Structure and content of a lease Flashcards
Fixed term tenancy
Fixed period. At the end of the fixed term the lease expires or comes to an automatic end without either party having to serve a notice
Periodic tenancy
Continues indefinitely from one period to another. This is for tenants who are not certain as to how long they wish to occupy the property. This type of lease will run until either party decides to terminate it by giving the other party notice that they want to bring the arrangement to an end. The notice should be the length of one period of the lease.
Tenancy at will
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.
Leasehold covenant - Definition
Provisions in the lease which either prohibit certain actions by the tenant or only allow the tenant to do certain things with permission
Leasehold covenant - Absolute covenant
The tenant absolutely cannot carry out the stated action according to the lease.
Leasehold covenant - Qualified covenant
Allow the tenant to carry out the stated action but only if it obtains landlord’s consent first
Leasehold covenant - Fully qualified covenant
Allows the tenant to carry out the stated action if it obtains landlord’s consent first but goes on to say that the landlord will not be able to withhold consent unreasonably
Repair
Repair = restoration by renewal or replacement of parts of a whole. Where a tenant has a lease of a building it is usual to place the tenant under a full repairing obligation for the whole building. Where the tenant has a lease of part of the building the responsibility will usually be divided between landlord and tenant.
Leasehold covenant - Repair - Wording
A covenant to ‘keep’ a building in repair also means ‘put’ into repair even if that involves the tenant putting the building into a better state of repair than when they entered into the lease.
Leasehold covenant - Insurance - General rule
Common for landlords to take out the insurance with the cost being passed on to the tenant as a separate insurance rent.
Leasehold covenant - Insurance - Landlord’s covenant to insure property against defined risks
There is often an inclusive list of the risks which the landlord must insure against e.g fire. This should be inclusive so that liability for any shortfall in the proceeds caused by these are passed on to the tenant in the repairing covenant.
Leasehold covenant - Insurance - A covenant by the tenant to pay for the insurance policy
Often this covenant is to pay a sum reserved as rent which includes the premium for the buildings insurance policy and an associated policy covering the landlord for loss of the annual rent during any period where the tenant is unable to use the building
Leasehold covenant - Insurance - 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
Alterations - Types of alterations
1) Alterations affecting the structure and exterior of the building
2) Alterations affecting service media such as heating, lighting, communications systems
3) Demountable partitioning
Landlords can use different types of covenant to exert different levels of control over different types of alterations
4) Non-structural interior alterations
Alterations - Absolute covenants
Likely to include an absolute covenant against structural and exterior alterations.
Alterations - Absolute covenants - S. 3 Landlord and tenant act
A tenant of business premises can use S. 3 to enable it to carry out improvements even where the lease contains an absolute prohibition. The tenant who wants to carry out improvements can serve a notice on the landlord detailing its proposals. The landlord has 3 months to object and if they do then the tenant has the right to apply to the court for authorisation to carry out the improvements and they will do so if it adds letting value to the property, are reasonable and suitable to the character of the property and do not diminish the value of any other property of the landlord
Alterations - Qualified covenants
Prohibits alterations without the landlord’s prior consent. S. 19(2) Landlord and tenant act if the alterations would provide an improvement then Landlord’s consent cannot be unreasonably withheld.
Alterations - Fully qualified covenant
Landlord cannot withhold their consent unreasonably to an alteration, whether or not it amounts to an
improvement.
Use
The landlord may choose to impose a tenant’s covenant which restricts the use of the property to a single purpose
Alienation - Definition
It includes different ways of creating an interest in the property for the benefit of a third party. This includes:
- Assignment
- Charging
- Sharing occupation
- Parting with possession
The landlord will want control over whoever else might occupy the investment property and will usually insist upon restrictions in the lease against tenants dealing with the leasehold interest
Assignment - S. 19(1)(a) Landlord and tenant act
This implies into any qualified covenants that consent is not to be unreasonably withheld. The effect therefore is to convert a qualified covenant into a fully qualified covenant.
Assignment - S. 19(1A) Landlord and tenant act
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. The effect is that such pre-agreed conditions and circumstances are deemed reasonable
Assignment - S. 1 landlord and tenant act
Where there is a qualified covenant on assignment 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 not reasonable to give consent
b) serve on the tenant written notice of its decision whether or not to give consent
Assignment - Situations where consent has been held to have been reasonably withheld
1) Where there was a long-standing and extensive breach of the repairing covenant by the assignor
2) Where the assignee would be in a position to compete with the landlord’s business
Assignment - Situations where consent has been held to have been unreasonably withheld
1) Where the landlord has refused consent in an attempt to obtain some advantage for itself
2) Where there are minor breaches of the repairing covenant
Underlease - Definition
An underlease is a lease created by someone who is already a tenant. When a tenant grants an underlease there are two leases in existence in relation to the same property. An underletting will be better than an assignment of the lease if the tenant would like to get the property back again at some time in the future or if the tenant only wants to dispose of part of the property
Underlease - S. 19(1)(a)
This implies into any qualified covenant that such consent is not to be unreasonably withheld
Underlease - S. 1
Where there is a fully qualified covenant on underletting 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
Underlease - Conditions imposed in the alienation covenant
- Terms of the underlease mirror the terms of the headlease
Rent and rent review - Annual rent
The lease will reserve an annual rent and include a tenant’s covenant to pay it. The lease should make clear: when rent is payable, whether rent is payable in advance or arrears, how instalments are to be apportioned, how the rent is to be paid, VAT and review of the rent
Rent review clause - Definition
A rent review clause is a mechanism by which the annual rent payable under a lease is periodically reassessed. Types of rent review clause:
1) Fixed increase
2) Index-linked
3) Tenant’s receipts
4) Open market rent review
Rent review clause - Fixed increase
It is possible to have a rent review clause which provides that at various set dates throughout the term, the rent will increase to a set amount
Rent review clause - Index linked
The rent is linked to an external index, the rationale is that this will allow rent to be altered in line with inflation. However, this does not track the property market specifically
Rent review clause - Tenant’s receipts
Linked to the tenant’s receipts from its use of the property. Often linked to the tenant’s turnover
Rent review clause - Open market rent review
Rent is adjusted at regular intervals (3-5 years) by reference to the open market rental value of the premises at the time of the review. Aim is to determine the rent which a tenant would be prepared to pay were the property to be let in the open market on the terms of the lease on the rent review date. Goodwill and improvements to the property by the tenant are usually excluded.
