UNIT 5 - Grant of a Lease and an Underlease Flashcards
A solicitor acts for the tenant of a retail unit (the ‘Property’) under a lease granted in 2015. The lease contains a covenant not assign, underlet, charge, hold on trust, part with or share possession or occupation of the property in whole or in part, except that the tenant may, with the landlord’s consent, assign the whole of the property. There are no other provisions relating to alienation in the lease. The tenant wishes to dispose of the lease and has found another retailer who is interested in the Property. However, the tenant is concerned that the landlord may refuse consent to an assignment of the lease because the other retailer is not as financially strong as the tenant.
Which of the following is the best advice to the tenant about whether the landlord will be able to refuse consent for the proposed assignment of the lease?
A) The landlord cannot prevent the tenant from assigning the whole of the Property as it wishes.
B) Provided the tenant has made a written application for consent, the landlord must give consent for the assignment unless it is reasonable not to do so.
C) Statute allows the landlord to insist on the tenant giving an authorised guarantee agreement for the assignee as a condition of giving its consent to this proposed assignment.
D) The landlord will be prevented from withholding its consent because statute implies into this covenant for assignment a proviso that the landlord’s consent will not be unreasonably withheld.
E) If the tenant is unable to obtain the consent of the landlord, the tenant should enter into a licence with the other retailer instead.
CORRECT ANSWER B - The covenant against assignment of whole of the property in the
lease is a qualified covenant and s19(1)(a) Landlord and Tenant Act 1927 implies into any qualified covenant that it be deemed to be subject to a proviso that such consent is not to be unreasonably withheld. Where there is a qualified covenant on assignment (whether the proviso that consent is not to be unreasonably withheld is express or implied by statute) and the tenant has made a written application for consent, the landlord must within a reasonable time give consent, except in a case where it is reasonable not to give consent (s 1 Landlord and Tenant Act 1988).
Option A is not the best advice as it would be reasonable for a landlord not to consent to an assignment to a proposed assignee who is not financially strong enough to pay the rent and perform the other covenants in the lease.
Option C is wrong; s 19(1A) Landlord and Tenant Act 1927 allows for the landlord and the tenant to agree conditions and circumstances in which it would not be unreasonable for
the landlord to refuse consent and such conditions often include that the assignor agrees
to give an authorised guarantee agreement for the assignee, but such conditions and circumstance must be agreed in advance. The facts indicate that the lease does not contain any such conditions and circumstances.
Option D correctly states the effect of s 19(1)(a) Landlord and Tenant Act 1927 on a qualified covenant, but the landlord is still able to withhold consent where it is reasonable to do so, eg if the proposed assignee is not financially strong enough to pay the rent and perform the other covenants in the lease.
Option E is not good advice as the lease contains an absolute covenant against sharing occupation, which would include allowing the other retailer into the property under a licence.
remove the existing shop front, enlarge the hole in the front wall and install bi-folding doors instead. The lease contains tenant covenants not make any external or structural alteration to the Property and not to make any non-structural alteration to the Property without the consent of the landlord.
Which of the following statements is the best advice to the landlord in this situation?
A) The landlord will have to consent to the alterations as if it does not, the tenant will be able to use a statutory procedure to carry out the alterations and claim compensation from the landlord at the end of the term.
B) The landlord can prevent the alterations being carried out as the relevant covenant in the lease is absolute.
C) The landlord can insist that the alterations are carried out by the landlord in return for an increase in the annual rent.
D) The landlord cannot refuse consent for the alterations as statute implies into the relevant covenant in the lease a term that the landlord cannot unreasonably withhold its consent.
E) The landlord can refuse consent to the alterations, but the tenant may be able to carry them out using a statutory procedure.
