Property Practice - Leasehold

Question 1

Repair Clauses

To what extent does property need to be put into repair?

Can a repair covenant require the tenant to remedy an inherent defect in design/construction?

What is the effect of a covenant requiring the tenant to “keep the property in repair”?

Answer 1

To the extent that it is fit for occupation of a reasonably minded tenant.

Yes, if it is the only way to effect repair.

This means to put the building in repair, even where this involves the tenant putting the building into a better state than when they entered the lease.

Question 2

Termination and frustration

Unless the lease states otherwise, the lease will give the landlord the right to terminate the lease should…

Answer 2

…reinstatement prove impossible.

The tenant should try to ensure they have an equivalent right: where reinstatement is impossible, they should be able to terminate.

Question 3

Insurance

How is insurance usually dealt with in a lease?

Answer 3

The landlord takes out the insurance, with the cost being passed on to the tenant as insurance rent.

Question 4

Insurance

Give typical examples of defined risks which the landlord covenants to insure against.

What wording is typically drafted into the end of the covenant and for what reason?

The property should be insured up to ____. What does this include?

Answer 4

Fire, storm, flood.
“such other risks as the landlord may reasonably require” - otherwise the landlord might insure against too many risks, at the tenant’s cost; or the landlord may not insure against certain risks.

Full reinstatement value. Includes costs of demolition, site clearance and professional fees.

Drafting: where reinstatement is impossible, the landlord may be able to retain the insurance money. However, the tenant may be in a strong enough negotiating position to require that the proceeds be passed over.

Question 5

Insurance

If the property is rendered unusable, is rent still payable?

Answer 5

Yes, in the absence of express terms to the contrary.

Question 6

Insurance

If the property is rendered unusable, rent is still payable. As such, what should the tenant require as a term of the lease?

Answer 6

A rent suspension clause, providing that rent is suspended during any period that the property cannot be occupied.

Usually the landlord will attempt to limit rent suspension to a set duration. This is because the landlord would have taken out ‘loss of rent’ insurance, but such insurance is usually subject to a fixed duration.

Question 7

Alterations

1. If a landlord imposes an absolute covenant against all alterations, what can the tenant of business premises do under s.3 of the Landlord and Tenant Act 1927?
2. How long does the landlord have to object? What can the tenant do if they do object?
3. What three grounds are considered?
4. Instead of objecting to the improvements, what can the landlord offer?
5. Will the tenant be obliged to accept the landlord’s offer?

Answer 7

1. Serve a notice on the landlord to carry out improvements.
2. 3 months. If they do so, the tenant can apply to court for authorisation.
3. The court will consider:
   - Whether the improvements add to the letting value of the property;
   - Whether reasonable and suitable to the character of the property;
   - Whether they diminish the value of any of the landlord’s other property.
4. To carry out the works himself in return for a reasonable increase of rent.
5. No. But rejecting it will mean that the court cannot give the tenant authority to do the works themselves.

Question 8

Alterations/Alienation

Section 19 of the Landlord and Tenant Act 1927 has the effect of turning any qualified covenants against alienation (i.e. a covenant requiring the landlord’s consent) into a fully qualified covenant (i.e. a covenant requiring the landlord’s consent, not to be unreasonably withheld)

Which five forms of alienation and one form of alteration does this apply to?

Answer 8

Alienation:
- Assignment
- Underletting
- Charging
- Parting with possession
- Sharing occupation

Alteration:
Improvement.

Question 9

Alteration: Improvement

If the tenant proposes works that increase the value/usefulness of the property, but reduces the value of the landlord’s reversionary interest does this constitute an improvement?

If the tenant obtains prior authorisation to make improvements using the s.3 statutory procedure (serving a notice on the landlord, etc.), what are they entitled to? Under what conditions?

Answer 9

Yes.
Compensation at the end of the term, provided that the improvement adds to the letting value of the property and is within certain statutory time limits.

The significance of this is that the landlord can only withhold consent if reasonable to do so.

