Structure and Content of a Lease

Question 1

Give the advantage of a commercial lease for a commercial tenant.

Answer 1

• Flexibility, so if a short term lease they can move premises at the end of the term if they deem necessary.
• Tenants can negotiate a break clause enabling them to terminate the else prior to the end of the fixed term.

Question 2

List the typical clauses which will be contained in a business lease.

Answer 2

• Prescribed Clauses;
• Commencement clause;
• Interpretation clause;
• Grant of the lease;
• Ancillary rights;
• Rights excepted and reserved;
• Annual rent;
• Rent review;
• Tenant’s covenants;
• Landlord’s covenants;
• Landlords right to enter on breach of repair covenant;
  Re-entry and forfeiture

Question 2

Explain the prescribed clauses contained within a lot of leases.

Answer 2

• Apply to leases dated on or after 19th June 2006 which are granted out of registered land and compulsorily registrable.
• Such leases must contain a standard set of clauses (‘prescribed clauses’) at the beginning of the lease or immediately after any front over sheet and/or front contents page.
• Prescribed clauses are a summary of the important details in the lease containing all info LR needs to complete registration.

Question 3

Explain the commencement clause.

Answer 3

Info including parties names, addresses of the parties, date of grant and the title number if the land is registered.

Question 4

Explain the interpretation clause.

Answer 4

Lists the defined terms.

Question 5

Explain the grant of the lease clause/ section.

Answer 5

The operative part of the lease where their landlord grants the tenant a lease of the property for the term. Term can be fixed, periodic or at will.

Question 6

Explain the ancillary rights clause/ section of the lease.

Answer 6

Gives the tenant rights over other land to enable them to use the leased property more effectively (eg rights of road use, car parks etc).

Question 7

Explain the rights excepted and reserved section of the lease.

Answer 7

Sets out rights in favour of the landlord over the leased property (eg right to enter and do repairs).

Question 8

Explain the annual rent clauses in a lease.

Answer 8

Details the rent payable by the tenant.

Usually payable quarterly.

May contain info on insurance premiums etc the tenant is required to pay or contribute to.

Question 9

What is a rent review clause?

Answer 9

Unless term is short, landlord wants to ensure there is a mechanism to increase the rent in line with the market. This clause will detail landlords rights to do this.

Question 10

What are tenant’s covenants in a lease?

Answer 10

Obligations imposed on the tenant as to how they look after the property.

Question 11

What are landlords covenants in a lease?

Answer 11

Obligations imposed on the landlord (usually the obligation to insure the property).

Question 12

What is a re-entry and forfeiture clause?

Answer 12

Allows landlord to bring lease to an end if tenant fails to pay the annual rent or is in breach of one of the other tenant covenants in the lease.

Question 13

What is a tenancy at will?

Answer 13

Tenant occupies property with permission of landlord on the term that it may be terminated by either party at any time.

Question 13

What is the difference between a fixed term lease and a period tenancy?

Answer 13

Fixed term will be for a fixed amount of time (usually a term of years) and will automatically expire on the end date.

A periodic tenancy is effectively a rolling tenancy (usually for months but sometimes goes on for years). Termination is achieved by giving notice to the other party. The notice should be the length of one period of the lease (eg a months notice for a monthly tenancy). Note as an exception to the general rule, yearly tenancy can be terminated on 6 months notice.

Question 14

What are the three types of leasehold covenant?

Answer 14

1) Absolute covenant;
2) Qualified covenant;
3) Fully qualified covenant.

Question 15

what is an absolute covenant?

Answer 15

Restricts the tenant from carrying out a stated action absolutely (under any circumstances).

However, the specific action may be allowed either by way of one-off consent or a permanent variation of the lease.

The landlord retains full discretion on what to allow.

Question 16

What is a qualified covenant?

Answer 16

Allows tenant to carry out the stated action with the landlord’s prior consent.

Question 17

What is a fully qualified covenant?

