sufficient financial strength to enable it to comply with the tenant’s covenants in the lease. The effect is that such pre-agreed conditions and circumstances are deemed reasonable.
Assignment
Section 1 Landlord and Tenant Act 1988*:
this means that where there is a qualified
covenant on assignment (whether the proviso that consent is not to be unreasonably withheld is express or implied by statute) and the tenant has made a written application
for consent, the landlord must within a reasonable time:
a) give consent, except in a case where it is reasonable not to give consent
b) serve on the tenant written notice of its decision whether or not to give consent
specifying in addition:
i) if the consent is given subject to conditions, those conditions,
ii) if the consent is withheld, the reasons for withholding it.
The Court of Appeal laid down a number of guidelines on the issue of the landlord’s
reasonableness under s 19(1)(a) in a 1986 case concerning an application to assign:
(a) The purpose of a fully qualified covenant against assignment is to protect the landlord
from having its premises used or occupied in an undesirable way, or by an undesirable
tenant or assignee.
(b) A landlord is not entitled to refuse its consent to an assignment on grounds which have
nothing whatever to do with the relationship of landlord and tenant in regard to the
subject matter of the lease.
(c) It is unnecessary for the landlord to prove that the conclusions which led it to refuse to
consent were justified, if they were conclusions which might be reached by a reasonable
person in the circumstances.
(d) It may be reasonable for the landlord to refuse its consent to an assignment on the
ground of the purpose for which the proposed assignee intends to use the premises, even
though that purpose is not forbidden by the lease.
(e) In general a landlord is bound to consider only its own relevant interests when
deciding whether to refuse consent to an assignment of a lease. However, it would be
unreasonable for a landlord not to consider the detriment which would be suffered
by the tenant if consent were to be refused, if that detriment would be extreme and
disproportionate in relation to the benefit gained by the landlord.
(f) Subject to the above propositions, it is, in each case, a question of fact, depending on
all the circumstances, whether the landlord’s consent to an assignment is being withheld
unreasonably.
The mandatory requirements in the RICS Code are:
- Lease negotiations must be approached in a constructive and collaborative manner.
- Any party not represented by an RICS member or other property professional must be
advised of the existence of the code and must be recommended to obtain professional
advice. - Transaction terms must be recorded in writing, subject to contract and must summarise
specified details as a minimum. The specified details relevant to the terms and conditions
considered in this chapter are:
∘
identity and extent of the premises, together with any special rights to be granted
∘
length of term including details of any renewal or break rights
∘
amount of rent, frequency of rent payments and frequency and basis of any
rent review
∘
liability for payment of insurance premiums
∘
ability to assign, underlet, charge or share the premises
∘
repairing, permitted use and alterations obligations.
The landlord is responsible for ensuring that heads of terms containing the specified
provisions are agreed before the draft lease is sent to the tenant’s solicitor for approval.
The remainder of the code is framed in terms of best practice, allowing an RICS member to
depart from the recommendations in exceptional circumstances. The points that are relevant
to the terms and covenants considered in this chapter are:
*
The identity of the property should be clearly defined, a lease plan should be provided
and the tenant should be granted all necessary rights for the intended use of the property
*
The length of term and any break provisions should be stated
*
Leases should allow either party to start the rent review process. Tenants should be
made aware of the method or formula for review where appropriate to allow time to take
professional advice
*
Leases should contain standard provisions for assignment of whole, underletting of whole
or part (where appropriate) charging and sharing with group companies
*
Repairing obligations should be appropriate to the length of the lease and the condition
of the premises
*
Controls on alterations and change of use should be no more restrictive than are
necessary to protect the value of the property and any adjoining or neighbouring
premises of the landlord.
Purpose of an agreement for lease?
Once the solicitors have agreed the form of lease/ underlease and carried out all the pre- contract steps, they should be ready to complete the grant of the lease. In leasehold transactions it is quite common to by- pass the contract and proceed straight to completion by
granting the lease itself. It takes a long time to negotiate a commercial lease and the parties are already financially committed, so to avoid further costs the parties may go straight to completion.
A contract, usually called an ‘agreement for lease’, will be useful where there is going to be a delay between agreeing the lease/ underlease and actually granting it but one (or both) of the parties requires the other to be bound into the transaction.
Where an agreement for lease is required, it is drafted by the landlord’s solicitor in the same way that the seller’s solicitor drafts the contract in the case of the sale of a freehold property.
The particulars of sale must state that the property is leasehold and give details of the term to be vested in the tenant. Incumbrances affecting the superior title must be disclosed (as these
will affect the tenant in the same way as they would affect a buyer of the freehold) and the agreement should provide for an indemnity to be given in the lease/ underlease in respect
of future breaches of any covenants affecting the title. In other respects, the contract will be similar to that prepared on a freehold transaction.
Standard Condition 8.2 (SCPC 11.2.3) provides for the lease/ underlease to be in the form annexed to the draft contract, and for the landlord to engross the lease/ underlease and supply the tenant with the engrossment at least five working days before the completion date.
Deduction of title?