The use of the s.3 procedure is rare in practice.

Question 10

User covenants

A landlord can impose control on the use of property by way of a qualified covenant, e.g. Not to use the Premises other than as a restaurant or such other use falling within Use Class E as the landlord may approve in writing.

Can the landlord’s consent be unreasonably withheld?
Can the landlord charge a fine or increase rent as a condition of giving consent?

What do both parties need to keep in mind?

Note: a landlord is unlikely to restrict the use of property too much, as this will put off many potential tenants

Answer 10

Yes (unlike alienation covenants)
No, unless a structural alteration is involved.

Planning permission.

Question 11

Alienation: Assignment

Conditions for the landlord to withhold consent can be agreed upon by the parties in advance. Are pre-agreed conditions subject to any requirement of reasonableness?

Where there is a qualified covenant against assignment, the tenant can make a written application for consent. The landlord must then, within reasonable time do two things:
For the latter of those, what must be specified?

The same considerations are given for underletting, so I have omitted them from the slides.

Answer 11

No.
1. Give consent, except where reasonable not to;
2. Serve a written notice of its decision, specifying in addition:
- conditions, if any.
- If withholding consent, the reasons for withholding.

Some guidelines are given in the book.

Question 12

Give examples of consent being unreasonably held.

Answer 12

Minor breaches of a repairing covenant.
The premises have been on the market for 18 months with significant rent, but the tenant’s assignment will cause slight harm to the landlord.

Question 13

Rent Review

What are the four types of rent review?

Answer 13

1. Fixed increase.
2. Index-linked.
3. Tenant’s receipts.
4. Open market rent view.

1. Fixed increase.
2. Index-linked - an external index is used so that rent remains in line with inflation.
3. Tenant’s receipts - linked to e.g. tenant’s turnover.
4. Open market rent view - adjusted at regular intervals by reference to the open market rental value of the premises.

Question 14

Open Market Rent Review

1. The aim of this is to determine the rent which a tenant would be prepared to pay if, hypothetically…
2. What two elements will be considered in this hypothetical scenario?

Answer 14

1. …the property were to be let in the open market.
2. Two elements of Open Market Review:
   - The physical property
   - The terms of the lease.

E.g. if lease terms are too onerous due to a narrow user provision, this will be reflected in the rent review.

Question 15

Open Market Rent Review

To deal with valuation problems, a well-drafted rent review clause will make certain assumptions and certain disregards.

3. Other than the assumption that there is a willing landlord and tenant, five common assumptions are:
4. What are three common disregards?

Answer 15

1. That the property is sold:
   a. with vacant possession (empty)
   b. on the terms of the lease
   c. after the tenant has fully complied with their obligations, if in breach.
   d. after the property has been fully restored, if destroyed or damaged.
   e. for a term of x number of years.
2. Common disregards:
   a. Any effect of the tenant’s occupation.
   b. Any goodwill of the tenant’s business.
   c. Any effect of physical improvements carried out by the tenant.

On 5, one approach is to make the hypothetical lease equal to the unexpired residue.

Question 16

Open Market Rent Review

The level of rent is…
Is time of the essence for either party to instigate review and negotiate the process?
If the parties fail to agree, the lease should make provision for the matter to be…

Answer 16

…upwards only.
No.
…referred to an independent third party.

There is some stuff on RICS Code, which I will leave out. It relates to members of the Royal Institute of Chartered Surveyors.

Question 17

Procedural Steps for the Grant of a Lease, Underlease and Assignment

REFER TO BOOK. These chapters are also covered in Land Law.

Question 18

Remedies for Breach of Leasehold Covenants

What is an old lease?

Under an old lease, if the original tenant (T1) assigns to T2 and T2 breaches a covenant,does T1 remain liable?

Under a new lease, would T1 remain liable?

In which of these cases is it useful for the landlord to impose an AGA in advance in the lease? Briefly, what is an AGA? What is the limitation of the AGA?