Answer 17

Allows tenant to carry out the stated action if landlord consent is obtained first, but goes on to say landlord will not be able to withhold consent unreasonably.

Question 18

What is the one risk with imposing aboslute covenant’s on commercial tenants?

Answer 18

It gives tenant little manoeuvre room and therefore makes the lease less attractive to potential tenants.

Many commercial tenants need a degree of flexibility in relation to the rental premises in order to carry out their business activities.

Question 19

Which three things do leases need to ensure in order to preserve the capital value of the property?

Answer 19

1) Building is kept in good repair;

2) Lease reserves a market rent throughout the term (with ability to increase the rent at regular intervals) ensuring a steady income;

3) Investment is readily sellable if necessary (ie lease must be acceptable to future potential buyers).

Question 20

What is an FRI?

Answer 20

Full repairing and insuring lease.

This means landlord gets a clear stream of rent without having to dip into it to pay for repairs, maintenance and insurance.

Full repairing and insuring leases (FRI’s) protect landlords from incurring expenditure which is not recoverable from tenants.

Question 21

Define the rule that ‘works of renewal or improvement go beyond repair’.

Answer 21

• Repair is restoration by renewal or replacement of parts of a whole, not renewal or replacement of the whole.
• This is a question of fact and degree and the work tenant has to carry out will depend on age and nature of the property at the date of lease.

Question 21

Under an FRI, who is repsonbile for what in relation to repairs?

Answer 21

• If tenant is occupying the whole bundling, they have full repair obligations for the whole building.
• If they only occupy part of the building, responsibility will be divided up between the landlord and tenant. In these situations the tenant would be under obligation to repair non-structural parts of the premises, and landlord will assume responsibility for structural parts and common areas.

Question 21

Explain the principle of repair obligations on tenants which arose from the case of Ravenseft Properties Ltd.

Answer 21

• Repairing covenants don’t obligate tenant to give back to landlord a property wholly different from that leased to them.
• However it can oblige tenant to remedy inherent defects in the design and/or construction of the building if that is the only way to effect the repair.

Question 22

What kind of provisions will a lease of part usually contain?

Answer 22

Provisions enabling the landlord to pass on the costs in maintaining the structure and common parts to the tenants via a service charge.

Question 23

What is the purpose of a full repairing and insuring lease (FRI)?

Answer 23

It protects the landlord from incurring expenditure which cannot be recovered from tenants.

Question 24

Explain the rule from post office v Aquarius Properties Ltd - ‘there must be disrepair first’.

Answer 24

• This established that there must be disrepair first before tenant can be in breach of covenant to repair.
• Physical condition of the property must have deteriorated from some previous physical condition.

Question 25

Explain the rule (from Proudfoot v Hart) which provides the property need not be in perfect repair.

Answer 25

• The property needs to be put in such a state of repair which renders it fit for occupation by a reasonably minded tenant.
• This therefore accounts for the fact a brand new property will inevitably suffer some deterioration.

Question 26

If a covenant contains wording to the effect of ‘ keep the property in good condition’ what is the effect of this?

Answer 26

This is more onerous than a plain covenant.

Tenant is (under such a covenant) obliged to carry out some works even though there is no actual disrepair.

Question 27

What is the effect of a covenant to ‘keep’ a building in repair?

Answer 27

This means to put the property into repair even if this means the tenant putting the building into a better state of repair than when they entered into the lease.

Question 28

Explain the typical insurance provision ‘ landlord’s covenant to insure the property against defined risks (insured risks).

Answer 28

• Lease will often contain inclusive list of risks in which the landlord must insurer against (eg fire, storm, flood). Issue with this is landlord may insure against expensive risks, and new risks which arise may not be covered by the insurance.
• Clause to the effect of ‘such other risks as the landlord may reasonably require’ will therefore often be included.
• Landlord’s obligation to insure should be limited so it does not include exclusions, limitations, excesses and conditions imposed by insurer (as liability for shortfall in proceeds caused by these are passed to the tenant within the repairing covenant).
• Property should be insured to its full reinstatement value, otherwise if totally destroyed there would not be enough money to rebuild.

