Terms of a Lease (repair, insurance, alterations, rent, term, user, planning)

Question 1

what are the considerations for a landlord vs tenant regarding the term of a lease?

Answer 1

commercial landlord =

• want fixed term not periodic because a lease where T can terminate by a notice is not valuable

tenant =

• may prefer a shorter and more flexible term due to changing business needs and less SDLT / LTT payable

Question 2

what are break clauses? what are the features of break clauses in a lease? (5 points)

Answer 2

• break clause = allows a party to terminate the lease before its contractual expiry date
• clause can be exercised either at a specified date only or it could be a rolling break (exercisable at any time after a specified date)
• exerciseable by giving the other party notice (e.g., 6 months)
• can be tenant’s only, landlord’s only, or mutual
• there will be conditions in the lease for exercising the break clause = rent is up to date, no breaches of covenants, no alienation, reinstate premises, etc.

Question 3

what are the advantages (3) and disadvantages (2) of a break clause for a tenant?

Answer 3

Advantages =

• gives it the flexibility of terminating the lease earlier to react to its own business needs or changing market conditions.
• If the tenant is a small or new business, this is especially true if it is not projected to make profit for a while or the business fails and operations need to close
• If the tenant finds the premises desirable it can simply carry out the fixed term which is easier and less costly than re-negotiating a new lease at the end of a shorter tenancy

Disadvantages =

• complying with the terms of the break clause can be onerous and may be forgotten
• more SDLT may be payable on a lease with a longer term even if there is a break clause

Question 4

what are the advantages (3) and disadvantages of a break clause for a landlord (2)?

Answer 4

Advantages =

• can allow flexibility if the tenant is undesirable or the landlord has alternative plans for the property
• break clauses help attract prospective tenants especially in a tenant’s market
• in terms of negotiating, including a break clause can be seen as a sign of compromise and good faith for the landlord, but in reality, if the tenant has already stayed in the premises for a long period of time and established its business, it is unlikely to want to exercise the break clause and leave

Disadvantages =

• if landlords prefer the certainty of knowing tenants are locked in
• the value of the landlord’s reversion may be less as the term of the letting is uncertain

Question 5

paying premiums on rent

Answer 5

commercial leases = usually short leases with market rent - no premium payable

residential long leases = with ground rent with a premium payable to landlord for grant of lease

Question 6

rent in FRI lease

Answer 6

• expressed yearly but payable quarterly
• even if quarters are not same length, rent usually divided equally
• payable in advance of quarter day
• vat may be payable if new commercial property (3 years or less, or L opted to tax)
• if lease is started in the middle of a quarter, rent will be apportioned

Question 7

rent review types (4)

Answer 7

1. stepped rent = lease sets out exactly how much rent will increase
2. turnover rent = rent calculated based on T’s turnover of the property (retail leases)
3. index linked rent = rent increased by reference to an agreed measure of inflation such as the retail prices index
4. open market rent review = ascertaining rent based on comparable premises and principles - FRI leases

Question 8

why does an institutional investor want rent review?

Answer 8

• there is no implied right to rent review
• L will want to ensure their rents are in keeping with market rent

Question 9

what is the rent review in FRI leases and what are its features?

Answer 9

• open market rent review = calculated based on comparable premises of the same size and location based on certain principles
• upwards only = if market rent decreases, rent stays the same
• value of rent is either determined by L and T agreeing, or if they do not agree, the lease will set out a mechanism for a valuer to determine new rent

Question 10

what are the considerations of a valuer for open market rent review? (2)

Answer 10

1. rent payable for comparable premises on the market, and
2. rent for the hypothetical lease (assuming and disregarding matters)

Question 11

what is the hypothetical lease for open market rent review and what are the assumptions (6) and disregards (3) ?

Answer 11

valuer considers both comparable rent payable on the market AND rent for the hypothetical lease with some disregards and assumptions

ASSUMPTIONS =

• premises are vacant and available
• there is a willing tenant and willing landlord
• tenant complied with all its obligations under the lease
• landlord complied with all its obligations under the lease (e.g., even if L did not repair lift, assume it is repaired)
• the term is the term remaining of the actual lease
• if damaged or destroyed, premises are repaired or rebuilt

DISREGARDS =

• the effect of tenant’s occupation of lease (disregard that premises are worth more to T in current occupation)
• goodwill attached to tenant’s business
• tenant’s voluntary improvements other than its obligations

Question 12

after a new rent is determined following rent review, what happens?

