Property (Leasehold) - Commercial Leases (1) Flashcards
What are the advantages and disadvantages of leasehold vs freehold?
Lease vs. Freehold: Leases offer advantages and disadvantages over freeholds.
(A) Tenant: Flexible, can impose break clauses, and lower capital expenditure.
(D) Tenant: Depreciating asset, and subject to burdensome covenants.
(A) Landlord: Retains control, capital interest appreciates in the long run.
(D) Landlord: Risk of tenant, rent may be volatile, more active role.
What are deed formalities?
Deed Formalities: Deeds must be clear on the face as a deed, written, signed by the transferor (and transferee if entering obligation), and signed (s1 LPMPA).
What is the parol lease exception?
Parol Lease Exception: Leases of 3 years or less can be created by deed, but can also be created in any other format provided the appropriate conditions are met (s54 LPA).
(1) Term: Term of three years or less (including periodic leases).
(2) Immediate Possession: Tenant takes immediate possession of the lease.
(3) Best Rent: Tenant pays best rent (meaning market rent).
(4) No Premium: Tenant does not pay a premium or fine on top of the rent.
What are the contents of a lease?
Structure: Commercial leases include similar content.
(1) Prescribed Clauses: These are standard clauses at the start of the lease (important details i.e. LR details).
(2) Basic Details: Basic details include commencement, party names, address, property description, title number.
(3) Interpretation: A section of specific capitalised definitions (i.e. the Property).
(4) Term: The term of the lease, and its length (i.e. fixed term 3 year lease).
(5) Ancillary Rights: Rights of tenant over other land, i.e. right of way.
(6) Reserved Rights: Rights of landlord over lease, i.e. right of repair.
(7) Annual Rent: Annual rent due.
(8) Rent Review: Mechanism to increase rent at defined intervals.
(9) Insurance Rent: Insurance may be payable as rent (simpler to recover).
(10) Covenants: Express covenants will be imposed on both parties (see lease covenants).
What are the contents of a lease of part?
Lease of Part: Leases of part will have additional contents.
(1) Ancillary Rights: Rights of tenant to common areas (i.e. receptions and stairs).
(2) Reimbursement: Mechanism to reimburse landlord for shared maintenance costs (i.e. ‘service charge’).
What are different lease terms?
Lease Term: Leases may be fixed, periodic or at will (subject to break clauses and statutory protection).
(1) Fixed: Granted for a fixed period (i.e. 3 years).
>Fixed term expires by ‘effluxion of time’, but may continue as a periodic lease.
(2) Periodic: Indefinite lease granted indefinitely from period to period (rent due each period).
>Expires once one full period of notice is served (or 6 months for 1 year periodic tenancy).
(3) At Will: Indefinite lease.
>Expires immediately upon notice being served by either party.
What is a break clause?
Break Clause: A break clause is a clause permitting a party to give notice to end a fixed-term tenancy early.
How are commercial leases protected?
Statutory Protection: Commercial leases may be protected by statute, altering the way in and time at which they may expire (see statutory protection).
What is the Code for Leasing Business Premises?
Code for Leasing Business Premises: The Royal Institute of Chartered Surveyors published a code of guidance for leasing business premises in 2019. It is designed to balance negotiations between landlord and tenant.
(1) Application: All members of the RICS must comply with the guidance. Certain sections are mandatory, others are only to be departed from with good reason. RICS membership is highly esteemed in this industry.
(2) Breach: Breach of guidance incurs disciplinary action against the surveyor. Landlords are often not members, so not bound.
What are the mandatory terms in the Code for Leasing Business Premises?
Mandatory Terms: Mandatory terms require that:
(1) Negotiations: Negotiations should be constructive and collaborative.
(2) Disclosure and Advice: Non-member parties should be advised of the code, and advice provided to them.
(3) Written Terms: Transactions should be recorded in writing, contained within a contract, and summarise the following details as a minimum:
* Identify premises and its extent;
* Identify length of term, including break clauses and renewal;
* Identify annual rent and payment dates;
* Identify frequency and basis of rent review;
* Identify liability for insurance premiums;
* Identify alienation rights;
* Identify repair, user, and alteration obligations.
(4) Landlord Onus: Landlord is responsible for ensuring specified details (above) are agreed before draft lease is sent for approval.
What best practice is outlined in the Code for Leasing Business Premises?
Best Practice: Best practice terms should not be departed from without good reason:
(1) Clear Description: Identity of property should be clearly defined.
(2) Lease Plan: A plan of the lease should be provided.
(3) Rights of Use: The tenant should be granted all necessary rights required for their intended use of property.
(4) Length of Term: The length of the lease term and break clause provisions should be provided.
(5) Rent Review: Leases should permit either party to instigate the rent review, and tenant made aware of formula.
(6) Alienation: Leases should permit assignment of whole, underlet of whole and part, charging, and sharing, for company groups.
(7) Repair: Repair covenants should be appropriate to the length of term and condition on grant.
(8) Alterations and User: Alteration and user covenants should be no more restrictive than necessary to protect reversion value and neighbouring property owned by the landlord.