Question 29

What does a property insured to a full reinstatement value cover the costs of?

Answer 29

Site clearance, demolition, professional fees (eg surveyors) and an allowance for inflation.

Question 30

Explain the covenant by a tenant to pay for the insurance policy.

Answer 30

This covenant is usually to pay a sum reserved as rent (the insurance rent) including premium for the building’s insurance policy and policies covering the landlord for the loss of annual rent during the period where tenant is unable to use the building due to damage caused by an insured risk.

Question 31

Explain the covenant by the landlord to reinstate the property.

Answer 31

• Often expressed as a covenant to use the insurance proceeds to reinstate the property.
• This is opposed to an absolute obligation to reinstate even if insurance proceeds aren’t sufficient.
• Ideally tenant should negotiate provision which mean landlord has to cover shortfall in event insurance proceeds don’t fully cover reinstatement (as landlord will have failed to insurance property to full reinstatement value).
• Tenant in strong position when negotiating may have agreed proceeds of insurance will be passed to tenant who has been paying premiums, or that proceeds be shared between landlord and tenant according to their proportionate interests in the building.

Question 32

Explain the rent suspension provision.

Answer 32

• Rent will continue to be payable even if property is rendered unusable, unless there are contrary provisions.
• Tenant should therefore ensure lease provides for payment of rent to be suspended during periods where property can’t be occupied due to damage caused by an insured risk.
• Landlord will usually be happy to include this provision as they can insure against the lost rent in such circumstances. Note that lost rent insurance for the landlord is usually limited (often to 3 years) and landlord may therefore limit the rent suspension accordingly.

Question 33

Who is liable where the damage to the property is caused by a non-insured risk, or insurance policy withholds al proceeds due to some action of the tenant which contravened the insurance policy?

Answer 33

The tenant will be liable to repair the property under the repairing covenant (and there will often be a clause to this effect).

This may for example be leaving the property unlocked, lending the keys to someone etc.

Question 33

Explain the termination provision often contained in a lease.

Answer 33

• Frustration will only apply in rare cases (unless otherwise provided for).
• Lease will therefore often give landlord the right to terminate lease should reinstatement be impossible.
• Tenant should try and ensure they have the same right (especially if rent suspension is time limited) in order to be able to terminate lease if property has not been reinstated by end of rent suspension period.

Question 33

What is the tenant’s obligation to repair?

Answer 33

This is the clause which holds the tenant liable for the total cost of repair if:

1) The property is not damaged by an insured risk; or
2) The tenant has vitiated the terms of the insurance policy through some action of their own which causes the insurance company to withhold all proceeds due under the policy.

Question 34

What are the common types of alterations to a property?

Answer 34

1) alterations affecting the structure and exterior of the building;
2) non-structural interior alterations;
3) alterations affecting service media (eg heating, lighting, communications systems;
4) Demountable partitioning (eg those used to separate open plan floors into different rooms).

Question 35

What is an absolute covenant preventing the tenant making all types of alterations to a property?

Answer 35

It may prohibit all alterations but more common for lease to contain this type of covenant in relation to structural/ exterior alterations.

Tenant’s however have some power under s3 LTA 1927.

Question 36

Explain the provision of s3 Landlord and Tenants Act 1927.

Answer 36

It can enable tenants to carry out alterations even where there is an absolute covenant restricting alterations.

Under the provision:
1) Tenant who wants to carry out improvements can serve notice on landlord detailing its proposals.

2) Landlord then has three months within which to object. If it does, tenant has right to apply to the court for approval to carry on the works anyway.

3) The court will authorise the improvements if:
a) they add to the letting value of the property; and
b) they are reasonable and suitable to the character of the property; and
c) do not diminish the value of any other property of the landlord.