Before drafting the lease/ underlease, the landlord’s solicitor will need to investigate the client’s title to ensure that the client is entitled to grant it, to anticipate any problems with the title and draft any agreement for lease. Where the property is subject to an existing mortgage, the mortgage will frequently contain a prohibition or restriction on the borrower/
landlord’s ability to grant a lease of the property so the lender must be contacted and its permission obtained before the transaction proceeds.
In the case of a lease, a tenant will want the landlord to deduce title to the freehold interest.
This is particularly important where a premium is to be paid for the grant of the lease, where the property is being offered as security for a loan or where a tenant is paying a significant rent.
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. Although most landlords are happy to deduce their title, under the general law a tenant 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 seven 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. If the landlord’s title is registered, the tenant will be able to check the landlord’s title under the Open Register rules in any event.
In the case of an underlease, if the headlease is registered with absolute leasehold title, there will be no need to see the title to the freehold. Where the headlease 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 undertenant 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.
The requirement to provide details of the freehold may cause problems to a headtenant if
it did not call for the deduction of the freehold title when it took the headlease. If unable to
comply, the headtenant will need to exclude this requirement by a special condition in the
contract.
Pre- contract enquiries and searches - lease
The landlord’s solicitor should provide the tenant’s solicitor with the following documents:
(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).
The tenant’s or undertenant’s solicitor will want to undertake the same searches and enquiries
as if the client were buying the freehold (see Chapters 3 and 5). There will normally be some
additional queries relating specifically to a lease. For example, the tenant will want to see
details of the landlord’s insurance policy
When reporting to the client, the solicitor should explain the tenant’s obligations under the
lease/ underlease and the danger of losing the lease through forfeiture for breach of covenant
Privity of contract and how the licence to underlet deals with this?
The usual condition of granting consent is that the undertenant is to enter into a direct
covenant with the head- landlord to perform the covenants in both the underlease and the
headlease. The direct covenant usually excludes the headlease covenants to pay rent and
only applies in so far as the headlease covenants relate to the underlet property.
Ordinarily, there is neither privity of contract nor privity of estate between a head- landlord and
an undertenant and, therefore, the head- landlord is unable to sue an undertenant in respect
of any breaches of the terms of the headlease. The direct covenant creates a contractual
relationship which enables the head- landlord to sue the undertenant for any breaches of
either the headlease (other than for non- payment of rent) or the underlease. (However, the
head- landlord will need to obtain a new direct covenant on each and every assignment of the
underlease from the proposed assignee.)
Key provisions in the licence to underlet?
The key provisions in the licence to underlet are the consent of the head- landlord to the grant
of the underlease and the direct covenant from the undertenant to the head- landlord. The
licence is also likely to contain an obligation on the part of the headtenant to pay the head-
landlord’s costs for approving the underletting and granting the licence.
What each party should recieve for completion of lease?
On completion, 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.
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.
On the grant of an underlease, the parties must also ensure that, on or before completion,
the head- landlord has given its consent to the grant of the underlease, usually in the form of a
licence to underlet
SDLT - leases?
A land transaction return must be submitted to HMRC on the grant of a lease in the usual way.
In the case of the grant of a lease, 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.
*
In the case of non- residential property, the SDLT payable on any premium is calculated on
the same basis as for the consideration on the sale of freehold land (see 1.6.1(b)).
*
In relation to the rental element, a complex formula is used to identify the Net Present
Value (‘NPV’) of the rent and SDLT is then calculated using this figure. Calculating the
NPV consists of working out how much rent is payable in total over the term of the lease
(including any VAT) and then discounting rental payments to be made in future years by 3.5% per annum to compensate for the fact that future rent received will have a lower
value than rent received today.
*
SDLT is chargeable on the VAT inclusive amount of the premium and the rent so it is
necessary to determine if VAT is chargeable because the landlord has opted to tax the
property.
LTT (Wales) - lease?
LTT is charged on the leases of non- residential property in a similar way to SDLT, ie on the
premium and on the rental element using the NPV of the rent.
*
The LTT payable on any premium is calculated on the same basis as for the consideration
on the sale of freehold land (see 1.6.1(d)), except that the 0% band for premiums
extending to £150,000 is not available where the ‘relevant rent’ exceeds £9,000. 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.
The land transaction return and payment must be submitted to the Welsh Revenue
Authority within 30 days of completion of the grant of the lease.
Pre- completion formalities for underletting lease?
The lease/ underlease is normally prepared in two identical parts, the lease and counterpart.
The lease is executed by the landlord and the counterpart by the tenant. On completion, these
are exchanged so that each party has a copy of the lease signed by the other in case of
subsequent dispute.
As with the transfer deed in the case of the sale of freehold land, a top copy (or engrossment)
of the lease/ underlease and counterpart will need to be made and it is these that the parties
will sign. The landlord will sign the lease itself in readiness for completion and the counterpart
should be sent to the tenant’s solicitor for execution by the tenant (at least five working days
before contractual completion date if SC 8.2.5 or SCPC 11.2.5 apply).
A lease is a legal estate in land and must be created properly according to the correct legal
formalities. The requirements for execution of a deed are dealt with in 5.3.
