U5. Grant of Lease and Underlease

Question 1

What is a lease and what is an underlease?

Answer 1

A lease is a grant of a lease by the freeholder (land lord) to the tenant

an underlease is a lease granted by a leaseholder to an undertenant.

Any underlease must have a term that is at least one day less than the lease, otherwise it will take effect as an assignment of the lease.

Question 2

What are the landlords covners as regards to the grant of lease?

What can the do to help with this?

Answer 2

The landlords main concern will be that the tenant will be able to pay rent and observe and perform the tenant covenants under the lease. The ability of the tenant in this regard is known as the ‘covenant strength’

To help with this landlords may:

1. Require a tenant reference
2. Require a rent deposit

Question 3

What are the tenants main concerns with regards to granting an underlease?

Answer 3

The tenant must ensure that the alienation provisions within the lease are complied with.

Typically the consent of the superior landlord will be required.

Question 4

When obtaining a lease, should check be carried out?

Answer 4

As with the sale of a freehold property, the landlords solicitor should investigate title and deduce title to the tenants solicitor. The tenants solicitor should investigate in the usual way.

Question 5

Does a landlord needs the lenders conset to grant a lease?

Answer 5

Yes, If the lender (bank mortgage) has a charge over the property, the terms will usually require the lenders consent to the proposed lease.

For registered land, this will usually be supported by a restriction in the proprietorship register in favour of the lender, prohibiting any disposition (transfer) or dealing without its consent.

Question 6

When should the lenders consent be obtained when granting a lease?

Answer 6

The consent in principle should be obtained at the earliest possible opportunity, and the lender will also need to approve the final form of lease before completion.

Question 7

What would happen if a landlord tried to grant a lease without the lenders consent?

Answer 7

The landlord of the proposed lease will be in breach of the terms of the charge

The tenant will be unable to register the lease (leases over 7 years), or make any other relevant HM Land Register applications (leases under 7 years), if there is a restriction on the title

Question 8

Do landlards have to deduce title to the freehold when granting a lease for registered freehold properties?

Answer 8

No, although it is desirable, there is no obligation to do so.

If the landlord does not deduce the title to freehold, the tenant should obtain official copies and filed/title plan from HM Land registry.

Question 9

Does a landlord need to deduce title to the freehold when granting a lease for Unregistered Freehold properties?

Answer 9

For leases under seven years, no.

For leases over seven years, the landlord must deduce title if the lease is to be granted for a term of more than seven years and will therefore be substantively registrable.

HM registry will be unable to register the lease with absolute leasehold title unless title has been deduced.

Question 10

If the landlords title is registered, does the landlord need to deduce title to the freehold if granting a lease?

Answer 10

The landlord will usually deduce title, however is under no obligation to do so.

The tenant may and should inspect the title in any event to investigate title and prepare for HM Land Registry Applications.

Question 11

If the landlords title is registered, do they need to deduce title to the freehold if granting a lease?

Answer 11

The landlord must deduce title if lease is substantivley registrable (more than 7 years)

If it is less then seven years, they do not.

However, the tenant willotherwise be unable to inspect the title, so best practice to obtain in any event to investigate title.

Question 12

If the headlease is registered with absolute leasehold title, does the freehold title need to be deduced?

Answer 12

Freehold title does not need to be deduced, but best practice to obtain.

Question 13

If the headlease is regestered with absolute leasehold title, does freehold title need to be deduced?

Answer 13

If the underlease is substantivley registrable (more than seven years), the landlord must deduce freehold title and the undertenant can ask to see deduction of the leasehold title going back 15 years.

Question 14

If the title to the underlease is unregistered, with absolute leasehold title, does the freehold title need to be deduced?

Answer 14

If the headlease reigstered with good leasehold title only, landlord should deduce freehold title if underlease substantively registrable (otherwise best practice to obtain).

Upgrade of headlease title will be required for underlease to be registered with absolute leasehold title.

Question 15

What are the standard conditions for the granting of a lease or underlease?

Answer 15

The standard conditions provide that where a new lease is substantively registrable, title should be deduced, so that the lease may be registered with absolute leasehold title.

However, these will only apply if they are incorporated into a contract for the grant of the lease of underlease.

Question 16

What 4 things will the landlords solicitor send to the tenants solicitor, and what 4 things will the solicitor then do when a lease is being granted in the pre contract stages?

Answer 16

The landlords solicitor will send the following to the tenants solicitor:

1. Evidence of title
2. Draft agreement for lease
3. Copies of any relevant documents held by the landlord (ie planning permissions)
4. Replies to standard precontract enquires.

The formal lenders consent to the proposed lease / underlease will usually follow in due course, although an agreement in principle might be provided at this stage.

The tenants solicitor will then:

1. Investigate title
2. Raise detailed standard enquires if replies have not already been provided, and any appropriate specific enquires / requisitions.
3. Undertake the usual pre-contract searches
4. In the case of an underlease, request draft licence to underlet from the landlords Solicitor

The tenants solicitor will need to review and amend the draft lease or underlease, taking instructions and reporting to the client on all key terms of the documents.

Question 17

Can tenants undertake limited due diligence in the pre contract stage of obtaining a lease?

Answer 17

For a short term lease or underlease and there is no lender involved, they may opt for limited due diligence.

However, the solicitor should be informed of the importance of such searches and what they could reveal so they can make an informed decision.

Question 18

What is a Licence to Underlet, and what is its purpose?

Answer 18

When granting an underlease, a licence to underlet will usually be required by the lease.

The purpose of a licence to underlet is to provide the superior landlords approval to the proposed underlease and to provide privity of contract between the head landlord and undertenant, that would otherwise not exist.

