Unit 5: Grant of lease and underlease

Question 1

Freehold vs Leasehold - general

Answer 1

• A freehold lasts forever, whilst a lease is a depreciating asset from date it is granted
• Leasehold property is popular and desirable, particularly in the commercial context

Question 2

Lease advantages for landlord?

Answer 2

• Positive covenants cannot be easily enforced against subsequent owners in freehold land.
  o When buildings have multiple occupants, whether commercial, residential or a mixture of both, it is important that positive covenants, particularly in relation to repair, can be enforced and this is difficult to achieve with freehold land. Leases are therefore necessary to enforce covenants in buildings with multiple occupants.
• Landlord retains a capital interest in the freehold which, depending on the market, will be an asset
  o If the lease is drafted properly, the landlord will be able to recover all expenditure, for example in relation to repairs and maintenance, by way of a service charge paid by the tenant.
  o The landlord also gains a steady income by renting the property at a market rent.

Question 3

Lease advantages for commercial tenant?

Answer 3

• A lease is flexible: if it is a short-term lease, the tenant can move easily at the end of the term if they need smaller or larger premises.
  
  • Tenants can often negotiate a break clause to enable them to terminate the lease before the end of the fixed term.
• Tenant has no capital outlay
  
  • Although they may need to pay a capital sum (premium) at the start of the lease, the capital of their business is not tied up in the premises

Question 4

Prescribed clause

Answer 4

Leases dated on or after 19 Jun 2006 out of registered land + compulsorily registrable must contain this at beginning of lease or immediately after any front cover sheet

Details of lease + all info LR need to complete registration

Question 5

Commencement

Answer 5

o The lease starts with the words ‘the lease’, followed by the date of its grant and the names and addresses of the parties
o Where created out of a registered title, the document will carry the usual Land Registry heading (county and district, landlord’s title number, brief description of the property, and date) at the top of its first page

Question 6

Grant of lease

Answer 6

o This is the operative part, whereby the landlord grants the tenant a lease of the property for the term
o The term can be fixed, periodic, or at will

Question 7

Fixed term lease

Answer 7

o most commercial properties are leased like this
o can be weeks, months or years (usually years)
o longer leases might have a ‘break clause,’ e.g., an office lease of 15 years with a tenant’s right to terminate on the 10th anniversary of the start of the term
o at the end of the fixed term, lease ‘expires’ automatically, without the landlord or tenant having to serve a notice
o Suitable for - tenants who know exactly how long they wish to occupy property and do not object to being locked in for that period of time

Question 8

Periodic tenancy

Answer 8

• continues indefinitely from one period to another
• Suitable for - tenants who are not certain as to how long they wish to occupy the property
• lease will run until either party decides to terminate it by giving the other party notice that they want to bring the arrangements to an end
• notice period should be the length of one period of the lease, unless it is yearly (in which case, six month’s notice)

Question 9

3. Tenancy at will

Answer 9

o where the tenant occupies the property with the permission of the landlord on the terms that the tenancy may be terminated by either party at any time
o is indefinite and might last any number of days, weeks or years
o often not used for commercial properties - too uncertain
o can occur where the parties are not expecting them, e.g., where the tenant remains in occupation at the end of the formal lease, or where parties want to create an informal agreement, such as a tenancy between family members

Question 10

Absolute covenant?

Answer 10

 tenant absolutely cannot do stated action according to lease
 landlord may allow it, either: one-off consent or permanent variation of the lease
 landlord has total discretion on the matter

Question 11

2. Qualified Covenant

Answer 11

 allows the tenant to carry out the stated action, but only if it obtains the landlord’s consent first

Question 12

3. Fully Qualified Covenant

Answer 12

 allows tenant to carry out the stated action if it obtains landlord’s consent first, BUT
 the landlord will not be able to withhold consent unreasonably
* Practice note - tenants’ solicitors will try to insert the words ‘reasonable’ and ‘reasonably’ throughout the document when negotiating the lease

Question 13

Purpose of full repairing and insuring leases?

