U5. Structure and Content of Lease

Question 1

What 10 things will a lease typically contain?

Answer 1

1. Prescribed Clauses
2. Commencement Dates and Parties
3. Definitions and Interpretations
4. Grant of the Lease
5. Rent and Rent Review
6. Tenants Covenants
7. Land Lord Covenants
8. Provisos
9. Schedules
10. Execution Clause

Question 2

When must prescribed clauses be included in a lease?

Answer 2

When the lease is granted on or after 19 June 2006 and the landlords title is registered, and the lease is substantively registrable, prescribed clauses must be included at the beginning of the lease.

Question 3

When will the commencment date be in a lease?

Answer 3

The date of the grant of lease

Question 4

Who are the parties to a lease?

Answer 4

1. The landlord
2. The Tenant
3. Any Guarntors

Question 5

What does the grant of the Lease Provide?

Answer 5

This is the main operating part of the lease.

1. It provides that the landlord grants, and the tenant takes, the lease of the premises at the rent.
2. It also provides the rights granted to the tenant, and rights reserved for the landlord. (Such as parking space, rights of access)

Question 6

What are the Tenants Covenants?

Answer 6

Tenants Covenants for the benefit of the land lord, to protect their landlords interests and sometimes their adjoining property.

Question 7

What are Provisos in a Lease?

Answer 7

Conditions or qualifications attached to the lease.

This is usually for re-entry / forfeiture which allows the landlord to enter and reposes the property when there is a nonpayment of rent, breach of covenant, or other specified circumstances (such as tenants bankruptcy or insolvency)

Question 8

What are the Landlords Covenants?

Answer 8

Landlords covenants to the tenant, which is usually covenants for quiet enjoyment and insurance

For mutlilet properties, this will usually extend to a covenant providing additional services relating to the building and common parts (ie landlord carrying out maintenance) in exchange for a service charge.

Question 9

What are schedules in a lease?

Answer 9

Schedules are used to separate key details / information from the lease itself.

All schedules must be expressly referred to in the main body to be incorporated.

Question 10

What are the Tenanrs may concerns when entering into a lease?

Answer 10

The tenant’s main concern on the grant of a lease will be to ensure that the lease is granted on reasonable an not unduly onerous terms, so that they may enjoy the premises without unnecessary restrictions.

Undue restrictions and onerous liabilities may affect the tenants day-to-day use and enjoyment of the property, their financial liability, and the marketability / transferability Police should they wish to deal with it in the future.

A tenant solicitor must therefore seek to amend the draught list to protect the tenants interests.

Question 11

What are the landlords main concerns when entering into a lease?

How can they go about ensuring this is protected?

Answer 11

The landlord’s main concern will be to ensure that their interests are protected.

Usually, they will enter a lease on a full repairing an insurance terms as this ensures the rent they receive is pure income and does not need to be used to pay for repairs.

‘A full repairing an insurance lease’ requires that the tenant is responsible for the costs of repairing and insuring the premises.

Question 12

What is a Full Repairing and Insurance Lease?

Answer 12

This means the tenant is responsible for costs of insuring and repairing the premises.

It allows the landlord to recieve ‘pure income’ from the rent as it does not need to be used to pay for repairs.

Question 13

What is an instutuinally acceptable lease?

Answer 13

A institutionally acceptable lease is one that is suitable for an investment from an institutional investor (pension fund) who is keen to get a steady income (Without deduction of over costs.

A Full insurance repair lease is an institutional accepted lease.

Otherwise acceptable terms would me that it is at market rent on terms that sufficiently control the tenant to protect the value of the landlords investment and adjoining property.

Question 14

What factor determines the tenants repair obligations under a lease and what are the two categories?

Answer 14

Repair Obligations will depend on the Extent of the Premises.

The premises will either be:

A lease of Whole
or
A lease of Part

Question 15

What are the tenants usual repair obligations if they are leasing the whole premisis?

Answer 15

Usually they are resposibile for the WHOLE OF THE PREMISES, to include the landlords fixtures (boilers etc) , structure, and exterior.

The definition of ‘Premises’ in the lease is key to ascertaining the tenants repair obligations.

Question 16

What are the tenants usual repair obligation if they are leasing part of a premis?

Answer 16

Usually responsible for the repair and maintenance of the PREMISES interior only, excluding the structure, exterior and common parts.

However, from a service charge they may ultimately be paying for the costs of the structure, exterior, and common parts.

The definition of ‘Premises’ in the lease is key to ascertaining the tenants repair obligations.

Question 17

What is the diffrence in tenants repair obligations when they are leasing the whole premises vs only leasing part of the premises?

Answer 17

Usually if they are renting the whole, they will be responsible for everything, including the landlords fixters, structure, and exterior.