Question 19

What is an agreeent for lease and is it required?

Answer 19

An agreement for lease is simply a contract or agreement to enter into the lease/ underlease on completion.

Most grants of leases and underleases will proceed straight to completion and there will be no need for an agreement for lease. As with freehold transactions, the contract stage may dispensed with.

Question 20

What 4 circustances may an agreement for lease be useful?

Answer 20

1. Where there is a delay in completion, but the parties wish to be formally committed to the transaction.
2. Where either parties need to carry out works on the property before the lease or underlease is formally granted. The agreement will cover in detail the obligations of the parties.
3. Where a third party consent is required to the grant of the lease / underlease or the tenants proposed used.
4. Where another tenant or other occupant is already in occupation and the surrender of their interest needs to coincide with the grant of a new lease / underlease.

An agreement for lease will be prepared by the sellers / landlords solicitor and then submitted to the tenants / undertenants solicitor for approval.

Question 21

Are standard conditions often put into an agreement for lease?

Answer 21

It is usual to incorporate standard conditions into an agreement for lease and for the agreed form of lease / underlease to be annexed to the agreement. Agreements for lease should only be exchanged when the form of lease/underlease to be annexed has been agreed, otherwise the document will be void for uncertainty as an ‘agreement to agree.’

Question 22

What is the landlords main concerns when granting a lease and why?

Answer 22

To have a lease that gives it suitable control over the property, and which is institutionally acceptable.

If the landlord exercises too much control, with unduly onerous provisions, it could have an adverse impact on the rent review.

If the lease is not institutionally acceptable, it could affect the value of the property, as well as its marketability and suitability for lending purposes.

Question 23

When granting a lease, what are the tenants main concerns and why?

Answer 23

To have a lease that will enable it to occupy the property on reasonable terms, without unduly onerous liabilities and restrictions.

A lease that has unduly onerous or restrictive terms could be difficult to deal with in the future, lead to additional financial liability, and affect the tenants day to day use and enjoyment of the property.

Question 24

Does the headlease effect the terms of the underlease?

Answer 24

Normally yes,

The Underleases terms will usually be governed by the terms of the headlease (as it will often state any underlease must be granted on similar terms), so there will be less room for negioation.

Question 25

What is the procedure when drafting the lease?

Answer 25

On the grant of a lease, the landlords solicitor will usually draft the lease and submits it to the tenants solicitor for approval. Terms will then be negioated.

Question 26

How must leases be executed?

Answer 26

Leases must be executed as a deed.

However, it may be made orally where the lease is of 3 years or less. Despite this, it is always best practice for such leases to be made in writing and by deed.

Question 27

What happens in pre completion of a lease?

Answer 27

Once the lease/underlease is agreed, the landlords solicitor will prepare engrossments (clean copies) of the lease/underlease and counterpart lease/underlease for execution by the landlord and tenant respectively, as well as any other parties to it (ie a guarantor execute the counterpart.)

Question 28

What should happen before the completion of an underelease?

Answer 28

1. The licence to underlet should be completed.
2. The tenants solicitor should see a copy of lenders consent.

Question 29

What 3 things will the landlord recive of the completion of a grant of a lease or underlease?

Answer 29

1. Executed Counterpart lease or underlease
2. The balance of any premium paid
3. Apportioned sums due under the lease

Question 30

What 3 things will the tenant recive of the completion of a grant of a lease or underlease?

Answer 30

1. Executed lease or underlease
2. Certified copy title deeds (if the superior title is unregistered)
3. Certified copy lenders consent

Question 31

What are the 4 main post completion matters when granting a lease or underlease?

Answer 31

SDLT / LTT Formalities

HM Land Registry Formalities: Legal leases of more than seven years

HM Land Registry Formalities: Legal Leases of Seven Years or Less

Notice of Underlease

Question 32

When must Stamp Duty and Land Tax be submited and paid when post completion of a lease?

Answer 32

SDLT - Must be submitted and duty paid within 14 days

LTT - Must be submitted and duty paid within 30 days of completion

Question 33

What notice of the underlease needs to be given post completion?

Answer 33

Formal notice of completion of the underlease must be served on the superior landlord, under the terms of the lease / licence to underlet.

It should be served in duplicate, accompanied by the relevant fee, and one copy of the receipted notice should be kept with the lease.

Question 34

Do leases of more than 7 years need to be registered post completion?

Answer 34

Leases of more than seven years are substantively registrable (Registrable in their own right) and will have their own title number. This is the case regardless of whether the superior title is registered or unregistered.

Question 35

How is a lease of more than seven years registered when the superior title is unregistered?

Answer 35

The tenants application will be for first registration (on FR1 Form, with DL in duplicate) and must be registered within 2 months of completion.

Question 36

How is a lease of more than seven years registered when the superior title is already registered?

Answer 36

This will be a registrable disposition and an application to change the register (AP1 Form) must be submitted within the priority period of the Pre-Completion Land Registry search. HM Land registry will also note the lease against the superior title.

Question 37

How are leases under seven years registered?

Answer 37

Legal leases bind any owner of the land and will be an overriding interest on 1st registration of the superior title.

However, a tenant may consider lodging a caution against first registration against the name of the estate owner to provide further protection for the tenant on 1st registration to superior title.

Question 38

How are leases registered against registred land when they are meduim sized leases (More than 3 years, but up until and including seven years)

Answer 38

It is best practise to apply to enter an notice of the lease and for registration of the ancillary rights / easements within it against the superior title.

Question 39

How are leases registered against registred land when they are shot leases (Up to and including 3 years?

Answer 39

It is not possible to apply to enter a notice of the lease against the superior title.

It is best practise to apply for registration of the easements within the least against the superior title