Answer 13

protect landlords from incurring any expenditure that cannot be recovered from tenants

Question 14

Obligations for tenant who has lease of part of building?

Answer 14

responsibility will usually be divided between landlord and tenant:
o tenant - usually responsible for non-structural parts of the premises
o landlord - usually responsible for the structural parts of the building and the common areas

Question 15

What is a covenant to repair?

Answer 15

o There must be disrepair first, before the tenant can be in breach of covenant to repair. The physical condition of the property must have deteriorated from some previous physical condition.
o Property need not be kept in perfect repair: ‘It need only be put into such a state of repair as renders it fit for the occupation of a reasonably minded tenant of the class likely to take it’.

Question 16

Definition of repair?

Answer 16

o Works of renewal or improvement go beyond repair. Repair is restoration by renewal or replacement of parts of a whole, not renewal or replacement of the whole (Lurcott v Wakeley [1911]). It is a question of fact and degree and the work that the tenant has to carry out depends on the age and nature of the property at the date of the lease.

Question 17

Obligation on tenant for repair?

Answer 17

o A repairing covenant does not oblige the tenant to give back to the landlord a property that is ‘wholly different’ from that leased to them, but it can oblige the tenant to remedy an inherent defect in the design and/or construction of the building if that is the only way to effect the repair

Question 18

Covenant to ‘keep’ a building in repair?

Answer 18

also means to ‘put’ it into repair, even if that involves the tenant putting the building into a BETTER state of repair than when they entered the lease

Question 19

Covenant to ‘keep the property in good condition’?

Answer 19

MORE ONEROUS than a plain covenant to keep it in repair: can mean that the tenant is obliged to carry out some works, even though there is no actual disrepair (Welsh v Greenwich LBC)

Question 20

Letting of a whole vs multi-occupation insurance

Answer 20

o Letting of a whole - tenant could be made solely responsible for insurance
o Buildings in multi-occupation - landlord takes out the insurance, with the cost being passed on to the tenant as a separate insurance rent

Question 21

Landlord’s covenant to insure the property against defined risks?

Answer 21

• There is often an inclusive list of the risks which the landlord must insure against, for example ‘fire, storm, flood, etc’.
  o The problem with this is that the landlord may continue to insure against unlikely or expensive risks and if new risks arise, these may not be covered.
  o Accordingly, it is common for the list of risks to conclude with ‘such other risks as the landlord may reasonably require’.
• Landlord’s obligation to insure should be limited so that it does not include exclusions, limitations, excesses and conditions imposed by insurer and any risks that are not commonly available
  o In practice - liability for any shortfall in the proceeds caused by these are passed on to the tenant in the repairing covenant
• Property should be insured to its ‘full reinstatement value,’ otherwise if the property is totally destroyed there will not be enough money to pay for its rebuilding
  o Full reinstatement value INCLUDES costs of demolition and site clearance, professional fees (e.g., architects, surveyors, etc) and an allowance for children
• E

Question 22

A covenant by the tenant to pay for the insurance policy?

Answer 22

• Usually this covenant is to pay a sum reserved as rent
  o includes:
   premium for the buildings insurance policy and
   an associated policy covering the landlord for loss of the annual rent (i.e. income stream) during any period where the tenant is unable to use the building following the occurrence of an insurance risk

Question 23

A covenant by the landlord to reinstate the property?

Answer 23

• Often expressed as a covenant to use the insurance proceeds to reinstate the property
  o Practice note - tenant would ideally like this extended to include an obligation for the landlord to make good any shortfall in the insurance proceeds from its own resources as there will have been a failure to insure the property to its full reinstatement value

Question 24

Provision for when reinstatement is impossible?

Answer 24

o Usually - lease will provide for insurance monies to be retained by the landlord, whose building it is, but
o a tenant in a strong negotiating position may have agreed that:
 the proceeds will be passed over to the tenant who has been paying the premiums, or
 that the proceeds will be shared between landlord and tenant proportionate to their respective interests in the building.