CORRECT ANSWER E - The proposed works are external and structural alterations and thus fall within the scope of the absolute covenant. However, they are not necessarily ‘improvements’ for the purposes of s 3 Landlord and Tenant Act 1927 so even though the tenant has a right to serve notice and apply for authorisation to carry out the alterations, it will be up to the court to decide if they add to the letting value of the property, are reasonable and suitable to the character of the property and do not diminish the value of any other property of the landlord. Option A therefore overstates the position. It also overstates the position on compensation; even if the alterations do add to the letting value of the holding, the lease is likely to contain a tenant’s covenant to remove all tenant’s alterations at the end of the term so there will be nothing left in respect of which to claim compensation.
Option B is not the best advice as the tenant may use the statutory procedure in s 3 Landlord and Tenant Act 1927 even where the relevant covenant in the lease is an absolute prohibition.
Option C also overstates the position; the landlord cannot insist on being able to do the alterations itself in return for an increase in the annual rent. This will only become possible if the tenant serves a notice under s 3 and even if it does, the tenant is under no obligation to accept an offer by the landlord to carry out the alterations and may withdraw its notice.
Option D is wrong as the relevant covenant in the lease is absolute, so there is no term implied by statute that consent will not be unreasonably withheld.
A landlord is proposing to let some retail premises to a clothes shop which has only just begun trading. The prospective tenant is concerned that it might not be able to afford the rent, should it increase on review, as its business is not yet established and it cannot predict the performance of its business over the 15-year term with any certainty at this stage. The landlord insists that there must be some form of rent review provision in the lease.
Which of the following types of rent review provision is the most appropriate to address the tenant’s concerns?
A) A fixed increase rent review.
B) An index linked rent review.
C) A rent review based on the tenant’s turnover.
D) An open market rent review.
E) An upwards-only open market rent review.
CORRECT ANSWER C - A turnover rent review will be directly linked to the turnover of the tenant’s business and should therefore only increase in line with the turnover of the business.
A fixed increase rent review (option A) would not be as suitable on the facts, as the tenant does not want to commit to any predictions as to the success of the business over the term. An index linked rent review (option B) is linked to an external index, such as the Retail Prices Index, so will increase in line with inflation regardless of the fortunes of the tenant’s particular business.
Open market rent reviews (options D and E) will reflect the rental market as a whole, not
the tenant’s particular business, so do not address the tenant’s concerns. Option E will be particularly harsh on the tenant as it locks in increases achieved in previous rent reviews even if the rental market has fallen and/or the tenant’s business is in trouble.
A solicitor is acting for a tenant who is taking a lease of a shop for a term of exactly seven years. The landlord’s freehold title is unregistered. The lease has now been completed.
Does the lease have to be registered with its own title at the Land Registry?
A) Yes, because the landlord’s freehold title is unregistered.
B) Yes, because the lease is for a term of over three years.
C) Yes, because the lease is for a term of seven years.
D) No, because it is not possible to register a lease unless the freehold is already registered.
E) No, because it is not possible to register a lease unless the term exceeds seven years.
CORRECT ANSWER E - This is a lease for a term of exactly seven years. A legal lease for seven years or less is not capable of being registered with its own title at the Land Registry, so options A, B and C are wrong. Option D is not the best answer as leases of over seven years must be registered with their own title at the Land Registry irrespective of whether the freehold title is registered.
Yesterday a landlord granted a lease of office premises in England to a tenant for a term of 10 years. The consideration for the lease is the payment of a commercial, open-market rent with a premium of £100,000. The landlord opted to tax the property for VAT purposes before the lease was granted.
Which of the following statements best describes the position on taxation for this transaction?
A) The tenant may need to pay stamp duty land tax (‘SDLT’) on the VAT-inclusive amount of the rent.
B) The tenant may need to pay SDLT on the VAT-inclusive amount of the premium.
C) The tenant may need to pay SDLT on the rent, exclusive of VAT.
D) The tenant may only have to pay SDLT on the VAT-inclusive amount of the premium.
E) The tenant may need to pay SDLT on the VAT-inclusive amounts of the rent and the premium.