Answer 12

new rent documented in rent review memorandum - signed by L and T

Question 13

when will T have to pay further SDLT/LTT after a rent review?

Answer 13

• If rent review is before the 5th anniversary of the term commencement date = T pays further tax calculated on the first 5 years rent
• If rent review is after the 5th anniversary of the term commencement date = T pays no more tax

Question 14

what if a new rent is agreed after the date of rent review set out in the lease?

Answer 14

• rent will be backdated to the rent review date
• means T will have to pay an additional sum + interest set out in the lease (cannot be punitive)

Question 15

who is responsible for the repair of the premises?

Answer 15

• no lease/no repairing covenant = the tenant’s only obligation is not to commit waste (not to make a lasting alteration to the nature of the land – low burden and does not protect L)
• A commercial tenant is responsible for repair of their demise (the extent of the premises let to them).

Question 16

what are the repair obligations for lease of whole?

Answer 16

look at definition of ‘premises’

tenant is responsible for repairing all of it - interior, exterior, and structural repair

Question 17

what are the repair obligations for lease of part?

Answer 17

tenant is only responsible for repairing their demise (interior repair)

landlord is responsible for repair of common parts but will recover the costs from the tenants by way of SERVICE CHARGE PAYMENTS (FRI lease)

Question 18

what does ‘demise’ mean?

Answer 18

the demise is the extent of a tenant’s premises let under the lease

it will be defined under the contract

it is important to check this because this will define the repairing obligation

Question 19

types of repair covenants (2)

Answer 19

1) full repairing obligation

2) qualified repair obligation

Question 20

what does a full repairing obligation require?

Answer 20

full repairing obligation (‘to keep premise in good repair’)

T must put the premises in good repair if T receives them in bad repair

this is why T should get survey before

(used in FRI leases)

Question 21

what does a qualified repairing obligation entail?

Answer 21

limits repairing obligation to keeping the premises in the state it was in on entering the lease

accompanied by a schedule of conditions

not FRI lease - usually only accepted by institutional lender in short letting or difficult market

Question 22

extent and limits of a full repairing obligation

Answer 22

• tenant can choose to repair or replace if there is a choice
• if lease states ‘replace’ = tenant will only accept if it states replace only if beyond economic repair
• renewal = T not responsible for renewal under a repair covenant
• if lease states ‘good repair AND CONDITION’ = more onerous on tenant, should be avoided
• for newly constructed properties, tenant should ensure that inherent and structural defects are excluded from T’s repairing obligation AND service charge contributions
• Insured Risks = excluded from T’s repairing obligations unless caused by T’s negligence

Question 23

If a draft lease states it is the tenant’s obligation to repair and replace - what is the obligation on the tenant? what should the tenant do?

Answer 23

• a replacing obligation is more onerous on the tenant than a simple repairing obligation
• it may mean that the tenant is obliged to e.g., replace a damaged roof instead of repairing it - which is more costly
• the tenant should negotiate with the landlord to remove the replacing obligation, and if the landlord insists on keeping it, compromise with an obligation to replace items that are ‘beyond economic repair’
• replacing is not required under a ‘repair’ only covenant if the tenant has a choice between repairing or replacing

Question 24

what is the obligation on the tenant if a lease obliges them to keep the demise in ‘good repair and condition’?

Answer 24

keeping the demise in good condition is more onerous on the tenant than a repairing obligation

e.g., if there is condensation, this is covered by the obligation to keep in good condition but not by the obligation to keep in good repair

Question 25

does the tenant have to renew items under its obligation to keep the demise in good repair?

Answer 25

if the lease does not state ‘renew’ then the tenant is not responsible for doing this under the repair covenant

if a draft lease states ‘renew’, tenant should insist on removing this

–> renew example: if subsidence caused the premises to be damaged so that it must be rebuilt

Question 26

if there is a draft lease for a new development, what should the tenant look out for in relation to the repairing obligation?

Answer 26

the tenant should refuse to give a repairing obligation without carving out liability to repair inherent and structural defects

it must insist that inherent structural defects are excluded from:
1- its repairing obligation, and
2- its service charge payments

rationale = it is unfair because the landlord would have warranties from contractors, and the tenant would have to repair but it is not responsible

Question 27

who is responsible for insuring leased property? who pays for the insurance?