Answer 18

Lease granted before 1 January 1996.

Yes, under privity of contract.

No. They are released from liability.

For new leases, an AGA can be stipulated in the lease. This is a promise by T1 that they will be liable for T2’s breaches. It is limited to the duration of T2’s ownership of the lease.

Landlord can also sue T2 under privity of estate, or they can require T2 to give a direct covenant.

Question 19

Remedies for Breach of Leasehold Covenants: Rent

If there is a breach of rent payment, what four remedies are available to the landlord?

Answer 19

1. Action in debt (six year limitation period)
2. Commercial Rent Arrears Recovery (CRAR):
3. Pursue guarantors and/or rent deposit
4. Forfeiture

Action in debt is via High Court or County Court.

Question 20

Remedies for Breach of Leasehold Covenants: Rent - CRAR

What does CRAR allow the landlord to do?

What is the procedure?

What is the limitation on this remedy?

Answer 20

Enter the property, seize and sell a commercial tenant’s goods.

Procedure

(1) Tenant owes 7 days’ rent
(2) Landlord gives 7 days’ notice of intention and employs enforcement agent
(3) Enforcement agent seizes goods and gives tenant 7 days’ notice of intention to sell.
(4) Landlord sells the goods at a public auction.

Limitation

The landlord cannot remove items up to the value of £1350 which are necessary for the tenant’s business.

Does not apply to insurance rent - only rent for possession and use of premises.

Question 21

Remedies for Breach of Leasehold Covenants: Rent

Where the landlord intends to pursue the former tenant or their guarantor, he must comply with s.17 of the Landlord and Tenant (Covenants) Act 1995. It applies to both new and old leases. What does this require and when?

Answer 21

• The landlord to serve a default notice on the former tenant or guarantor to recover a fixed charge from them.
• The notice should be served within 6 months of the tenant’s breach as only the first 6 months is recoverable.

A fixed charge = monetary payment such as rent, service charge or other liquidated sum.

On (2) the landlord doesn’t need to start proceedings. He just needs to serve the default notice.

Where the landlord does proceed against a former tenant or their guarantor, that person may be able to call for an overriding lease, making the former tenant/guarantor the immediate landlord of the defaulting tenant.

Question 22

Remedies for Breach of Leasehold Covenants: Rent

What is the effect of forfeiture?
To be able to use it, the lease must…
What are the two ways in which the landlord can forfeit the lease?
The landlord must be careful not to waive its right to forfeiture by carrying out an act demonstrating…

Answer 22

Bring the lease to an end.
Contain a forfeiture clause.
Peaceable re-entry or if not possible, court order.
…an intention to continue the relationship. (e.g. accepting rent after breach)

Question 23

Remedies for Breach of Leasehold Covenants: Repair

What are the four remedies available?

Answer 23

1. Specific Performance
2. Damages
3. Self-help (Jervis v Harris) clause.
4. Forfeiture

Question 24

Remedies for Breach of Leasehold Covenants: Repair

• When will specific performance be granted by the court?
• What are the effects of a self-help (Jervis v Harris) clause on the landlord’s recovery of the costs of repair?

Answer 24

• Where other remedies are not available.
• It allows the landlord to recover the cost of repairs as a debt rather than a damages claim, which are subject to the statutory provisions on damages (see below).

Question 25

Remedies for Breach of Leasehold Covenants: Repair

Damages are always available for breach of covenants, but what are the two important statutory provisions in relation to repair?

Answer 25

• Damages are limited to the amount by which the landlord’s reversion (i.e. the property) diminished in value. (Section 18, LTA 1927).
• For leases granted for more than 7 years with more than 3 years to run: notice must be served on the tenant. If the tenant serves a counter-notice within 28 days, the landlord requires the court’s leave.(The Leasehold Property (Repairs) Act 1938)

Notice is identical to the one for forfeiture - must specify breach, that it needs to be remedied and compensation.

