The key lease covenants in a commercial lease and the law relating to their breach

Question 1

Who is generally responsible for repairing the Property? What kind of repairing covenant is it?

Answer 1

Tenant is responsible for repairs unless caused by an Insured Risk. It is a full repairing obligation covenant.

Question 2

Who is responsible for insuring the Property and Common Parts?

Answer 2

Landlord

Question 3

What is the meaning of a covenant to repair?

Answer 3

There must be disrepair first.

The tenant only needs to put the property in a state of repair as renders it fit for occupation.

Renewal or improvement are beyond repair.

Tenant not obliged to give back a wholly different property to that leased to them.

Question 4

What is the difference between a repair covenant and a covenant to keep the property in good condition.

Answer 4

keep’ in good condition more onerous than repair. Can mean tenant is obliged to carry out work even if property not in disrepair.

Question 5

Repair - who is responsible - lease of whole

Answer 5

In a lease of whole of the landlord’s title such as an office block, the definition of ‘Premises’ will refer simply to the title and postal address of the office block.

The tenant is responsible for the interior, exterior and structural repair.

Question 6

Repair - who is responsible - lease of part

Answer 6

in a lease of part, say the fifth floor of the office block, the definition of ‘Premises’ will
specify the fifth floor of the office block.

The tenant is only responsible for
interior repair.

In a lease of part, other demises are the responsibility of their respective tenants. Areas of the building or estate used commonly by all tenants (‘common parts’), such as hallways, lifts and staircases, communal car parking, etc, are the responsibility of the landlord.

Although the landlord will bear responsibility for repairing the common parts, the landlord will recover the cost of doing so collectively from the tenants by way of service charge payments.

An FRI lease typically contains extensive clauses setting out the services and how they are charged.

Question 7

Repairing covenant

Answer 7

The repairing obligation is set out as a tenant’s covenant in the lease. Without this, the tenant’s implied responsibilities as to the repair of the premises would be minimal, so the obligation is essential to a commercial landlord

Question 8

Example of a full repairing covenant

Answer 8

‘to keep the Premises in good repair’

Don’t be misled by the word keep, as this obligation means that if the premises are not in good repair, the tenant must put the premises in good repair.

A tenant taking on a full repairing obligation should obtain a survey so they are aware of any major items of repair that may be needed

Question 9

Example of a qualified repairing covenant

Answer 9

‘to keep the Premises in good repair but not to put the Premises in any better state of repair
than it was in at the date of this lease as evidenced by the Schedule of Condition’

The schedule of condition will contain photographs recording the state of the premises.

By definition, this is not an FRI lease repair covenant, and only likely to be accepted by an
institutional lender in exceptional circumstances (eg, a short letting or a difficult market).

Question 10

What about inherent and structural defects

Answer 10

If the property is newly constructed, it may have inherent or structural defects that only come to light over time. These may cause issues that the tenant would be obliged to repair under its repairing obligation.

This is unfair, as the tenant is not responsible for them, and the landlord should have warranties from the contractors (the builder, structural engineer, architect, etc) that the landlord can rely on.

A tenant taking a lease of a newly constructed property should ensure that inherent and
structural defects are therefore excluded from the tenant’s repairing obligation and service charge contributions.

Question 11

Who will be responsible for insurance - leases

Answer 11

A commercial landlord will almost always be responsible for the insurance of the building (even where it is a lease of whole). In keeping with the principles of an FRI lease, the cost of insuring will be recovered from the tenant under the lease:

• In a lease of whole, the landlord will insure the whole, and the sole tenant will refund the
  landlord the whole of the insurance premium.
• In a lease of part, the landlord will insure the whole, and each tenant will refund the landlord a proportionate part of the insurance premium.

The money that the tenant or tenants pay to the landlord will usually be referred to as ‘insurance rent’. The reason for this is covered in the chapter on termination of leases

Question 12

What are insured risks? - leases

Answer 12

fire, explosion, lightning, earthquake, tempest, storm, flood, bursting and overflowing of water tanks, apparatus or pipes, damage to underground water, oil or gas pipes or electricity wires or cables, impact by aircraft and aerial devices and articles dropped from them, impact by vehicles, subsidence, ground slip, heave, riot, civil commotion, strikes, labour or political disturbances, malicious damage

These are the risks that will be covered by the insurance policy taken out by the landlord.

The definition may allow for the landlord to add other risks to the list from time to time.
They will also be excluded from the tenant’s repairing obligation, except in certain instances (eg, if the tenant’s negligence means that the insurance is not paid out).

Question 13

What are alterations? - leases

Answer 13

Alterations are changes to the premises, such as reconfiguring the internal walls, opening up new windows, adding a mezzanine floor, etc.
If the lease is silent on alterations, then the tenant is free to carry out alterations.

The only restriction imposed by law is the doctrine of “waste” which means that the tenant cannot carry out alterations which reduce the value of the premises.

In practice, an institutional landlord will want to control tenant’s alterations to avoid issues such as the premises being less appealing to other future tenants.

