Property (Leasehold) - Grant of lease/underlease (4) Flashcards
How is a lease granted?
Grant of Lease/Underlease: Granting a lease or underlease involves an altered version of the standard conveyance procedure.
Lease Document
Lease Document: Leases comprise documents, setting out the terms that govern the landlord-tenant relationship.
(1) Lease Negotiations: Parties have flexibility to negotiate the terms of a lease. The proposed terms are usually initially agreed in a Heads of Lease document.
(2) Underlease Negotiations: Parties have less flexibility (terms must often match the head lease). The written consent of the landlord should be sought.
Strength of Covenant
Strength of Covenant: Landlords seek tenants with strength of covenant (ability to pay rent and comply with lease terms).
(1) Leases: Landlords can do this through references, or secure themselves with guarantors and rent deposits.
(2) Underleases: Landlords have less means here, so may impose conditions on their consent.
What needs to be done in the pre-agreement stage of lease negotiations?
Pre-Agreement: At the first stage, solicitors will take instructions. This largely reflects standard conveyancing.
Investigation of Title
Investigation of Title: Solicitors will investigate title (and ensure lease can be made subject to mortgage if relevant).
Deducing Title
Deducing Title: Tenants will generally seek deduction of freehold title. Often this can be found online.
(1) Lease: Absolute freehold title is required to obtain absolute leasehold title.
<7 Years: Landlords are not obliged to disclose for leases not exceeding 7 years.
>7 Years: Landlords are obliged to disclose for leases exceeding 7 years.
(2) Underlease: Undertenants may seek head lease title and freehold title (if former not absolute).
* Unregistered Head Lease: Undertenant can oblige head tenant to disclose head lease and all assignments in previous 15 years. They can call for freehold title if the term will exceed 7 years.
* Special Condition: If the head tenant cannot deduce freehold title when obliged, they must exclude the obligation by special condition.
Searches and Enquiries
Searches and Enquiries: Tenant’s solicitor will make standard searches and enquiries, plus additional items.
(1) Landlord Compliance: Landlord’s are required to provide when requested:
* Draft agreement for lease;
* Draft lease/underlease;
* Head lease/freehold title;
* Planning consents;
* Lender consent (to grant).
(2) Additional Searches: Certain lease specific searches may be required - such as existing insurance policies.
Licence to Underlet
Licence to Underlet: Most leases will require consent of the landlord to underlet, typically by deed. This is also required for absolute covenants, if the landlord is persuaded to consent at their complete discretion.
(1) Tripartite Document: Typically a tripartite document entered by head landlord, head tenant, and undertenant.
(2) Direct Covenant: Undertenant directly covenants with head landlord to perform all non-rent covenants. This enables landlord to take direct action against them for non-compliance.
>There is no AGA as head tenants remain liable.
(3) Limitation Period: Licences are usually time limited by the landlord, i.e. 3 months from consent.
(4) Costs: Head tenant will tend to undertake to cover head landlord’s costs incurred in the process.
What is the agreement stage of lease negotiations?
Agreement: Agreement is the equivalent of ‘exchange’. Parties often skip this stage, and agree on completion.
(1) Draft Agreement: Drafted by landlord’s solicitor.
>Finalised using Law Society’s Formula B.
(2) Contents: Same as freehold (particulars, standard conditions, completion date, incumbrances, indemnities).
(3) Engrossment: Landlord must engross lease/underlease to tenant at least 5 working days before completion.
What is the completion stage of a lease negotiation?
Completion: Lease/underlease is prepared in ‘lease’ and ‘counterpart’, in the form of a deed.
(1) Execution: Landlord and tenant execute their half, and exchange on completion.
>Landlord’s consent to underlease must be provided by this point (if relevant).
(2) Rent Apportionment: As rent is typically in advance, the tenant will pay the proportion of the remaining period.
(3) Effect of Completion: On completion:
Landlord: Landlord receives signed counterpart, rent premium, and apportioned rent.
Tenant: Tenant receives signed lease, certified title deed copies (maybe certified copy of lender’s consent).
What happens at the post-completion stage of lease negotiations?
Stamp Duty
Stamp Duty: SDLT must be paid within 14 days of completion if required.
(1) Rate: Chargeable on both lease premium and rent.
(2) Premium: Charged at freehold rates (includes VAT).
(3) Rent: Calculated using Net Present Value.
* NPV: Total rent payable over term (including VAT). Deduct rental payments at 3.5% per annum to account for inflation.
* Rate: £0-£150,000 (0%); £150,001-£5,000,000 (1%); Remainder (2%).
(4) Wales: LTT.
Registration of Title
Registration of Title: Leases may require registration at Land Registry within 2 months of completion.
(1) Short Lease: Leases not exceeding 7 years do not require registration.
(2) Long Lease: Leases exceeding 7 years require registration (irrespective of freehold title).
(3) First Registration: First registration may result in absolute, possessory, qualified or good title.
Absolute: Requires evidence of absolute freehold title.
Good: Awarded if the Registrar has not seen freehold title, or it is not absolute title.
>Cannot guarantee defect-free lease, affecting mortgages and future sale.
Registration Against Title
Registration Against Title: Leases may require registration as a charge against a superior freehold.
(1) Registered Freehold: Leases may require registration against superior registered freehold.
Short Lease: Short leases take effect as overriding interests.
>Leases exceeding 3 years can be voluntarily noted.
Long Lease: Long leases must be noted, within OSR1 priority period.
(2) Unregistered Freehold: Legal leases ‘bind the world’, but will trigger first registration of superior freehold within 2 months of completion.
Notice of Underlet
Notice of Underlet: Tenant should inform the landlord of an underlet within 1 month of completion.