Question 26

Remedies for Breach of Leasehold Covenants: Forfeiture for repair

Forfeiture for non-rent covenants is more complicated than forfeiture for rent. The statutory procedure of s.146 of the Law of Property Act 1925 must be followed. What is that procedure?

Where the lease was originally for seven years or more with at least three years left to run, what does the Leasehold Property (Repairs) Act 1938 require?

Answer 26

(1) s.146 notice is served which:
- specifies the breach;
- requires the breach to be remedied within reasonable time (if capable of being remedied);
- Requires compensation for breach

(2) The landlord can forfeit the lease if the tenant fails to comply with the notice.

Leasehold Property (Repairs) Act: The s.146 notice must notify the tenant of their right to serve a counter notice within 28 days.

As with forfeiture of non-payment of rent, the tenant may apply to the court for relief from forfeiture.

On (3), if the tenant does so, the landlord would require leave of the court.

Question 27

Termination under Common Law

What are the four ways in which a lease can be terminated at common law?

Common Law termination

Answer 27

1. Effluxion of time
2. Notice to quit
3. Surrender
4. Merger

Question 28

Termination under Common Law

1. Effluxion of time simply refers to the…
2. Notice to quit is used for periodic tenancies. Suppose there is a monthly periodic tenancy starting on 1 August. If the landlord serves notice to quit on 14 August, when is the earliest date for termination?
3. Suppose it is a yearly periodic tenancy that started on January 1 2023. If the landlord serves a notice to quit on April 1 2023, when is the earliest date for termination? What about if the landlord serves a notice to quit on October 1 2023?
4. Surrender can only be achieved if… To be legal it must be…
5. The opposite of surrender is ____ whereby the tenant acquires… or where a third party…

Answer 28

1. …contractual end date in a fixed-term lease.
2. 30 September.
3. In the first scenario, the lease ends on January 1 2024, as this is the end of the completed year of tenancy. In the second scenario, the lease ends on 1 April 2024, as half a year’s notice is required for yearly periodic leases.
4. …both the landlord and tenant agree for the lease to merge into the landlord’s reversion. To be legal, it must be by deed.
5. The reversion, or where a third party acquires both the reversion and lease.

Question 29

Termination and Security of Tenure for Business Leases: The 1954 Act

If this Act applies, the common law methods of termination may not apply.

1. Which tenancies fall under its ambit?
2. Which four business tenancies are not protected by the Act?

Answer 29

1. Tenancies where the property is or includes premises occupied by the tenant for the purposes of a business.
2. Four businesses not protected by the Act:
   - Tenancies at will;
   - Fixed-term tenancies of six months or less.
   - Agricultural holdings, farm tenancies and mining leases.
   - Fixed-term tenancies that have contracted out of the 1954 Act.

The tenant may run the business personally, as agent or as manager.
On (2) for fixed term tenancies not exceeding six months, the landlord cannot circumvent the Act by granting successive 6 month tenancies: if the tenant has occupied for more than 12 months, they gain protection of the Act.

Question 30

Security of Tenure for Business Leases: The 1954 Act

What is the statutory notice procedure before the lease for contracting out of the 1954 Act?

Answer 30

(1) Landlord gives notice warning the tenant that they are agreeing to a lease without security of tenure.
(2) The tenant makes a declaration that they received the notice and agree to contract out.

(3) A reference to service of the notice and the tenant’s declaration must be contained or endorsed in the lease.

If the notice was given less than 14 days before the grant of lease, the tenant’s declaration must be in the form of a statutory declaration before an independent solicitor.

Question 31

Security of Tenure for Business Leases: The 1954 Act

A. The effect of the 1954 Act is to give the tenant security of tenure - what does this mean?

B. What are the seven ways to terminate?

C. Even if so terminated, the tenant can …. which can only be opposed under the grounds in ____ (for which, there are also seven grounds).

Answer 31

A. Gives the tenant the right to remain in the property after the expiry of the contractual term and to apply for a new tenancy.