Most leases provide that rent is payable in advance, not in arrears. Unless completion takes
place on a day when rent under the lease/ underlease falls due, a proportionate amount of
rent calculated from the date of completion until the next rent payment day will be payable by
the tenant on completion and this should be agreed in advance.
The landlord’s consent must be given by or on completion of the assignment, otherwise the
assignor is likely to be in breach of the assignment covenant in the lease. The contract can
deal with this two in different ways, depending on which set of standard conditions are used:
*
Under the SCs, either party may rescind the contract by notice if the consent has not
been given three working days before the completion date or if, by that time, consent has
been given subject to a condition to which the buyer reasonably objects. Although this
allows contracts to be exchanged before the landlord’s consent is obtained, it gives rise
to uncertainty as to whether the transaction will complete. Where the timing of completion
is important (eg where there is a dependent transaction), it is safest not to exchange until
the landlord’s consent has been obtained. Otherwise the assignment may fall through when the landlord refuses consent, whereas the dependent transaction would still be
binding.
*The SCPCs provide that if the landlord’s consent has not been obtained by the completion date, completion is postponed until five working days after the assignor notifies the buyer that consent has been given. The contract may not be rescinded until six months have passed since the original completion date. Either party can then rescind by serving notice
on the other. Again, if timing of completion is important, it is safest not to exchange until the landlord’s consent has been obtained.
Purpose of a licence to assign and who prepares the draft?
The purpose of a licence to assign is for the landlord to give consent to the assignment of
the lease by the assignor to the assignee. If the assignment were to take place without that
consent, the assignor may be committing a breach of the tenant’s alienation covenants in the
lease: the assignor may not be released from liability under the tenant’s covenants (see 9.2.2)
and the lease itself could be liable to forfeiture (see 9.5).
The draft licence to assign is** produced by the landlord’s solicitor **and sent to the assignor’s
solicitor who coordinates with the assignee’s solicitor to amend or agree the draft. If the
assignor and assignee are to enter into covenants in the licence then all three (ie landlord,
assignor and assignee) will be parties to the licence, which must be in the form of a deed.
Often the licence will be prepared in triplicate, so that on completion each party receives a
signed and dated part. Any guarantors of the assignee or assignee will be required to join in.
Key provisions in the licence to assign
A typical licence to assign will contain the following components:
(a) The landlord grants consent to the assignor to assign the lease to the assignee. Often
this consent will be time- limited (eg three months) because the landlord has no control
over when the assignment takes place and the assignee’s financial position can change
in a short time. The landlord would not want to be bound to consent to an assignment if
the assignee’s financial position has deteriorated since the references and accounts were
checked.
(b) If the lease was granted on or after 1 January 1996, the assignor will typically give an
authorised guarantee agreement to the landlord (see 8.4.4 below).
(c) If the lease was granted before 1 January 1996, a direct covenant by the assignee to the
landlord to observe and perform the covenants in the lease for the remainder of the term
(see 8.4.3 below).
(d) the assignor agrees to pay the landlord’s legal and professional costs.
Privity of contract and how the licence to assign deals with this?
The relationship between the landlord and the assignee will depend on whether the lease is
an ‘old lease’ granted before 1 January 1996, or a ‘new lease’ granted on or after that date
(see 9.2).
An assignee of an old lease is liable under the doctrine of privity of estate for all the
covenants in the lease which ‘touch and concern’ the land, but only for as long as the lease
remains vested in the assignee. The landlord will therefore seek to extend the liability of
the assignee by requiring it, as a condition of the landlord’s consent, to enter into a direct
covenant to observe the covenants in the lease for the remainder of the term of the lease,
thereby creating privity of contract between the landlord and the assignee. This direct
covenant is usually contained in the licence to assign.
An assignee of a new lease is also liable for breaches of covenant committed while the lease
is vested in them (although they are liable during that time for all of the tenant covenants, not
just those that touch and concern the land). However, on a future assignment of the lease, the
Landlord and Tenant (Covenants) Act 1995 automatically releases the assignee from all the
tenant covenants of the tenancy. If the landlord requires a direct covenant from the assignee,
then this covenant should be limited to the period the assignee is actually the tenant, not the
remainder of the entire term. To compensate the landlord for this loss of privity of contract for
the whole of the term, statute allows the landlord to require that the assignor enters into an
authorised guarantee agreement instead.
An AGA will typically contain covenants by the assignor:
(a) guaranteeing that the assignee will perform the tenant’s covenants in the lease, including
the covenant to pay rent
(b) promising to perform such covenants if the assignee does not
(c) indemnifying the landlord for the assignee’s failure to pay rent or to observe the other
covenants
(d) promising to take a new lease if the liability of the assignee is disclaimed on insolvency.
The AGA should provide that the assignor’s liability does not extend beyond that of the
assignee (ie it is more limited than may be the case for an old lease), so that on the assignee
being released from liability on a further assignment of the lease, so is the assignor.
Deduction and investigation of title - assignment?