CORRECT ANSWER A - On the grant of a lease, SDLT is potentially payable both on any premium charged by the landlord and the rent reserved by the lease. Where VAT is chargeable (because the landlord has opted to tax the property before the grant of
the lease), SDLT is charged on the VAT-inclusive amounts. This means that option C is incorrect on VAT. However, SDLT will not be charged on the premium in this instance as
the applicable rate for consideration not exceeding £150,000 is 0%. Here the VAT-inclusive amount of the premium is £120,000. So options B, D and E are wrong as they all refer to the payment of SDLT on the premium.
A solicitor is acting for a proposed undertenant who is taking an underlease of a commercial property for a term of five years. The proposed landlord is the tenant under
a lease of the property granted last year for a term of 10 years. The lease was registered with absolute leasehold title. The superior landlord is the freehold owner of the property and the superior landlord’s title to the property is unregistered. The undertenant wants the solicitor to investigate the superior landlord’s freehold title.
Which of the following statements is the best advice as to what the proposed landlord should be expected to deduce by way of title to the freehold?
A) The proposed landlord will not have to deduce title to the freehold because it is unregistered.
B) The proposed landlord will have to deduce title to the freehold as the proposed undertenant is legally entitled to call for it.
C) As the proposed landlord’s title is registered with absolute leasehold title, there will be no need for it to deduce the freehold title.
D) The proposed landlord may not be able to deduce title to the freehold as it was not entitled to call for it when its lease was granted.
E) The proposed landlord should not have to deduce title to the freehold as the undertenant will be able to obtain this information under the open register rules.
CORRECT ANSWER C - The proposed landlord will have registered its lease within two months of grant because leases of over seven years must be registered with their own title at the Land Registry irrespective of whether the freehold title is registered. As the proposed landlord’s lease is registered with absolute leasehold title, the best class of title available, then there is no need to see the freehold title.
Option A is oversimplified as there are circumstances in which a tenant would be expected to deduce title to the freehold to a prospective undertenant. Option B is misleading on two counts; the general law allows an undertenant to call for the freehold title only when the headlease is unregistered, and then only where the underlease is for a term of more than seven years; here the headlease is registered and this underlease is for a term of five years. Option D is misleading as the proposed landlord was entitled to call for the freehold interest last year as its lease was granted for ten years, ie a term of more than seven years. Option E is wrong as the open register rules allow third parties to inspect registered titles and in this case, the freehold is unregistered.
A solicitor acts for the landlord of a retail unit. The lease was granted for a term of 10 years commencing on 5 January 2015. It is now 1 May 2024. The lease was not contracted out
of the Landlord and Tenant Act 1954 (the 1954 Act) and the landlord has instructed the solicitor to serve a s 25 notice on the tenant to terminate the lease on 5 January 2025.
Can the solicitor comply with the landlord’s instructions?
A) No, because the tenant enjoys security of tenure so the landlord cannot terminate the lease unless the tenant is in breach of at least one of the tenant’s covenants.
B) No, because is too early to serve the s 25 notice.
C) No, because it is too late to serve the s 25 notice.
D) Yes, because the landlord will be able to comply with the requirements of the 1954 Act for service of the s 25 notice if it is served today.
E) Yes, because the 1954 Act allows a landlord to terminate a tenancy in the last six months of the contractual term.
CORRECT ANSWER D - The contractual expiry date of the lease is 4 January 2025 so on 1 May 2024, the landlord is within the 12–6 month window to terminate on that date. It is neither too early nor too late to serve the s 25 notice, so options B and C are wrong.
Option A is misconceived as the 1954 Act allows the landlord to terminate the lease whether or not the tenant is in breach of the lease; breaches of the lease may be relevant to whether the landlord can successfully oppose a renewal of the lease using s 30 grounds (a), (b) and (c) but this is a different point about which there is no information in the facts.
Option E is wrong as the proposed date for termination of the lease in a s 25 notice cannot be earlier than the date the tenancy could have been terminated under the common law, which for a fixed term lease is the contractual expiry date.