4) If court authorises the works, landlord can make an offer to carry them out in return for a reasonable rent increase. Tenant has right to refuse this but if they do, the court cannot grant the tenant permission to do the works itself.

5) If the landlord does not offer to carry out the works itself/ object to the improvements within 3 months (or if the court authorises the work), tenant may lawfully carry them out irrespective of the absolute covenant against building works.

Question 37

Explain qualified and fully qualified covenants in respect of alteration works.

Answer 37

many landlords allow non-structural alterations provided prior consent is given by the landlord. This provides landlord with control over the works and they can order the alterations to be reverted at the end of the leas term.

Consent and the conditions for consent will usually be contained in a separate document - license to alter.

Question 38

What is the effect of a qualified covenant against alterations?

Answer 38

• Landlord consent must be obtained prior to any works being carried out.
• S19(2) LTA 1927 implies a term into the covenant against making ‘improvements’, which states the landlord cannot unreasonably withhold its consent against the improvements. It has been established an ‘improvement’ means any work which will increase the value or usefulness of the property to the tenant (even if this results in the reduction in value of landlord’s reversionary interest.
• As such where there is a qualified covenant, if the work constitutes an improvement the landlord cannot withhold their consent unreasonably.
• Tenant will however prefer a fully qualified covenant which makes it clear landlord cannot withhold consent unreasonably to any alteration (regardless of whether it constitutes an improvement).

Question 39

Why and how is demountable partitioning commonly allowed?

Answer 39

It usually has minimal impact on the building and therefore many landlords contain within the covenant, permission to add partitioning provided it is removed at the end of the tenancy.

Question 40

Explain the compensation for improvements provision available to tenants having used the s3 LTA 1927 procedure to obtain consent to make their alterations.

Answer 40

• Tenants are entitled to claim compensation under s1 LTA 1927 in these situations if the improvements ‘add to the letting value of the holding’ and the claim is made within the statuary time limits.
• In practice, s3 is rarely used and landlords will give consent without the need for having to go to court.
• Most leases contain provisions obligating tenants to remove alterations at the end of the tenancy, meaning there are rarely alterations left at the end which will add to the property’s letting value.

Question 40

Is rent payable in arrears or in advance the lease is silent on the way rent is to be paid, is rent deemed to be paid in arrears or in advance?

Answer 40

In arrears.

Question 41

What is apportionment and how is it calculated?

Answer 41

• This usually relates to when the tenant occupies the property. Rent is usually paid in quarters.
• As such, it is unlikely tenant will take property on the exact date rent would be due and therefore an initial sum (less than the rental payment for the first full term) will be needed. This will be calculated by what is called apportionment and is calculated on a daily basis.

Question 42

If the landlord opts to tax (for VAT purposes) and who accounts for it?

Answer 42

If the landlord opts to tax the tenant will usually be responsible for VAT payments.

Such payments will be added onto the agreed annual rent.

Question 42

Landlords often impose covenants on tenants to restrict the use of the property (eg nothing other than for use as a restaurant).

1) What is the danger of a narrow user clause being imposed on the tenant?

2) What does a landlord typically do to get around this danger?

Answer 42

1) It may make the tenancy unattractive to prospective tenants who wish to retain the possibility of diversifying the business, or cause a current tenant to dispose of a lease at a later stage.

2) Landlord may therefore impose a covenant allowing for change of user within a certain class set out in the Use Classes Order 1987 (eg not to use premises other than as a restaurant or such other use falling within use class E).

Question 43

Are there any statutory implications to a landlord ‘unreasonably’ refusing consent in relation to user covenants?

Answer 43

No.

Question 44

How is alienation usually defined?

Answer 44

• Defined as the different ways of creating an interest in the property for the benefit of a third party.
• Tenants can dispose of their interest in the property in any way they like (unless restricted by the lease). This is known as alienation.
• A landlord will therefore want control over who else might occupy the investment property and does this by imposing restrictions in the lease against tenants dealing with the leasehold interest.