The assignor’s solicitor should investigate title in the same way as for the purchase of a
freehold property. The superior freehold title should be checked as part of this process as well
as the leasehold title, as any covenants or easements affecting the freehold will also bind the
leasehold interest. Any potential problems should be identified and all relevant incumbrances
disclosed in the draft contract.
The assignor’s solicitor should always provide the assignee’s solicitor with a copy of the lease
and any licence permitting assignment to the current and previous tenants.
As to whether the superior freehold title should also be deduced:
(a) If the assignor’s lease is registered with absolute title, the assignor’s solicitor will be able
to obtain and provide the assignee with official copies of the register and the title plan in
the usual way. Since the title to the lease is guaranteed by the Land Registry, there is no
need for the assignee to investigate the title to the freehold.
(b) If the lease is registered with good leasehold title, there is no guarantee of the
soundness of the freehold title and so, although not entitled under the general law to
do so, the assignee will try to insist on deduction of the freehold title. Without deduction
of the freehold title, the lease may be unacceptable to the assignee and/ or any lender.
If the freehold title is registered, either party could make a search under the open register
rules. Otherwise the freehold title will be deduced by the method used for unregistered
land (see 2.4). The provision for deduction of the freehold title must be dealt with by
special condition in the contract because neither set of standard conditions require the
assignor to deduce the freehold title.
(c) If the assignor’s lease is unregistered, under the general law the assignee is entitled to
call for the lease and all assignments under which that lease has been held during the
last 15 years, but not for evidence of the freehold title. Without deduction of the freehold
title, unless the freehold is already registered with absolute title, the assignee will only
obtain a good leasehold title on registration of the lease at the Land Registry following
completion, which may be unacceptable to the assignee and/ or any lender. If the
freehold title is registered, either party could make a search under the open register rules.
Otherwise the freehold title will be deduced by the method used for unregistered land
(see 2.4). The provision for deduction of the freehold title must be dealt with by special
condition in the contract because neither set of standard conditions require the assignor
to deduce the freehold title.
The assignee’s solicitor will need to investigate title and consider the terms of the draft
contract. The terms of the lease should be checked to ensure that they will be acceptable to
the assignee and any lender (see Chapter 6). Of particular importance is the length of the
residue of the term, the permitted user, the rent and whether the landlord’s consent to the
assignment will be required (see 8.3 above).
Pre- contract enquiries and searches?
The assignee’s solicitor should make the same enquiries and searches, for the same reasons,
as on a purchase of a freehold property (see Chapter 3). In addition, the assignee’s solicitor
should ask to see the insurance policy relating to the property and the receipt for the last
insurance premium due. The assignee should also ask to see a copy of the receipt for the last
payment of annual rent due under the lease to check that the assignor is not in breach of the
lease; if there are any outstanding breaches the landlord will be able to enforce the breach
against the assignee.
Where the lease has only a short period left unexpired, that the buyer may choose not to
carry out some or all searches, as the risk does not justify the cost involved.
How to transfer an assignment?
In order to transfer legal title to an estate in land, it is necessary to do so by deed. In the case
of an assignment of a lease, the transfer deed is sometimes called a ‘deed of assignment’,
but this document has the same effect and function as any other transfer deed. The transfer
deed is usually prepared by the assignee’s solicitor.
In the case of the assignment of a registered lease, irrespective of how long it has left
to run, the form prescribed under the Land Registration Rules 2003 is a TR1. If the lease
is unregistered, the assignment of a lease exceeding seven years in length will lead to
compulsory first registration and so a TR1 will normally be used, although it is possible to use
a deed of assignment similar in format to a conveyance of unregistered land. The deed of
assignment format will always be used for the assignment of a lease for seven years or less
as the assignment will not trigger first registration.
Covenants for title?
If an assignor is in breach of a repairing covenant in the lease, the lack of repair could involve
them in liability to the assignee after completion under the covenants for title which will be
implied in the transfer deed. This is because, where the assignee sells with full or limited title
guarantee, the covenants for title include a promise that the assignee has complied with the
tenant’s covenants in the lease, including repair. However, the principle of caveat emptor
makes it the assignee’s responsibility to check the physical state of the property and the
assignor should not be expected to make any promises about it.
The conflict between the promise implied by the covenants for title and caveat emptor is
resolved by modifying the covenants for title to exclude references to repair. This is covered
in both sets of standard conditions in the contract, but there must be an express modification
of the implied covenants for title in the transfer deed itself. A suggested form of wording is as
follows:
The covenants set out in section 4 of the Law of Property (Miscellaneous Provisions)
Act 1994 will not extend to any breach of the tenant’s covenants in the lease relating
to the physical state of the property.
Panel 9 of a TR1 contains space to insert this wording, but it could also be inserted in panel
11 (additional provisions).
Indemnity?
For the assignment of old leases granted before 1 January 1996, an indemnity covenant from
the assignee to the assignor is implied except where, for unregistered leases, value is not
given by the assignee for the transaction. In the latter case, an express indemnity covenant
will be inserted into the transfer deed if required by the contract, and this is provided for by
both sets of standard conditions.