However when leasing part, they are only resposible for the interior only, excluding the structure, exterior, and common parts.

But, The definition of ‘Premises’ in the lease is key to ascertaining the tenants repair obligations.

Question 18

When negioating a lease, what should the tenant avoid the repair covenant including? (2 things)

Answer 18

1. An obligation to ‘Put the Property into Repair.’

This is because the tenant will be under a positive obligation to put the property into the repair even if it is not in repair at the date of the lease.

Instead it should say ‘Keep the Property in Repair.’

2. An obligation to ‘Keep the Property in Good Condition’

This goes further than a simple obligation than remedying a disrepair.

Question 19

When negioating a lease, what 4 things should the tenant include in the repair covenant?

Answer 19

1. An exclusion of liability for fair wear and tear
2. An exclusion for historic contamination (ie contamination not caused by the tenant)

This is because it could technically be disrepair, and a breach of the tenants obligation to comply with statute.

NB A pre-contract environmental search should be consulted to see if such an exclusion would be reasonable.

3. An Exclusion of damage caused by a risk covered in the landlords building insurance policy unless, because of the tenants actions, it has been vitiated (invalidated) or money not paid out.
4. IN NEWBUILDS - An exclusion of the tenants liability to inherit defects in the design and construction of the building, as these would technically be classed as disrepair.

Landlords will typically agree to this as they will usually have warranties from the builders for several years after construction.

Question 20

How will the bench mark of ‘Keeping the property in repair’ be set at in a lease?

Answer 20

By the schedule of Condition.

A report from a surveyor details the state of repair and condition of the property prior to the grant of lease.

It is designed to set the minimum benchmark for the tenants repairs obligation.

Question 21

With regards to insurance, who typically insures and pays for insurance in a commerical lease?

Answer 21

The landlord will typically insure the property

This will usually be at the expense of the tenant

Question 22

What are the landlords 2 concerns regarding insurance in a lease?

Answer 22

1. To ensure the property is fully ensured against the usual insured risks.

This is so the landlords interest, capital investment, and mortgage is protected.

2. To be able to recover insurance costs from the tenant

Question 23

What are the tenants 4 converns regarding the insurance in a lease?

Answer 23

To ensure that:

1. The property is fully insured against damage or destruction caused by a comprehensive list of insured risks.
2. The landlords is obliged to repair or reinstate in the event of such damage or destruction
3. Rent will not be owed when the premises are unsuitable for use after such damage or destruction
4. They have the option to break the lease if reinstatement is delayed

Question 24

What are insured risks?

What is important to consider when defining insured risks?

Answer 24

In the lease, there will be a list of risks the landlords covenants to insure.

There should be consideration for the pre contract searches. For example, if there issues with flood, the list should include flooding and related costs.

However, as the tenant will be paying towards the insurance policy, they must balance this risk against including risks that may be expensive and unnecessary.

For example, cover including terrorist acts may be expensive for a landmark building, or unnecessary for an industrial unit in a small town.

Thus it is recommended that at the end of a reasonably comprehensive list of insured risks, it says ‘And such other risks as the Landlord shall reasonably require.

To protect the landlord, this obligation should be subject to:

a) exclusions, excess, limitation, or other condition imposed by insurers

b) such insurance being avaliable on reasonable terms (Cost)

Question 25

What will usualy be included in the lease with regards to insurance?

Answer 25

1. Landlords covenant to insure for the full reinstatement value against insured risks. 2. Tennants covenant to pay the insurance rent 3. Landlords covenant to appy the insurance proceeds / to repair / to reinstate

Question 26

Why should the tenant ensure the landlord covenant to insure for the full reinstatement value against insured risks?

Answer 26

So the tenant is not responsible for a shortfall in the insurance proceeds, the insurance should be for FULL REINSTATEMENT. Thus, it should include all costs, such a demolition, site clearance, professional fees and VAT.

Question 27

What should the tenant covenant to pay with regards to insurance under a lease?

Answer 27

The tenant should covenant to pay insurance rent as defined in the lease. It will usually include: 1. the policy premium and tax 2. Insurance valuations 3. Any excess on claims 4. Cover for the landlord in the event of rent suspension

Question 28

What are the tenants concers with regards to alterations provisions in the lease?

Answer 28

Most tenants will wish to make alterations to the premises to suit their requirements, and as such will like to have as few restrictions as possible. In addition, unduly restrictive provisions on alterations could have an impact to deal with the lease in the future (Alienation)

Question 28

What happens if a landlord is paid insurance money, but reinstatement is impossible?

Answer 28

The landlord can keep the insurance money.

Question 29

What is rent suspension clause in a lease? When can a tenant not rely on rent suspension?