A landlord owns a property which is let to a business tenant on a 10 year fixed term lease. The contractual term expires in just over six months’ time and the landlord wishes to serve a s 25 notice on the tenant opposing the grant of a new tenancy today. The landlord acquired the property four and a half years ago and wishes to move into the property itself when the tenant leaves. Last year the tenant failed to pay the June instalment of the rent but has otherwise been a good tenant.
Which of the following statements is the best advice to the landlord as to which ground(s) to specify in its s 25 notice?
A) The landlord cannot rely on ground (g) because it has only owned the property for four and half years.
B) The landlord will be able to rely on grounds (b) and (g), but it would be better to rely on ground (b) as it is a discretionary ground.
C) The landlord is unlikely to be able to rely on ground (b) but could rely on ground (g).
D) The landlord will be able to rely on grounds (b) and (g), but it would be better to rely on ground (b) as the tenant will not be entitled to compensation.
E) The landlord will be able to rely on grounds (b) and (g), but it would be better to rely on ground (g) as it is a mandatory ground.
CORRECT ANSWER C - On the facts, the two grounds that are potentially available to the landlord are (b) and (g). Ground (b) is discretionary and ground (g) is mandatory.
Ground (b) is available where there has been a persistent failure by the tenant to pay rent. The tenant has only missed one rent payment and so it is unlikely that the landlord could rely upon it. Options B, D and E are, therefore, not the best advice. Option B is also misconceived as it would not be better to rely on a discretionary ground where a mandatory ground is available. Option D is correct that ground (b) is a non-compensatory ground and this might have been a reason for choosing it had it been available.
Ground (g) is available where, at the termination of the lease, the landlord intends to occupy the premises as its business or residence. This is not available if the landlord acquired its interest in the property within five years of the ending of the current tenancy. This will be the termination date specified in the s 25 notice. Although the landlord has not yet owned its interest in the property for five years on the date of service of the s 25 notice, it will have done so by the termination date specified in the s 25 notice and so will not be barred from relying on ground (g). Option A is therefore wrong.
A solicitor acts for the freehold owner of an office building. The client needs to occupy the whole of the building in 18 months’ time, but wants to raise some rental income from the building in the meantime. The client has identified a suitable short-term occupier.
Which one of the following options will best achieve the client’s objective?
A) Granting the occupier a lease for 18 months, contracted out of the Landlord and Tenant Act 1954.
B) Granting the occupier a tenancy at will.
C) Granting the occupier a contractual licence.
D) Granting the occupier a lease for six months, followed by another lease of six months when the first one expires.
E) Granting the occupier a lease for six months with an option to extend the term by a year once the first six months has passed.
CORRECT ANSWER A - A fixed term lease of 18 months gives the client certainty of income for the whole of the period, but the occupier will not have the right to stay on in the property or renew the lease as a contracted out tenancy is excluded from security of tenure under the 1954 Act.
In relation to option B, the 1954 Act excludes tenancies at will from security of tenure, but a tenancy at will can be terminated without notice by the occupier so gives no certainty of income. In relation to option C, a contractual licence is not a tenancy within the meaning of s 23 of the 1954 Act but may be construed as a (secure) lease if, in practice, exclusive possession is enjoyed.
In relation to option D, two tenancies of exactly six months each (so not resulting in occupation for more than 12 months) will not attract security of tenure but will not guarantee income for the full 18 months. Also, the client cannot be sure that the occupier will take the second lease once the first lease expires.
In option E, the tenancy will be treated as a tenancy for more than six months so enjoy security of tenure under the 1954 Act.
A corporate client has found a shop premises it wishes to occupy. The current occupier has indicated they are prepared to let the premises to the client for a ten year term and the client is happy with this, as it does not want to commit to the premises for any longer period. The client’s solicitor has received official copies of the current occupier’s title to the premises. In the Property Register the premises is described as ‘leasehold land’. Details of the lease show the current occupier is the tenant and the registered lease is for a term of 999 years and was granted five years ago by the owner of the freehold.
Which ONE of the following statements is the best advice to the client regarding its proposed ten year letting?
A) The client should take an assignment of the registered lease.