Question 45

Give examples of what can amount to alienation.

Answer 45

1) Assignment;
2) Underletting (subletting);
3) Charging (mortgaging);
4) Sharing occupation (eg allowing third party occupation through licensing arrangements);
5) Parting with possession (covers assignment and underletting but also informal arrangements which may be difficult to classify).

Question 46

Generally speaking will a commercial lease typically allow assignment?

Answer 46

Yes - but an assignment of the whole property (and not an assignment of part).

Question 47

Explain the provision of s19(1)(a) LTA 1927.

Answer 47

The provision implies (into any qualified covenant) that consent to assign cannot be unreasonably withheld by the landlord.

The effect of this therefore is that the qualified covenant is automatically converted into a fully qualified covenant.

Question 48

Explain the provision of s19(1A) LTA 1927.

Answer 48

• This allows the landlord and tenant to agree in advance the conditions and circumstances in which it would not be unreasonable for the landlord to refuse consent.
• Conditions are usually that the assignor agrees to give and authorised guarantee agreement for the assignee and/or that the signee agreed to provide guarantors.
• Circumstances would usually include that the assignor is up-to-date with rent and/or that the assignee is in sufficient financial position to comply with tenant’s covenants in the lease.
• The effect is these pre-agreed conditions will be deemed reasonable.

Question 49

Explain the revision of s1 LTA 1988.

Answer 49

Where there is a qualified covenant on assignment (regardless of whether obligation for consent not to be unreasonably withheld is express or implied) and the tenant has made a written request for consent to the landlord, the landlord must within a reasonable time:

a) give consent (except where it is reasonable not to give consent); and
b) serve on the tenant written notice of its decision whether or not to give consent specifying in addition to this:
i) if consent is being given subject to conditions (and what those conditions are); or
ii) if consent is withheld , the reasoning as to why consent is being withheld.

Question 50

Explain the guidelines issued by the COA regarding landlord’s reasonableness to refuse consent to assign.

Answer 50

1) Purpose of fully qualified covenant agaisnt assignment is to protect landlord from having premises used or occupied in undesirable ways/ by undesirable tenant’s/ assignees;

2) Landlord is not entitled to refuse consent to assign on grounds which have noting to do with relationship of landlord and tenant regarding subject matter of the lease;

3) It is unnecessary for landlord to prove that the conclusions which led to refusal were justified if they were conclusions which would have been reached by a reasonable person in the circumstances;

4) It may be reasonable for landlord to refuse consent to assignment on grounds of the purpose assignee intends to use it, even if that purpose is not expressly forbidden in the lease;

5) Landlord primarily should consider their own interests on deciding whether to refuse, however it would be unreasonable not to account for detriment which would be suffered by the tenant should the assignment be refused, if that detriment would be extreme/ disproportionate in relation to the benefit gained by the landlord;

6) Subject to the above, it is a question of fact depending on all circumstances, as to whether the landlord’s consent to an assignment is being withheld unreasonably.

Question 51

List some situations where it has been deemed reasonable for landlord to refuse consent (therefore not breaching s19(1)(a)).

Answer 51

• Proposed assignee’s references were unsatisfactory;
• Assignor was in breach of repair covenant and landlord was not satisfied the assignee would be in a position to remedy that breach;
• Assignee would be in a position to compete with the landlords business;
• Where assignment would reduce value of landlord’s reversion (although not reasonable if landlord has not intention of selling its reversionary interest);
• Where proposed assignee intends to carry on a use detrimental to the premises, or the use is inconsistent with the landlord’s tenancy mix policy;
• Where the assignee would acquire protection under part 2 of LTA 1954 (and the assignor did not have such protections)

Question 51

List some situations where it was held consent was unreasonably withheld by the landlord (breaching s19(1)(a) LTA 1927).