Question 25

Rent suspension?

Answer 25

• General rule - in the absence of an express term to the contrary, rent will continue to be payable even if the property is rendered unusable.
  o Tenant - should ensure that the lease provides for the payment of rent to be suspended during any period that the property cannot be occupied following damage by an insured risk
  o In practice ^ insurance is limited in duration (often 3 y) and the landlord may attempt to limit the rent suspension accordingly

Question 26

Termination - general rule

Answer 26

• General rule - unless the lease states otherwise, if the building is totally destroyed, the doctrine of frustration will only apply in exceptional circumstances
• Implications:
  o the lease will often give the landlord the right to terminate the lease should reinstatement prove impossible
  o tenant should try to ensure that they have the same right (particularly where rent suspension is time-limited)
  o tenant should be able to terminate the lease if the property has not been reinstated by the end of the rent suspension period; otherwise they will be paying rent for a property they cannot use, as well as the rent on alternative premises

Question 27

Issues when the damage is caused by something not covered by the insurance policy?

Answer 27

o e.g., where a particular risk was not insurable or
o e.g., parties agreed that the landlord should not insure against it because the premiums were to high
o e.g., where the risk was insured but the tenant has done something entitling the insurer to withhold all or part of the payout
o CONSEQUENCE - tenant will be liable to repair the property under the repairing covenant

Question 28

When to use an absolute covenant for alterations?

Answer 28

• More common to use absolute covenants in relation to structural and exterior alteration
• A tenant of business premises can use s3 Landlord and Tenant Act 1927 to enable it to carry out ‘improvements’ even where the lease contains an absolute prohibition

Question 29

Procedure for s3 ‘improvements’?

Answer 29

 tenant can serve a notice on landlord detailing its proposals
 landlord has 3 months within which to object
 if it objects, the tenant has the right to apply to the court authorisation to carry out the improvements
 court can authorise the improvements if:
 they add to the letting value of the property,
 are reasonable and suitable to the character
 do not diminish the value of any other property of the landlord

Question 30

Alternative to s3 improvement procedure

Answer 30

• Instead of objecting or ^, the landlord can offer to carry out the works itself in return for a reasonable increase in the rent
  o tenant does not have to accept such an offer and can withdraw its notice
  o if the tenant withdraws notice, the landlord has no right to carry out the works and increase the rent
  o if the tenant REJECTS the landlord’s offer, the court cannot give the tenant authority to do the works itself
• If the landlord does not offer to carry out the works itself, or object to the improvements within three months, or the court authorises the work:
  o The tenant may lawfully carry them out, even if the lease contains an absolute covenant against the works

Question 31

Qualified and fully qualified covenants?

Answer 31

• Many landlords will allow tenants to make non-structural alterations and changes to service media, but with consent
  o Rationale - the landlord can retain control by imposing conditions about how the works are done and whether they will need to be removed and the property reinstated at the end of the term
• Conditions, consent, etc. will typically be imposed in a separate document called a licence to alter

Question 32

• Qualified covenant against alterations ?

Answer 32

prohibits alterations without the landlord’s consent
o s19(2) Landlord and Tenant Act 1927 - implies a term into a qualified covenant against making ‘improvements’ that the landlord cannot unreasonably withhold its consent
o s19(3) Landlord and Tenant Act 1927 - an increase in rent cannot be charged by the landlord as a condition of giving consent, provided no structural alterations are involved in the change

Question 33

Meaning of ‘reasonable’ for alterations?

