The terms of a lease and rent Flashcards
What are some key points for the lease duration term?
Generally the term must be determinate
FRI leases are generally for a fixed term
A tenant may pay less stamp duty land tax or land transaction tax on shorter tenancies ie under 5 year tenancies
what is the term commencement date?
date on which the lease term starts
It may be the date of completion of the lease (when the lease becomes legally binding) but also MAY BE BEFORE OR AFTER
It is common for the commencement date to be earlier than when the lease is dated for simplicity if landlord has multiple occupants
But if the term started in the past the tenant is not expected to pay rent for the period they have not yet used!
The term may also start after the lease is dated - a revisionary lease - where the parties want to extend the letting in advance of the expiry of the current lease
How do you calculate the expiry of a lease term?
Depends on how this is defined in the lease:
“From and including” a certain day of the year the term expires on the day before that day
Lease for 10 years from and including 24 march 2019 expires on 23 march 2029
“From” a certain day the term starts the dat after that day and expries that day of the year in the relevant year
Lease for 10 years from 24 March 2019 starts on 25 March 2019 and ends on 24 March 2029.
What happens if a lease does not have a break clause?
Nether landlord or tenant can bring the lease to the end with agreement of the other party
What does “anniversary” mean in the context of a break clause?
Eg the fifth anniversary of the commencement date means the same day of the year
eg 5th anniversary of 8 September 2019 would be 8 September 2024
What are the common types of rent that leases fall into?
Short leases with a market rent or
Long leases with a ground rent
What are commercial leases?
Usually short leases up to 20 years with market rent
A premium (lump sum) is not usually charged on the grant of the commercial lease
What are residential leases?
Can be long leases - eg 999 years
The first person to buy the property will pay a premium o the landlord for the grant of the lease
Such leases often used to impose a ground rent but since june 30 2022 most new long residential leases have been restricted to imposing a peppercorn rent only
Ground rents imposed before that date remain effective
How is rent usually structured in a commercial FRI lease?
Expressed as an annual figure
but rent is payable quarterly either in traditional quarter days or modern quarter days
Rent is usually due in advance on the quarter day but lease needs to state this. if the lease is silent then the rent is payable in arrears
Is there an implied right for rent review
No
Therefore an FRI for 10 years or more will usually contain a rent review clause
What are different types of rent review?
Stepped rent - rent for 25k for first year, 30k for second …
Turnover rent - rent calculated based on the tenant turnover at the property
Index lined rent - rent increased by reference to an agreed measure of inflation such as retail prices index
Open market rent review - most common for FRIs and involves ascertaining the rent based on comparable premises and certain principles
How does open market rent review work?
Commercial leases tend to have upwards only rent review so rent can only increase based on market review and never go down
If tenant and landlord cannot agree the new rent a specialist valuer will be engaged to determine the new rent and consider:
- the rent payable for comparable premises AND
- the terms of the hypothetical lease which is an imaginary lease based on the actual lease but assuming certain matters and some disregards
What are basic assumptions of a hypothetical lease?
The premises are vacant and available
There is a willing landlord and a willing tenant
What are the common disregards of a hypothetical lease?
Disregards what the tenant has done with the premises voluntarily - so not under the lease obligation
Rationale is tenant should not be penalised with higher rent if he has improved the premises for its own use
Goodwill is also disregarded - eg if tenant is a successful restaurant and makes the location more valuable to other restaurant businesses - unfair to be penalised for this
What happens after rent review?
New rent is documented in a rent review memorandum
It is signed by the landlord and the tenant and kept with the lease for future reference
If rent review is before the 5th anniversary of the term commencement date the tenant may have to pay stamp duty land tax or land transaction tax (as this is calculated on the first five years of rent).
If rent review is after the 5th anniversary then the tenant will not need to pay further SDLT or LTT
If the new rent has been agreed after the rent review date then the new rent is backdated to the date of the rent review and the tenant will have to pay the difference and interest at the rate set out in the lease.