Answer 29

There should be a clause meaning the tenant will not need to pay rent for the property if it has been damaged by an insured risk and is thus unsuitable or unfit for occupation and use until fixed. Landlords will usually agree this, as they will be insured against rent suspension. Rent suspension will only be up until the landlord is obliged to ensure for, thus if it is not unlimited, the tenant should ensure there is a clause they can terminate. NB: If a tenant has caused the insurance policy to be viated, they cannot rely on rent suspension.

Question 30

What are the Landlords concerns with regards to alteration provisions in the lease?

Answer 30

The main concern is that the tenants alterations will not have an impact of the value of the property, its marketability, and its value as security for lending purposes. They will also be concerned about the impact on other occupants / nearby property (noise or nuisance)

Question 31

What are the three types of covenants with regards to alterations in a lease? What do they mean?

Answer 31

1. Absolute Covenants - Absolutley not permitted. 2. Qualified Covenants - Permited with the land lords consent. 3. Fully Qualified Covenants - Permitted with the land lords consent, and consent is not to be unreasonably withheld?

Question 32

What can a tenant do if it wants to make an alteration against an absolute covenant?

Answer 32

They will risk forfeiture of the lease unless: 1. The land lord gives a one of conset 2. They get a deed of variation of the lease

Question 33

What will solicitors for the tenant seek for tenants with regards the type of covenant relating to alterations in a lease?

Answer 33

They will seek absolute covenants so that alterations are permited with the landlords consent, and that consent cannot be witheld, but they will also seek to add thaat consnet cannot be delayed.

Question 34

What is an improvement? What if a tenant wants to make an improvement but there is a qualified covenant?

Answer 34

Improvements are those alterations that increase the value or usefulness of the property from the tenants view. This is a subjective test from the tenants point of view. The Land Lord and tenant act, s.19 provides that where there is a qualified covenant against improvements, consent may not be unreasonably withheld. However, the landlord may require compensation for any reductions in value of its reversion, payment of its legal and other costs, and where reasonable reinstatement at the end of term. DESPITE THIS, STILL BEST TO HAVE A FULLY QUALIFED COVENANT TO AVOID ANY DISUPUTE AS TO WHETHER WORKS CONSITUTUE IMPROVEMENTS

Question 35

What is an improvement? What if a tenant wants to make an improvement but there is a Absolute covenant?

Answer 35

An improvement in this context is one that: 1. Adds to the letting value 2. Are reasonable and suitable to the character of the property. 3. Does not diminish the value of any other property of the land lord. S.3 Land Lord and Tenants act provides that consent cannot be unreasonably withehld.

Question 36

What happens if there is an absolute covenant, but the alteration is to comply with the Equality Act?

Answer 36

The covenant will be statuory modified to an Fully Qualifed Coventnant.

Question 37

What is a licence to alter?

Answer 37

A licence to alter is a formal document given consent to the alterations, usually with the plans annexed. It deals with the carrying out of the works (including standards of workmanship and materials, and supervision by the landlords surveyor), obtaining all other necessary consents, payments of costs and reinstatement at the end of term. This is optional, consent may just be given.

Question 38

Are tenants able to claim compensation for improvements adding to the letting value of the property?

Answer 38

Where a tenants alterations are improvements, and add to the letting value of the property, they may be entitled to compensation. However, this procedure is rarely used as in most cases the lease will require removal of alterations at the end of term, meaning that no compensation will be payable.

Question 39

What type of covenant is an alteration to the strucute and exterior likley to be?

Answer 39

Absolute Covenants

Question 40

What type of covenants in an alteration to internal, non structural likley to be?

Answer 40

Qualifed or Fully qualifed covenants.

Question 41

What are the tenants converns with regards to user and planing clauses in the lease?

Answer 41

Tenants would like to have relatively few restrictions on user, as very limited user clause may have an impact on the future marketability of the lease or a change in business. However, an overly broad clause could inflate the rent payable on review.

Question 42

What are the landlords convers with regards to user and planing clauses in the lease?

Answer 42

Landlords will usually like to limit the tenants permitted use of the property due to the potential impact on the use of adjoining property by the landlord of others. For example, in a retail setting a landlord may wish to prevent competition with its own business, or provide a suitable mix of tenants in a parade of shops. However, a very limited clause could have a negative impact on rent review for the land lords.

Question 43

What does user and planing relate to in a lease?

Answer 43

What the tenant is allowed to use the property for

Question 44

What will a typical provision regarding use and planing in a lease contain?

Answer 44

A typical provision will specify and use and allow diversification within a specific use class or classes with the Town and County Planning Order.

Question 45

Who is resonsible for ensuring that the change in use complies?

Answer 45

It is the tenants responsibility to ensure that their proposed use complies with planning law, any covenants within the title, and other statutory provisions.