1. Landlord’s notice under s.25
2. Tenant’s request for a new tenancy under s.26.
3. Forfeiture
4. Surrender
5. Periodic tenancy: tenant’s notice to quit.
6. Fixed term: tenant’s notice served three months in advance under s.27.
7. Fixed term: tenant ceasing to be in occupation for business purposes at the end of lease.

C. Apply to court for a new tenancy; section 30.

On (6) the notice cannot expire before the end of the contractual expiry date.
Important note: the landlord does not have the same right under (5) and (6) to end the lease.

This means the only way the landlord can terminate is under s.25, or by forfeiture/surrender where available.

Question 32

Security of Tenure for Business Leases: The 1954 Act

When the landlord serves the s.25 notice, they will make clear whether or not they oppose a new tenancy.

If they are not opposed to a new tenancy, what must the notice indicate?
If they are opposed to a new tenancy, what must the notice state?

The notice must state the date upon which the landlord wants the tenancy to end.
It must be served within ____ before the termination date specified in the notice.

The termination date cannot be sooner than…

Landlord’ s.25 notice

Answer 32

The proposed terms of the new lease;
The s.30 grounds upon which they rely.
6-12 months.

…the lease could otherwise have come to an end under common law.

Question 33

Security of Tenure for Business Leases: The 1954 Act

1. A tenant occupies an office property under a 10-year fixed term lease. The term ends on 29 September 2023 and the lease is not contracted out of the 1954 Act.

What must the landlord do if they want to terminate the tenancy on the contractual end date of 29 September 2023?

2. Assume the same, but the date is now 25 June 2023. Can the landlord terminate the tenancy?

Landlord’s s.25 notice

Answer 33

1. They should serve a notice specifying 29 September 2023 as the termination date, and should be served between 29 September 2022 and 29 March 2023.
2. Yes. However, the earliest date he can specify as the termination date is 25 December 2023 (giving the tenant six month’s notice), and the latest possible termination date is 25th June 2024.

Question 34

Security of Tenure for Business Leases: The 1954 Act

If the landlord opposes a new tenancy in the notice, what must the tenant do in order to keep their rights under the Act?

If the tenant has not done so, the landlord can pre-emptively…

Landlord’s s.25 notice

Answer 34

The tenant must apply to the court before the termination date given in the s.25 notice.

…apply for an order to terminate the lease on the s.30 grounds stated in its notice.

Question 35

Security of Tenure for Business Leases: The 1954 Act

If a tenant wants to terminate the lease on the contractual expiry date, they may do either by:

If a tenant wants to terminate the lease after the contractual expirty date, they may only do so by:

If a tenant wishes to remain in the property after the contractual expirty date, what could they do?

Tenant’s Options

Answer 35

Ceasing to occupy as a business premises by the end of the lease, or serving an s.27 notice (for a fixed tenancy) giving the landlord three months’ written notice.

Serving an s.27 notice or agreeing a voluntary surrender.

Do nothing, and wait for landlord’s s.25 notice, or serve an s.26 request for a new tenancy.

Question 36

Security of Tenure for Business Leases: The 1954 Act - s.26 procedure

The tenant’s s.26 request must state the date on which the tenant wants the new tenancy to begin and the request must contain the tenant’s proposal’s for the new tenancy.

1. When serving this, the tenant must give the landlord between:
2. If the landlord wishes to oppose the new tenancy, what must the landlord do?
3. In order to keep their rights under the Act, what would the tenant need to do?

Answer 36

1. 6-12 months’ notice of the proposed new tenancy start date.
2. Serve a counter-notice on the tenant within 2 months of the tenant’s s.26 request stating the s.30 opposition.
3. Apply to court for a new lease before the proposed new tenancy start date (unless the landlord agrees to extend the time limit).

Again the proposed new tenancy start date cannot be earlier than at common law.

Again, the landlord, after serving the counter-notice can preemptively apply to court for an order to terminate, specifiying the s.30 grounds relied upon.

