Structure and content of a lease

Question 1

Options for the term of a lease

Answer 1

1) Fixed term - at the end of the fixed term the lease expires or comes to an automatic end without either party having to serve a notice
2) Periodic tenancy - not granted for a fixed period but continues indefinitely from one period to another, will run until either party terminates it
3) Tenancy at will - 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

Question 2

Leasehold covenant - Definition

Answer 2

Provisions in the lease which either prohibit certain actions by the tenant or only all the tenant to do certain things with permission

Question 3

Leasehold covenant - Absolute covenant

Answer 3

The tenant absolutely cannot carry out the stated action according to the lease.

Question 4

Leasehold covenant - Qualified covenant

Answer 4

Allow the tenant to carry out the stated action but only if it obtains landlord’s consent first

Question 5

Leasehold covenant - Fully qualified covenant

Answer 5

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

Question 6

Leasehold covenant - Repair

Answer 6

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.

Question 7

Leasehold covenant - Repair - Wording

Answer 7

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.

Question 8

Leasehold covenant - Insurance - General rule

Answer 8

Common for landlords to take out the insurance with the cost being passed on to the tenant as a separate insurance rent.

Question 9

Leasehold covenant - Insurance - Insurance provisions - Landlord’s covenant to insure property against defined risks

Answer 9

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.

Question 10

Leasehold covenant - Insurance - Insurance provisions - A covenant by the tenant to pay for the insurance policy

Answer 10

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

Question 11

Leasehold covenant - Insurance - Insurance provisions - Rent suspension

Answer 11

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

Question 12

Leasehold covenant - Alterations - Types of alterations

Answer 12

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

Question 13

Leasehold covenant - Alterations - Absolute covenants

Answer 13

Likely to include an absolute covenant against structural and exterior alterations. However a tenant of business premises can use S. 3 Landlord and tenant act to enable it to carry out improvements even where the lease contains an absolute prohibition. Under S. 3 a 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 not the tenant has the right to apply to the court for authorisation to carry out the improvements.

Question 14

Leasehold covenant - Alterations - Qualified and fully qualified covenants

Answer 14

These need landlords consent. A qualified covenant against alterations prohibits alterations without the landlord’s prior consent. S. 19(2) Landlord and tenant act a term is implied into a qualified covenant against making improvements that the landlord cannot unreasonably withhold its consent. However a tenant would prefer a fully qualified covenant that makes it clear that the landlord cannot withhold their consent unreasonably to an alteration whether or not it amounts to an improvement

Question 15

Leasehold covenants - Alienation - Definition

Answer 15

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

Question 16

Leasehold covenant - Alienation - Statutory provisions relevant to assignment covenants - S. 19(1)(a) Landlord and tenant act

Answer 16

This implies into any qualified covenants 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.

Question 17

Leasehold covenant - Alienation - Statutory provisions relevant to assignment covenants - S. 19(1A) Landlord and tenant act

Answer 17

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

Question 18

Leasehold covenant - Alienation - Statutory provisions relevant to assignment covenants - S. 1 landlord and tenant act

Answer 18

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

Question 19

Leasehold covenant - Alienation - Statutory provisions relevant to assignment covenants - Situations where consent has been held to have been reasonably withheld

Answer 19

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

Question 20

Leasehold covenant - Alienation - Statutory provisions relevant to assignment covenants - Situations where consent has been held to have been unreasonably withheld

Answer 20

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

Question 21

Leasehold covenant - Alienation - Underlease - Definition

Answer 21

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

Question 22

Leasehold covenant - Alienation - Underlease - S. 19(1)(a)

Answer 22

This implies into any qualified covenant that it be deemed to be subject to a proviso that such consent is not to be unreasonably withheld

Question 23

Leasehold covenant - Alienation - Underlease - S. 1

Answer 23

Where there is a 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

Question 24

Leasehold covenant - Alienation - Underlease - Conditions imposed in the alienation covenant

Answer 24

If these conditions are not complied with then the lease is at risk of forfeiture. Common conditions include:
- Terms of the underlease mirror the terms of the headlease

Question 25

Rent and rent review - Annual rent

Answer 25

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

Question 26

Rent and rent review - Rent review clause - Definition

Answer 26

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

Question 27

Rent and rent review - Rent review clause - Fixed increase

Answer 27

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

Question 28

Rent and rent review - Rent review clause - Index linked

Answer 28

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

Question 29

Rent and rent review - Rent review clause - Tenant’s receipts

Answer 29

Linked to the tenant’s receipts from its use of the property. Often linked to the tenant’s turnover

Question 30

Rent and rent review - Rent review clause - Open market rent review

Answer 30

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.

Question 31

Direct covenant between landlord and undertenant

Answer 31

The obligation to oay the annual rent is excluded from the direct covenant so the landlord can only recover the rent from the tenant