For the assignment of leases granted on or after 1 January 1996, the assignor will usually
be automatically released from future liability on the assignment and so will not require an
indemnity. However, if the assignor is to remain liable (eg under the terms of an AGA), an
express indemnity covenant should be included in the transfer deed. Again, both sets of
standard conditions entitle the assignor to insert an indemnity in such circumstances.
Assignment
Pre- completion searches - registered lease?
An official search of the registers of the leasehold title (OS1) should be carried out to check
for any new entries and to gain a priority period within which to register the transfer
Assignment
Pre- completion searches - unregistered lease?
Another land charges search should be made against the name of the assignor to check that
no adverse entries have been made since the pre- exchange land charges search on all the
previous estate owners was made and to ensure that the priority period of 15 working days
covers completion of the assignment
Assignment
Pre- completion searches - company search?
The circumstances in which company searches should be carried out are set out in 5.4.3 and
apply equally to leasehold transactions.
The licence to assign?
The landlord’s solicitor will supply the engrossments (or ‘top copies’) of the licence, which
must be by deed if it contains covenants. Where the assignee is to give a direct covenant to
the landlord, the licence is usually drawn up in at least two parts, the landlord executing the
original licence (which will be given to the assignor on completion for onwards transmission to
the assignee) and the assignee executing the counterpart (which will be given to the landlord
to take effect on completion). The assignor’s AGA can be contained in the licence (in which
case a third part will be needed) or created as a separate deed, in either case to take effect
only on completion of the assignment.
Apportionments?
The assignor will usually have paid rent in advance. Unless completion takes place on a day
when the annual rent become due under the lease, it will be necessary for the instalment to
be apportioned on completion, so that the assignee reimburses the assignor for the period
from completion until the next rent day. There may also be other outgoings for which the
assignor wants to claim reimbursement, such as the insurance premium. The assignor should
supply a completion statement which shows the amounts due and explains how they have
been calculated. Copies of the receipts or demands on which the apportionments are based
should also be supplied with the completion statement, so that the assignee can check the
apportioned sums.
ASssignment - completion
The assignor will hand to the assignee such of the following documents as are relevant to the
transaction:
(a) the lease
(b) the transfer deed (TR1 or deed of assignment, as appropriate)
(c) the licence to assign executed by the landlord
(d) evidence of the freehold title in accordance with the contract (lease not registered or not
registered with absolute title)
(e) evidence of discharge of the assignee’s mortgage
(f) copies of duplicate notices served by the assignor and its predecessors on the landlord
in accordance with a covenant in the lease requiring the landlord to be notified of any
dispositions
(g) insurance policy (or copy if insurance is effected by the landlord) and receipt (or copy)
relating to the last premium due
(h) receipt for rent (and other outgoings for which the assignor wishes to claim
reimbursement).
ASssignment - completion
The assignee should hand to the assignor such of the following items as are relevant to the
transaction:
(a) money due in accordance with the completion statement
(b) duly executed counterpart licence to assign
(c) a release of deposit (only likely where the assignee is paying a premium).
Section 45(2) of the LPA 1925 provides that, on production of the receipt for the last rent due
under the lease, an assignee must assume, unless the contrary appears, that the rent has
been paid and the covenants performed. The assignee’s solicitor should inspect the receipt on
completion (and also receipts for any other apportioned outgoings).
Post- completion steps - assignment - SDLT/LTT?
SDLT/ LTT is payable only on any purchase price charged by the assignor, and is due at the
same rates using the same procedure as for the sale of freehold land (see 1.6.1). No SLDT/ LTT
will be charged on the rent as it will have been paid when the lease was granted.
Post- completion steps - assignment - registered lease?
Where the lease is already registered at the Land Registry, an application for registration
of the transfer to the assignor should be made within the priority period given by the pre-
completion OS1 search. This is irrespective of the length of time left on the lease: once
registered, the lease continues to be registered until it expires.
Post- completion steps - assignment - unregistered lease?
An unregistered lease which, at the date of the transfer to the assignee, still has over seven
years of the term unexpired will need to be registered at the Land Registry within two months
of the assignment or will be void in respect of the legal estate.
An application for registration with absolute title can be made where the assignee can
produce satisfactory evidence relating to the superior title. In other cases, only good leasehold
title can be obtained.
If the freehold title is already registered, the lease will be noted against the freehold title. In
other cases, the assignee may consider lodging a caution against first registration against the
freehold title, in order to protect their interests against a subsequent buyer of the freehold.
If the lease has seven years or less unexpired, it is incapable of registration with
separate title.
Post- completion steps - assignment - notice of assignment?
Where the lease provides that notice has to be given to a landlord of an assignment (which
is a standard provision), the notice should be given in duplicate accompanied by the
appropriate fee set out in the lease. The landlord should be asked to sign one copy of the
notice as acknowledgement of receipt and return the receipted copy to the sender to be kept
with the title deeds.
- Effluxion of time?
· A lease ends by effluxion of time when the contractual term ends.
· A fixed term tenancy which does not have security of tenure will expire at the end of the contractual term. The landlord can require the tenant to vacate the premises, and if the tenant refuses, the landlord can treat the tenant as a trespasser.