B) The client cannot obtain a ten year lease, as there is already a lease in existence.
C) The client needs to ask the freeholder to grant it a ten year lease.
D) The client should be granted a ten year underlease by the current occupier.
E) The 999 year registered lease must be terminated.
CORRECT ANSWER D - The current occupier is a tenant and owns a leasehold estate. They can sell the 999 lease (known as an assignment) or they can grant a lease out of it (known as an underletting or subletting).
Option A is not the best answer as if the client took an assignment of the lease, it would obtain the balance of the 999 year lease. The facts indicate the client does not want to be committed to the premises for longer than ten years.
Option B is wrong as it is possible for the current occupier to grant a ten year underlease from the lease they own. The 999 year lease would then become the headlease.
Option C is wrong as the freeholder has already granted a lease of 999 years and cannot grant a ten-year lease whilst the 999 year lease still subsists.
Option E is not the best answer as this is not necessary to achieve what the client wants, and the facts suggest no basis for termination of the 999 year lease.
You act for Carpel plc which has a large in-house legal department. You receive a call from one of the in-house solicitors who is not a property expert concerning a letting of premises owned by Carpel plc. The lease has not yet been granted but as the tenant is carrying out major works to the property prior to the grant of the lease, an agreement for lease was exchanged last week incorporating the Standard Commercial Property Conditions (Third Edition - 2018 Revision) without amendment. The in-house solicitor has realised that the draft lease does not contain a forfeiture clause. He says to you, “Well, I’m glad I spotted that one before we completed the lease. I’ll put suitable provisions in before then.”
TRUE OR FALSE:
The solicitor cannot insist on the insertion of the forfeiture provisions in the lease
TRUE - Up until exchange of contracts, the parties are free to negotiate the terms of the lease and until exchange there is no legal relationship between them so that either party could pull out at any time leaving the other party without any remedy.
Once contracts are exchanged, a legal relationship exists between the parties. In the case of the sale of a freehold, the seller becomes obliged to sell the property to the buyer and the buyer becomes obliged to buy. In the case of the grant of a lease, the landlord becomes obliged to grant the lease and the tenant becomes obliged to take that grant. In addition, the terms of the lease will also become fixed on exchange. The Standard Commercial Property Conditions achieve this by providing that the form of the lease that the parties will enter into will be the same as that which has been annexed to the contract (see SCPC 11.2.3).
Accordingly, it is too late to seek to insert forfeiture provisions into this lease.
You have been asked to deal with the registration requirements at the Land Registry in respect of a lease that has just been granted to a client of the firm. The lease was granted by deed for a term of eight years out of an unregistered freehold title.
Which ONE of the following statements is correct?
A) You must register the lease at the Land Registry within two months.
B) You must register the lease at the Land Registry before the expiry of the priority period.
C) The lease will be an interest that overrides and therefore does not require registration.
D) You must register the lease at the Land Charges Registry.
E) The lease is a fixed term legal lease and therefore binding on all subsequent owners of the freehold without the need for registration.
CORRECT ANSWER A - In the case of a grant of a lease out of unregistered title, if the lease is granted for a term in excess of seven years, this triggers first registration of the lease which must take place within two months of the grant of the lease.
Option B is wrong as this refers to the position where the freehold is registered.
Option C is wrong as this refers to the position where the lease is for a term of seven years or less and granted out of a registered freehold.
Option D is wrong as legal leases never require registration at the Land Charges Registry (this being different to the Land Registry).
Option E is wrong as this refers to the position where the lease is granted for a period of seven years or less from an unregistered freehold.
Darcy plc is a developer which is constructing a development comprising a row of shops. The shops are on the market to be let on ten year leases for a premium of £50,000 and an annual rent of £40,000. The parties are entering into an agreement for lease.
Edward and Emma are potential tenants of one of the shops.
Which ONE of the following statements is correct?
A) On exchange of contracts, Darcy plc will grant the lease to Edward and Emma.
B) Edward and Emma need to ensure that their solicitor has thoroughly investigated title prior to exchange of contracts.