Answer 27

commercial landlord always responsible for insurance

FRI lease:
- cost of insurance is recovered from tenant (insurance rent)
- lease of whole = L ensures whole, T refunds L the whole of the insurance premium
- lease of part = L ensures whole, each T refunds proportionate part of insurance premium

Insured Risks = excluded from T’s repairing obligations unless caused by T’s negligence

Question 28

if damage was caused to a tenant’s property from an ‘Insured Risk’, what happens?

Answer 28

the tenant will not be obliged to repair damage caused by insured risks

unless the insurance pay-out is withheld or reduced due to T’s fault (e.g., T was negligent and caused fire)

if the landlord is repairing an insured risk, the tenant’s rent is suspended while the tenant is not able to use the property

Question 29

FRI leases (full repair and insuring) features

Answer 29

usually for a fixed term not periodic term

means the tenant is responsible for the cost of repair and insurance and landlord receives clear rent

REPAIR OBLIGATIONS =

• tenant has a full repairing obligation (‘to keep the premises in good repair’) - involves putting premise in good repair if T gets them in bad repair
• tenant not responsible for repairing damage caused by an Insured Risk unless tenant is at fault
• for lease of part = landlord maintains common parts and recovers costs from tenants via service charge payments

INSURANCE =

• L insures whole property and recovers insurance premium from Ts
• if property is damaged, L uses insurance money to repair and rent is suspended while T cannot use the property

RENT AND RENT REVIEW =

• landlord receives clear rent (no deductions)
• payable quarterly by standing order
• upwards only market rent with assumptions and disregards to achieve fairness

Question 30

alteration covenants summary (4 points)

Answer 30

• leases may contain absolute, qualified, or fully qualified covenants against alterations (of external/internal; structural/non-structural)
• if lease contains qualified covenants against alterations, s19 LTA converts it to a fully qualified covenant against alterations if T’s proposed alterations are ‘IMPROVEMENTS’ from T’s perspective (likely are) –> L cannot unreasonably withhold consent
• If L consents = documented in a LICENSE FOR ALTERATIONS which contains tenant covenants – e.g., high quality, T covers L’s costs of granting license, T gets all planning/building consents, reinstate premises
• Even if covenants are absolute, T can serve notice on L of its intention to carry out improvements and if L objects, T can apply to court for permission

Question 31

what are alterations?

Answer 31

changes to the premises, such as reconfiguring the internal walls, opening up new windows, adding a mezzanine floor, etc

Question 32

if there is no lease or the lease is silent on alterations, can a tenant carry out alterations?

Answer 32

tenant is free to carry out alterations subject to the doctrine of waste which imposes an obligation on the tenant not to carry out lasting alterations which affect the nature of the land or reduce its value (e.g., destruction or damage)

Question 33

Why would a landlord want to include an alterations covenant?

Answer 33

• Control tenant’s alterations to avoid issues such as the premises being less appealing to other future tenants
• maintain value of premises
• Especially because absent a covenant, the only obligation on the tenant is not to commit waste

Question 34

what are the types of alterations covenants?

Answer 34

1. absolute covenant against alterations = alterations are not permitted - if T wants to make alterations, it can ask but L has no obligation to even consider the request
2. qualified covenant against alterations = alterations are only permitted with L’s consent. s19(2) LTA 1927 converts this to a fully qualified covenant if the alteration is an improvement from the tenant’s point of view (it likely is)
3. fully qualified covenant against alterations = alterations are only permitted with L’s consent but the landlord must act reasonably in deciding to withhold consent

Question 35

can a qualified alterations covenant be converted to a fully qualified one?

Answer 35

yes - statute converts it

this is if the alterations are considered ‘improvements’ to the property from the tenant’s point of view, which is likely to be the case

Question 36

what is the requirement for L to act reasonably in deciding to consent to a fully qualified covenant?

Answer 36

• A landlord is not entitled to refuse consent on grounds which have nothing to do with the landlord and tenant relationship
• The harm to the tenant vs the detriment to the landlord in considering the request must be considered.
• example = refusing on the belief that alterations will affect the premises value is reasonable

Question 37

what can the tenant do if the landlord refused to give consent to the tenant carrying out alterations? or if it has a fully qualified alterations covenant and the landlord refused to consent?