· If the landlord consents to an unprotected tenant remaining in occupation, the tenant is not holding over, but would be treated as a ‘tenant at will’.
· If the landlord accepts rent, then the tenancy at will may be converted to a periodic tenancy. A landlord needs, therefore, to exercise care.
- Break clause?
· A break clause ends a lease early.
A break clause generally requires positive action by a party to end the lease.
· A fixed term tenancy may contain a break clause, which allows the lease to be ended before the end of the contractual term.
· If the tenant exercises a break, then it is effective with a protected tenancy.
· However, if the landlord exercises a break (either a landlord only or mutual break clause), it only operates to bring the contractual term to an end. The tenant may still hold over. Therefore, if a landlord’s break clause is to be effective, a lease that would otherwise be protected must be contracted out.
- Notice to quit?
· A notice to quit is used to end a periodic tenancy, and the notice period depends on the period of the lease.
Notice to quit for a periodic tenancy means either the landlord or tenant giving notice that they intend the tenancy to end.
For a protected tenancy, a landlord’s notice to quit will end the periodic tenancy, but the tenant can hold over.
· A periodic tenancy cannot be contracted out, but of course not every periodic tenancy will qualify as a protected tenancy (eg, a non-commercial tenancy or a service tenancy).
· A notice to quit gives the other party a specific date on which to vacate, which must expire on the first day or the last day of the tenancy period.
· For example, if the tenancy runs from the 15^^th^^ day of each month to the 14^^th^^ day of the next month, then the notice period may end on either the 14^^th^^ or 15^^th^^.
It’s inclusive – if it includes a certain date it would end the day before
Notice periods for notice to quit?
· Unless there is a tenancy agreement that specifies otherwise, the notice period required depends on the period of tenancy:
Weekly – four weeks (residential) or one week (other tenancies)
Monthly – one month
Quarterly – one quarter
Yearly – six months
- Notice to quit and security of tenure?
· If the periodic tenancy is a protected tenancy, then the landlord may still serve notice to quit, but it will only end the periodic tenancy itself. The tenant will be entitled to hold over.
· The tenant may also serve notice to quit if it wishes to leave the premises. This is effective whether the tenancy protected or not.
· Therefore, a landlord wishing to recover possession from a protected tenant under a periodic tenancy will need to serve a hostile section 25 notice supported by one or more of the statutory grounds.
· This must follow the notice requirements of s25 (ie, 6 to 12 months’ notice of the termination date) but may double as a notice to quit provided it also, for example, ends on the first or last day of the period. Alternatively, a separate notice to quit may be served.
· Note that although the tenant of a protected periodic tenancy can hold over, it cannot serve a section 26 notice.
- Surrender?
· A fixed term tenancy may be brought to an end earlier than the end of the contractual term provided both landlord and tenant agree. The tenant gives up its leasehold interest to the landlord
Two types of surrender?
- An express surrender
- A surrender by operation of law
An express surrender?
where the tenant gives up its leasehold interest to the landlord by deed.
A surrender by operation of law?
is where both landlord and tenant have behaved in a way that indicates that the tenancy is no longer in existence. For example, the landlord accepts the keys from the tenant with an understanding that the tenant is leaving the premises permanently.
* CONDUCT!!!!!!!!!!!
Would a premium be payable for surrencder?
· A premium may be payable for the surrender, but the direction will likely depend who has most to gain. A premium paid by the tenant to give up its interest is known as a reverse premium.
Can surrender work when the lease is protected?
· Either an express surrender by deed or a surrender by operation of law are effective even if the tenancy is protected.
· If, as sometimes happens, there is an agreement to surrender a protected tenancy in advance of the deed, however, there is a procedure similar to contracting out which must be followed.
Merger?
· A merger happens when either the tenant acquires the landlord’s superior interest (the opposite to a surrender), or a third party acquires both.
This would happen whether the tenancy is protected or not.
Landlord’s remedies
- Damages
- Action in debt
- Gurantor and rent deposit
- Commercial rent arrears recovery (CRAR)
- Specific performance
- Injunction
Landlord’s remedies for breaches
- Damages
· A tenant’s covenants are enforceable as a matter of contract between the parties, and the landlord can bring proceedings in the court to claim for damages.
Damages are brought in to claim for breach of lease
· The measure of damages is to put the landlord back into the position they would have been were it not for the breach of covenant.
· Court proceedings can be costly and protracted, and the landlord may not be able to recover its costs.
· There are particular issues relating to damages for breach of the repairing covenant.
Measure for damages?
· The measure of damages is to put the landlord back into the position they would have been were it not for the breach of covenant.
- Action in debt?
· A landlord can issue court proceedings to recover a debt, such as unpaid rent, service charge or insurance rent.
How is an action in debt limited?
· An action for debt is limited to rent due in the six years before the issue of proceedings. Any earlier outstanding rent is irrecoverable.
- Guarantor and rent deposit?
· If the landlord had concerns about the covenant strength of a tenant or assignee at the time of the grant or assignment, the landlord may have obtained a guarantor or rent deposit from the tenant.