Question 37

Security of Tenure for Business Leases: The 1954 Act

The landlord’s s.25 notice or s.26 counter-notice must state on which seven specified grounds under s.30 of the Act it does so. These are:

Landlord’s s.30 grounds for opposition

Answer 37

a. Tenant’s failure to repair;
b. Tenant’s persistent delay in paying rent;
c. Tenant’s susbstantial breach of other obligations;
d. Landlord has offered alternative accommodation;

e. Tenancy is an underletting of part.
f. Landlord intends to demolish or reconstruct and could not reasonably do so without obtaining possession.
g. Landlord intends to occupy the holding for its own business or as a residence.

Question 38

Security of Tenure for Business Leases: The 1954 Act

The s.30 grounds of opposition to a new lease are:

a. Tenant’s failure to repair;
b. Tenant’s persistent delay in paying rent;
c. Tenant’s susbstantial breach of other obligations;
d. Landlord has offered alternative accommodation;
e. Tenancy is an underletting of part.
f. Landlord intends to demolish or reconstruct and could not reasonably do so without obtaining possession.
g. Landlord intends to occupy the holding for its own business or as a residence.

Which of these are mandatory grounds and what does this mean?

s.30 grounds for opposition

Answer 38

d, f and g are mandatory, meaning the court has no discretion to decide whether to allow the new lease.

Question 39

Security of Tenure for Business Leases: The 1954 Act

Ground (f): Landlord intends to demolish or reconstruct and could not reasonably do so without obtaining possession.

This is the most common ground. The landlord must show that on termination, he: (3 conditions)

Ground (g): Landlord intends to occupy the holding for its own business or as a residence. What are the requirements?

s.30 grounds for opposition

Answer 39

Ground (f) requirements

i. has a firm and settled intention to carry out the work;
ii. intends to demolish, reconstruct or carry out substantial work; and
iii. cannot reasonably carry out the work without obtaining possession.

Ground (g) requirements

• owned the property for at least five years before the end of the current tenancy.
• Firm and settled intention to occupy;
• that practical steps have been considered/taken;
• that there is a reasonable prospect of achieving the intention.

Question 40

Security of Tenure for Business Leases: The 1954 Act

The tenant is only entitled to the “holding”, meaning the property comprised in the current tenancy, but excluding…

On the other hand, the landlord has the right to insist that any new tenancy will be a tenancy of…

The term of the new lease will be such as is… but cannot exceed…

The term will not commence until…

Terms of new lease

Answer 40

…any part not occupied by the tenant (i.e. which the tenant has underlet).
…the whole property, including those parts underlet.

…reasonable in the circumstances; 15 years.
…3 months and 4 weeks after the order.

Question 41

Security of Tenure for Business Leases: The 1954 Act

The rent is the open market rent. The court must disregard the following four things:

If either party finds the new lease ordered by the court to be unacceptable, can they apply for its recovation?

Terms of new lease

Answer 41

a. The tenant’s and their predecessors’ occupation;
b. any goodwill attached;
c. improvements carried out by the tenant;
d. in the case of licensed premises, any addition in value due to tenant’s licence.

Only the tenant, not the landlord.

The landlord’s only remedy is to appeal.

Question 42

Security of Tenure for Business Leases: No fault grounds

What are the no-fault grounds and what is the significance of this?

Answer 42

No fault grounds

e. Tenancy is an underletting of part.
f. Landlord intends to demolish or reconstruct.
g. Landlord intends to occupy.

Significance

If the landlord opposes a new lease on a no-fault ground, the tenant is entitled to compensation, equivalent to the value of the holding.

Question 43

Security of Tenure for Business Leases: No fault grounds

When is the tenant entitled to enhanced compensation and to what extent?

Is a clause contracting out of the obligation to pay compensation valid?

Answer 43

If the tenant occupied the property for 14 years, they are entitled to 2x the rateable value.

No, unless the tenant has occupied for fewer than five years.

Includes predecessors in the same business occupying.