Answer 37

• Even if covenants are absolute, T can serve notice on L of its intention to carry out improvements and if L objects, T can apply to court for permission
• court will give permission if the improvements:

1. add to letting value
2. are reasonable and suitable to character of property
3. do not diminish value of any other property belonging to L

• If L does not object in 3 MONTHS, T can carry out improvements
• L can offer to carry out improvements itself and increase rent but T DOES NOT HAVE TO AGREE TO THIS AND CANNOT ASK COURT FOR PERMISSION
• but consider if applying to court is worth the time and cost - and maintaining relationship with L is important but application may break this down

Question 38

if T applies to court to carry out improvement, when is the court likely to give permission? (3)

Answer 38

court will give permission if the improvements:

1. add to letting value
2. are reasonable and suitable to character of property
3. do not diminish value of any other property belonging to L

Question 39

what can the tenant do if they requested consent from the landlord to carry out alterations, and the landlord offered to carry out the alterations itself but increased rent?

Answer 39

• tenant can accept this
• tenant can refuse = but T cannot then apply to court for permission to carry out improvements itself

Question 40

if the landlord gives consent to carry out alterations, what must be done?

Answer 40

the tenant and landlord will enter a licence of alterations

Question 41

what are the usual provisions included in a licence of alterations to protect the landlord’s position? (5)

Answer 41

• time limit to complete alterations
• control on the quality of materials used and standard of workmanship
• requiring tenant to obtain necessary planning permission and building regulation consent
• require tenant to reinstate the property to the position it was in before alterations and put right any damage caused
• pay the landlord’s costs in considering the application (including surveyor and solicitor fees)

Question 42

what are the usual features of an alterations covenant in an FRI lease? (3)

Answer 42

• the covenant may be absolute, qualified, or fully qualified concerning whether the landlord’s consent is needed
• it will differentiate between the types of alterations (e.g., qualified for internal non-structural but absolute for external structural)
• it will provide for whether alterations must be reinstated at the end of the term

Question 43

what are user covenants? what are the types of user covenants?

Answer 43

• refer to what the tenant is allowed to use the premises for
• lease can contain absolute, qualified, or fully qualified covenants against change of use
• statute does NOT convert qualified user covenant to fully qualified user covenant
• BUT: LANDLORD CANNOT CHARGE A LUMP SUM OR INCREASE RENT FOR GIVING CONSENT UNLESS CHANGE OF USE ALSO REQUIRES STRUCTURAL ALTERATIONS

Question 44

if the tenant requests consent for a change of use of the premises under a qualified or fully qualified covenant, can the landlord charge for their consent?

Answer 44

• If the change of use does not involve structural alterations, then the landlord CANNOT charge a lump sum or increase rent in exchange with giving consent
• If the change of use does involve structural alterations then the landlord can charge a lump sum or increase rent in exchange with giving consent

Question 45

when negotiating a lease, what are the tenant’s vs landlord’s interests when it comes to user covenants?

Answer 45

• user covenants will restrict the uses of the premises AND the tenant’s ability to change the use (consent from L)
• tenant wants = widely defined uses to retain flexibility if it wants to change the use or if it wants to attract assignees or subletees if it wants to pass the lease on
• landlord wants = narrowly defined user clauses to retain control but not too narrow so as to detract interested potential tenants or limit market rent on rent review

Question 46

What 4 points does the Code for Leasing Business Premises require in relation to alterations and change of use?

Answer 46

Gives points of good practice (not binding):

1. A lease should only restrict alterations and change of use insofar as it is necessary to protect the value of the premises and any neighbouring premises of the landlord
2. L must give T at least a fully qualified covenant for INTERNAL NON-STRUCTURAL alterations in a lease of part
3. L must give T the ability to carry out INTERNAL NON-STRUCTURAL alterations WITHOUT CONSENT in a lease of a whole
4. If L will require alterations to be reinstated at the end of the lease, this must be made clear in the heads of terms - otherwise lease can only require this if it is reasonable

Question 47

planning law - how does this affect a tenant’s ability to request consent for, and carry out, alterations or changes of use?

Answer 47

• the lease and any licence giving consent will require the tenant to obtain the necessary planning permissions and building regulations consents
• alterations may constitute ‘building works’ which require planning permission or building regulations consents
• and changes of use may constitute ‘developments’ if they materially change use to another use class which may require planning permission