· The landlord can rely on the contractual terms of a guarantee to claim its losses from the guarantor.
· A guarantee will typically cover all the tenant’s obligations, so that the landlord is not limited to pursuing unpaid rent, but also any breach of the tenant’s covenants.
· The landlord can draw on a rent deposit (usually limited, say to six months’ rent) if there are any arrears.
· The tenant will be required to top up the deposit after a withdrawal. If the breach is an isolated occurrence, this can provide a useful cushion while preserving the landlord/tenant relationship.
- Commercial rent arrears recovery (CRAR)?
· Commercial rent arrears recovery (CRAR) is a self-help remedy (similar to the old common law remedy of distress which it replaced on 6 April 2014).
· Self-help remedies have the advantage of being generally cheaper and quicker than court proceedings.
· CRAR may be used where:
o the premises are purely commercial (it cannot be used, for example, where the premises comprise a shop and residential flat)
o a minimum of seven days’ principal rent is owed (it can’t be used to recover service charge or any other sum reserved as ‘rent’ but does include VAT and interest)
o the lease has not been forfeited
· CRAR requirements:
o the landlord must appoint an enforcement agent who either has the required certificate from the court or is exempt from the requirement (eg, a police officer)
o Seven clear days’ notice must be given of the intention to enter the tenant’s premises (clear days exclude Sundays and bank holidays)
o The notice must include certain details, such as the amount of the debt and how to repay it, details of the power being used to enforce the debt, and contact details for the enforcement agent
o If the notice expires without repayment of the debt, the enforcement agent can enter the premises and take control of goods belonging to the tenant up to the value of the debt owed.
o The landlord must serve a further seven clear days’ notice if it intends to sell any of the seized goods.
- Equitable remedies
· Both injunctions and specific performance are equitable remedies. Aside from the cost issue of court proceedings, equitable remedies are discretionary. Their use as a remedy against tenant breaches is limited.
- Specific performance?
· Specific performance is an order to the tenant to do something that it has not done.
· Specific performance has been granted for a tenant to put premises in repair, but this was an exceptional case (the lease did not provide other alternatives).
· Otherwise, specific performance will rarely be available to a tenant, particularly for a breach of repair.
Injunction?
· An injunction is an order to the tenant not to do something.
· The landlord may be able to get an injunction, for example, if aware that the tenant intends to assign the lease unlawfully.
· However, the landlord is unlikely to get an injunction against an assignment that has already taken place.
forfeiture requirements for Repair – s.146 notice and 1938 Act wording
- Breach of repair on leases of:
- the lease is for a term of seven years or more; and
- there are at least three years of the term left to run;
o If so, the tenant has 28 days to serve a counter-notice. This means that the landlord must get leave from the court before proceeding (and this is not easy).
o CAN ONLY BE SERVED IF THERE IS A BREACH OF REPAIR
forfeiture requirements for non-payment of rent?
– must fall within the forfeiture clause in the lease – do not need a s146 notice
For any other breaches, the landlord must serve a section 146 notice detailing the breach and giving the tenant a reasonable time to remedy the breach before proceeding to peaceable re-entry or proceedings for forfeiture.
When can the landlord forfeit the lease?
When there is a forfeiture clause in the lease and according to the terms of that clause. These usually include if the rent is unpaid when due (or following a grace period), if the tenant breaches other obligations, and if the tenant suffers an ‘insolvency event’.
What happens in the landlord can forfeit the lease for non-payment of rent?
- For non-payment of rent, the landlord can proceed to peaceable re-entry of the premises or issuing proceedings for forfeiture.
For other breaches what must the landlord do to forfeit the lease?
- For any other breaches, the landlord must serve a section 146 notice detailing the breach and giving the tenant a reasonable time to remedy the breach before proceeding to peaceable re-entry or proceedings for forfeiture.
How can the landlord waive their right to forfeit the lease?
· If the landlord acts in a way that acknowledges the continuing existence of the lease, the landlord risks losing the right of forfeiture.
· An implied waiver of the right of forfeiture can arise if:
o the landlord does some unequivocal act recognising the continuing existence of the lease;
o with knowledge of the breach in question; and
o communicates that act to the tenant.
· The intention of the landlord is irrelevant.
When can the tenant apply for releif from forfeiture?
- A tenant, and others deriving an interest from the lease, may apply for relief from forfeiture as soon as the landlord takes action to forfeit.
- Relief from forfeiture is a discretionary remedy, and if granted, restores the forfeited lease and aims to put the parties back in the position they would have been if the forfeiture had not taken place.
What is forfeiture?
· Forfeiture is the right of the landlord to re-enter the premises and take them back from the tenant. It brings the lease to an end before the contractual term (or during any period of holding over).
· The threat of forfeiture may spur a tenant into compliance with its obligations, but in a difficult rental market, a tenant who breaches some of its obligations may be better than no tenant at all!
When does the landlord have the right to forfeiture?
· Forfeiture is not an automatic right, and is only permitted insofar as the lease provides for it.
- Why can forfeiture be an effective remedy?