C) Edward and Emma will need to pay stamp duty land tax on exchange of contracts.
D) After exchange, Edward and Emma’s solicitor will need to prepare the transfer deed for the acquisition of the shop.
E) Edward and Emma’s solicitor will not carry out any searches as they are only acquiring a leasehold estate, not the freehold.
CORRECT ANSWER B - Their solicitor should normally investigate title before exchange of contracts. Once contracts are exchanged there is a legally binding agreement between the parties, and it is important to be sure that the title is satisfactory before this commitment is made and also carry out searches and other enquiries which will help the tenant decide whether it wishes to proceed with the transaction. In this respect, the procedure, and the underlying reasons for it, is like that for the sale of a freehold property with which you are already familiar.
Option E is wrong for the reasons mentioned above.
Option A is wrong as the lease is not granted on exchange. Exchange is a contractual agreement to grant the lease at a later date. The lease will in fact be granted on completion.
Option C is wrong. Stamp Duty Land Tax normally becomes payable on completion when the tenants move into the property.
Option D is wrong. On the grant of a lease, there is no transfer deed. The lease itself is the document that creates legal title.
A client has granted a lease of industrial premises for a term of 15 years to a tenant. The consideration for the lease is the payment of a commercial, open-market rent. No premium was paid by the tenant.
Which ONE of the following statements best describes the position in respect of Stamp Duty Land Tax (“SDLT”)?
A) SDLT may be payable by the client on the rent.
B) SDLT may be payable by the tenant on the rent.
C) SDLT will not be payable as no premium was paid for the lease.
D) SDLT will not be payable as SDLT is not payable on the grant of a lease.
E) SDLT will be payable by the tenant on the rent
CORRECT ANSWER B - On the grant of a lease, SDLT is potentially payable both on any capital sum (known on the grant of a lease as a “premium”) charged by the landlord and the rent. You are told in the question that no premium was paid and so whether SDLT is payable depends on the amount of the rent. SDLT on rent is calculated using a complex mathematical formula based on the “Net Present Value” of the rent. However, SDLT is not charged if the Net Present Value does not exceed £150,000. So SDLT may be payable, depending on the amount of the rent. If it is payable, it will be paid by the tenant.
Option A is wrong. It suggests that it would be the client that pays any SDLT. The client is the landlord and the SDLT payable (if any) will be paid by the tenant.
Option C is not the best answer as SDLT can be payable where no premium is payable if the rent level is high enough.
Option D is wrong as SDLT can be payable on the grant of a lease, as described above.
Option E is not the best answer, as you cannot know for sure whether SDLT is payable without knowing the amount of the rent.
A client is the leaseholder of a commercial premises, the freehold being owned by the client’s landlord. The client’s lease contains a clause requiring the landlord’s prior written consent to any underletting. The client wants to grant an underlease of the premises and has applied to its landlord for consent to its proposed underletting. The landlord’s solicitor has produced a draft Licence to Underlet.
Which ONE of the following statements is correct?
A) The parties to the Licence will be the client and the undertenant.
B) The Licence creates privity of estate between the freeholder and the undertenant.
C) The Licence will contain the freeholder’s consent to the client granting the underlease.
D) The parties to the Licence will be the freeholder and the undertenant.
E) The Licence will be completed after the underlease has been completed
CORRECT ANSWER C - The client requires its landlord’s consent to any underletting. The client’s landlord is the freeholder and the Licence will be the document by which that consent is formally given.
Options A and D are wrong because the Licence is a tripartite document between the headlandlord (the freeholder), the headtenant (the client) and the undertenant.
Option B is wrong as the Licence will usually contain a direct covenant between the undertenant and headlandlord, by which the undertenant covenants to observe the covenants in the headlease and underlease. This creates privity of contract between the undertenant and the headlandlord. It does not create privity of estate.
Option E is wrong as it suggests the Licence will be completed after the underlease. However, the Licence needs to be completed before or on completion of the underlease, or the client’s lease covenant which requires prior consent will have been breached.