Question 14

Restrictions on alterations - leases

Answer 14

Typical provisions in an FRI lease:
* The type of alterations permitted (external or internal, structural or non-structural?)
* If they are permitted, whether landlord’s consent needed
* Whether they must be reinstated (ie, the premises returned to its original state) at the end of the lease term

The degree of control will likely depend on the type of alteration. For example, in an office lease, it is common to allow internal non-structural partitions to be altered to provide a different office configuration.

Question 15

Absolute covenant against alterations - leases

Answer 15

An absolute covenant against alterations means that they are not permitted.

If the tenant wants to make an alteration covered by an absolute covenant, they can ask the landlord, but the landlord has no obligation even to consider such a request.

Question 16

Qualified covenant against alterations - leases

Answer 16

A qualified covenant against alterations means that they are only permitted with landlord’s
consent. The landlord does not have to give consent.

A fully qualified covenant is similar to a qualified covenant, but in this case, the landlord must act reasonably in deciding to withhold consent.

Question 17

What about improvements - leases

Answer 17

If the lease contains a qualified covenant against alterations, s19(2) LTA1927 converts it to a fully qualified covenant insofar as the tenant’s proposed alterations are improvements from the point of view of the tenant.

The conversion from qualified to fully qualified covenant

Question 18

Example of an improvement

Answer 18

A tenant applies for consent under a qualified covenant to modernise the air conditioning system.

As it is an improvement for the tenant, the landlord must act reasonably in its decision to
give/withhold consent

Question 19

Licence for alterations

Answer 19

If the landlord consents to alterations under a qualified covenant, then the consent will usually be documented in a licence for alterations.

As well as details of the works consented to, and any time limit for carrying them out, it will
contain various tenant’s covenants as below:
* carry out the works in compliance with the landlord’s requirements, typically with good quality materials and a high standard of workmanship
* obtain all necessary consents, which could include planning permissions and building
regulations approval
* pay the landlord’s costs in dealing with the tenant’s application for a licence for alterations
* reinstate the premises at the end of the lease term

Question 20

Tenant’s statutory rights to carry out improvements

Answer 20

If the tenant’s proposed alterations are improvements, then even if the lease contains an absolute covenant against alterations, the tenant may be able to circumvent this by using this statutory procedure:
* Under s3, LTA1927, the tenant serves notice on the landlord of its intention to carry out
improvements.
* If the landlord objects, the tenant can apply for the court’s permission to carry out the
improvements.

The court will give permission if the improvements:
- add to the letting value of the property;
- are reasonable and suitable to the character of the property; and
- will not diminish the value of any other property belonging to the landlord.

• If the landlord does not object within three months, the tenant may carry out the improvements.
• The landlord may offer to carry out the works itself and increase the rent, but the tenant does not have to agree to this. However, the tenant can then not ask the court for permission.

Question 21

What is a user clause - leases

Answer 21

User refers to what the lease allows the tenant to use the premises for.

If the lease were to be silent on user, then the tenant is free to use the premises for anything they like. The lease will therefore control the use of the premises with a user clause.

Question 22

What does section 19(3) of the Landlord and Tenant Act 1927 say about change of user

Answer 22

means that if the landlord decides to give consent to a change of use, the landlord may not charge a lump sum or increase the rent for giving consent unless the change of use also requires structural alterations (in which case the landlord may charge a lump sum or increase the rent for giving consent)

Question 23

What does Code for Leasing Business Premises say

Answer 23

sets out some points of good practice on alterations and change of use such as the following:

• The lease should only restrict alterations and change of use insofar as necessary to protect the value of the premises and any adjoining or neighbouring premises of the landlord.
• The Code (subject to certain exceptions) requires a landlord to at least give the tenant a fully qualified covenant for internal non-structural alterations in a lease of part, and the tenant the ability to carry out internal non-structural alterations without consent in a lease of whole.
• If the landlord will require any alterations to be reinstated at the end of the lease, this should be made clear in the heads of terms.

Otherwise, the lease may only require this if it is reasonable.

Question 24

What is forfeiture?

Answer 24

the right of the landlord to re-enter the premises and take them back from the tenant. It brings the lease to an end before the contractual term (or during any period of holding over).

Question 25

The right to forfeiture

Answer 25

Forfeiture is not an automatic right, and is only permitted insofar as the lease provides for it.

A commercial lease will typically allow the landlord to forfeit the lease if the tenant fails to pay the rent (usually after a period of grace), breaches its obligations under the lease, or there is an ‘insolvency event’.

For non-payment of rent, the landlord is entitled to forfeit as soon as the lease allows. For any other breach of the tenant’s obligations, the landlord must serve a section 146 notice LPA 1925.

This notice gives the tenant a reasonable opportunity the opportunity to remedy it, failing which the landlord will be entitled to forfeit.

Question 26

Relief from forfeiture

Answer 26

As soon as the landlord serves a section 146 notice or starts the process of forfeiture, whether by peaceable re-entry or issuing proceedings, the tenant is entitled to apply for relief from forfeiture.

Relief from forfeiture is a discretionary remedy. If the court award the tenant relief from forfeiture, then the lease is restored as if forfeiture had never taken place.

The aim of the court is to put the parties back into the position in which they would have been had forfeiture not taken place.

If forfeiture is for non-payment of rent, then the tenant will normally be able to get relief from forfeiture by settling all rent arrears and landlord’s costs.