· Forfeiture can cause embarrassment to a tenant’s business. Typically the landlord will arrange for a bailiff to attend the premises in the early morning and change the locks, and put a notice on the door.
· Any staff, customers or tradespeople will not be able to enter the premises. The tenant will likely want to minimise the damage to their business’s reputation by settling the debt and regaining access to the premises.
· Forfeiture can be achieved by peaceable re-entry, ie, by simply instructing the bailiff as above. There is a risk that the tenant may legally challenge this if it has not been carried out lawfully or if the tenant’s stock, equipment or belongings are lost, damaged or stolen.
· Alternatively, the landlord can apply to the court for an order for forfeiture. This costs more and takes longer than peaceable re-entry. However, it makes it more difficult for the tenant to challenge the forfeiture on the grounds of lawfulness.
- Type of breach - forfeuture?
· Once and for all breach
If a breach is a ‘once and for all breach’, once the landlord waives the right of forfeiture, it will never be able to regain it for that breach.
· Examples include:
o non-payment of rent
o an unlawful assignment or underletting
o an insolvency event
* Continuing breaches
· Other breaches are ‘continuing breaches’ meaning that each day that the breach continues, the landlord regains the right of forfeiture.
· Examples:
o failure to keep the premises in repair
o breach of the user covenant
o failure to comply with an insurance obligation
· Example: a tenant has let the premises fall into disrepair. The landlord may, for example, accept rent from the tenant. As it is a continuing breach, each day that the tenant fails to repair the premises, the landlord has a new right of forfeiture
Relief for forfeiture for non-payment of rent?
· If forfeiture is for non-payment of rent, then the tenant will normally be able to get relief from forfeiture by settling all rent arrears and landlord’s costs.
When can the tenant serve counter-notice for foefeiture for a breach of repair?
- If the tenant has a lease with a term of 7 years or more, and there is still 3 years or more to run, it has 28 days to serve a counter-notice, which means that the landlord must seek leave from the court to continue with forfeiture.
What is the best remedy for breach of repair obligation?
- The best remedy for the landlord is a self-help clause (Jervis v Harris clause) in the lease.
- Requirements for a s146 notice:
o Specify the breach
o Require remedy
o Demand compensation
- Damages for breach of repairing obligation
· Similarly with forfeiture, a landlord cannot issue proceedings for damages for a repairing obligation until it has served a section 146 notice, and given the tenant 28 days to serve a counter-notice.
· A further difficulty with damages is that even if the landlord gets through the counter-notice hurdle, the measure of damages is the loss of value to the landlord’s reversion, not the cost of putting the premises into full repair.
· A Jervis v Harris clause will give the landlord the right to:
o enter the property
o carry out any repairs
o recover the cost of doing so from the tenant.
· There is no need for the landlord to serve a section 146 notice (and therefore no opportunity for the tenant to serve a counter-notice).
· The cost of carrying out the repairs is treated as a debt to the landlord, not damages, and therefore it can be recovered in full.
When is a self-help clause availiblke to the landlord?
Must be in the lease for it to be applicable
- Debt action - advantages and disadvanatges?
· Advantages – reasonably simple, amount of debt is clear if rent has not been paid, can separate debt from ongoing landlord/tenant relationship
· Disadvantages – court action which is potentially costly and time consuming
· Use/limitations – any sum owed under the lease, whether principal rent or, eg, service charge
- Commercial Rent Arrears Recovery (CRAR) - advanatges and disadvanatages?
· Advantages – quick and efficient, no need to involve court
· Disadvantages – care must be taken to observe proper procedure
· Use/limitations – limited to principal rent, not other sums treated as rent
- Forfeiture (specifically for non-payment of rent) - advanatges anf disadvanatages?
· Advantages – quick and efficient, no need to involve court. Threat of forfeiture might be sufficient.
· Disadvantages – risk that tenant will not comply and may lose tenant (whether this is a problem will depend on the market)
· Use/limitations – depending on the lease, may extend to other sums treated as rent
· Damages - advanatges and disadvantages for repairing breaches?
Advantages – not many!
Disadvantages – section 146 notice required, if lease qualifies, tenant may be able to serve counter-notice. Damages limited to reduction in value of landlord’s reversion.
* Drop in value of the landlord’s interest
Use/limitations – if tenant serves counter-notice, the court will only give leave to continue in exceptional grounds (eg, repair is needed urgently)
· Forfeiture - advanatges and disadvantages for repairing breaches?
Advantages – not many!
Disadvantages – section 146 notice and counter-notice considerations similar as per damages
Use/limitations – as per damages
· Self-help (Jervis v Harris) clause - advanatges anfd disadvanatages for breach of repair?
Advantages – quick and efficient, no need to involve court. Landlord recovers full cost of repairs.
Disadvantages – landlord must take care not to exceed powers (eg, carrying out repairs that go beyond the repairing obligation)
Use/limitations – must be provided by the lease
Specific performance advanatges and disadvantages for repairing breaches?·
Advantages – may be only option
Disadvantages – rarely granted unless exceptional circumstances (such as lease without forfeiture or self-help clause)
Use/limitations – discretionary remedy – last resort