Answer 51

• Landlord refused consent in attempt to obtain advantage for itself;
• Where there were minor breaches of the repair covenant;
• Where premises had been on the market for 18 months, the rent was significant and the slight harm to the landlord would be outweighed by prejudice to the tenant.

Question 52

What are the requirements for an underlease?

Answer 52

An underlease is an estate in land which must be for a shorter term than the term of the head lease.

Question 53

What is the general rule when determining whether a landlord has acted reaonsbly in refusing consent to an assignment?

Answer 53

• Generally speaking, it should be considered what a reasonable landlord would do in similar circumstances.
• For instance, it would likely be reasonable to refuse consent if the assignee intended to use the property in a way which would go on to breach the terms of the lease.

Question 54

Give the two main reasons a landlord may be concerned about the tenant underletting to a subtenant.

Answer 54

1) It is possible landlord might end up with under tenant as their direct tenant. This would happen if:

a) head tenant’s lease is forfeited and the under tenant (whose under lease would come to an end at the same time) successfully applies to the court for relief from forfeiture; or
b) head tenant’s lease is surrendered or disclaimed by head tenant’s liquidator; or
c) if both leases expire and under tenant exercises their statutory right to stay on in the property and apply for a new lease under the LTA 1954 but the head tenant does not.

2) Head tenant will remain liable to landlord for performance of covenants under the lease, but the under tenant will be in occupation and have physical control of the property. Landlord will therefore have limited day-to day control over the property, as rights reserved (such as inspection and serving notices) will be exercisable by the head tenant. Landlord will therefore have to go through the head tenant to get anything done.

Question 55

Which statutory provisions apply to a landlord’s ability to refuse consent to a tenant to underlet the property?

Answer 55

Both s19(1)(a) LTA 1927 and s1 LTA 1988 also apply to the landlord’s consent to underletting (as well as assignments).

Question 56

List some common conditions for underletting which are imposed in the alienation covenant of a lease.

Answer 56

1) Terms of the under lease mirror the terms of the head lease.

2) Annual rent reserved by under lease is at least as high as the annual rent reserved by the head lease.

3) Any underletting must exclude s24-28 in Part 2 of the LTA 1954 (which gives business tenants statutory rights to stay on the property and rent leases at expiry of the contractual term).

4) Under tenant enters into a direct covenant with the landlord to perform the tenants covenants in the under lease and the head lease.

5) That no further underletting of the property is permitted.

Question 57

What are the four types of rent review mechanism?

Answer 57

• Fixed rent review;
• Index linked rent review;
• Tenants receipts; and
• Open market rent review.

Question 58

Explain fixed rent review mechanism.

Answer 58

• Possible to have a rent review clause which provides that at various dates throughout the term, rent will increase by a set amount.
• Benefits are simplicity and certainty but has the draw back of being pre set at a time when it is impossible to know what the rental market will be like throughout the term (thereby removing flexibility).

Question 59

Explain the index-linked rent review mechanism.

Answer 59

• Rent is linked to an external index (eg retail price index).
• Reasoning is this will allow rent to be altered in line with inflation.
• It does not however track property market specifically (so reviewed rent may be different to that of the market).
• This type of rent review will often have a cap which limits the percentage increase whilst also ensuring it increases by a minimum amount.

Question 59

Explain the tenant’s receipts rent review mechanism.

Answer 59

Rent review will be linked to the tenant’s receipts from its use of the property.

Where used it is likely linked to tenant’s turnover but could be linked to other receipts (eg profits or sums received from subletting).

Has the advantage of tracking the tenant’s actual financial health and gives landlord incentives to the landlord to maximise the trade of tenant.

Downside is the rent increase will be affected if tenant’s business is struggling.

Question 60

Explain the open market rent review mechanism.

Answer 60

Rent is adjusted at regular intervals during the term by reference to the open market renal value of the premises at the time of review.

This is the most common type of rent review mechanism.