Answer 33

e economics of the landlord-tenant relationship (i.e., is what the tenant is proposing going to have some kind of financial/economic implication on the landlord’s ability to sell the reversion, etc.)
o If works in question will increase the value or usefulness of the property to the tenant, then they will constitute an improvement, even if they will result in the reduction in the value of the landlord’s reversionary interest

Question 34

Compensation for improvements

Answer 34

• A tenant which has obtained prior authorisation to make the improvements by using s3 is entitled to claim compensation for improvements at the end of the term that ‘add to the letting value of the holding’ under s1 of the Landlord and Tenant Act 1927
• In practice - Tenants usually obtain consent to carry out the alterations without using the s 3 statutory procedure
  o most leases contain a tenant’s covenant to remove all alterations and reinstate the premises at the end of the term (so there are no improvements left in respect of which to claim compensation).

Question 35

User and planning

Answer 35

• Landlords may choose to impose a tenant’s covenant which restricts the use of the property to a single purpose
  o Example - Not to use the Premises other than as a restaurant.
• Risk - A narrow clause might:
  o put off a tenant who wants to retain the possibility of diversifying the business or disposing of the lease at a later date
  o depress the rent on any rent review
• Solution - landlord may impose a covenant which allows for the possibility of changing the user by making use of the categories set out in the Use Classes Order 1987
  o Example - Not to use the Premises other than as a restaurant or such other use falling within Use Class E of the Town and Country Planning (Use Classes) Order 1987.
• Better solution - A landlord can impose greater control with a qualified covenant:
  o Example - Not to use the Premises other than as a restaurant or such other use falling within Use Class E of the Town and Country Planning (Use Classes) Order 1987 as the Landlord may approve in writing.
• NB there is no statutory implication that the landlord’s consent cannot be unreasonably withheld for user covenants
• Restriction - the landlord cannot charge a fine or an increased rent as a condition of giving consent, provided no structural alteration is involved
• Tenant’s preference - would prefer a fully qualified covenant:
  o Not to use the Premises other than as a restaurant or such other use falling within Use Class E of the Town and Country Planning (Use Classes) Order 1987 as the Landlord may approve in writing (such approval not to be unreasonably withheld).
• NB both landlord and tenant need to remember that change of use might necessitate planning permission as well.

Question 36

Assignment - converting a qualified covenant into a fully qualified one?

Answer 36

1. s19(1)(a) Landlord and Tenant Act 1927 - implies into any qualified covenant (not to assign without the landlord’s consent) that it be deemed to be subject to a proviso that such consent is not to be unreasonably withheld- converts a qualified covenant into a fully qualified covenant.

Question 37

Assignment - conditions and circumstances in which it would not be unreasonable for the landlord to refuse consent?

Answer 37

1. s19(1A) Landlord and Tenant Act 1927 - allows for the landlord and the tenant to agree in advance conditions and circumstances in which it would not be unreasonable for the landlord to refuse consent.
2. Conditions - e.g., the assignor agrees to give an authorised guarantee agreement for the assignee and/or that the assignee agrees to provide guarantors
3. Circumstances - e.g., that the assignor is up to date with the rent and/or that the assignee is of sufficient financial strength to enable it to comply with the tenant’s covenants in the lease
4. Effect - such pre-agreed conditions and circumstances are deemed reasonable

Question 38

Qualified covenant on assignment and written consent?

Answer 38

3. s1 Landlord and Tenant Act 1988 - 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:
4. give consent, except in a case where it is reasonable not to
5. serve on the tenant written notice of its decision whether or not to give consent, specifying in addition:
6. if the consent is given subject to conditions, those conditions;
7. if the consent is withheld, the reasons for withholding it

Question 39

What is an underlease?

Answer 39

• Underlease - created by someone who is already a tenant; results in two leases in existence in relation to the same property (headlease and underlease)
  o must be for a shorter term than the headlease
  o if not, it will be an assignment of the headlease, rather than the creation of a new underlease

Question 40

Underlease benefits

Answer 40

o if the property is temporarily surplus to requirements
o better than leaving the property empty and wasting money on rent
o could make a profit by renting the underlease out for higher than they pay on the headlease
o convenient way of disposing only part of the property (e.g., one out of three floors)
o a way to get around a concerned landlord who might refuse consent to an assignment of the headlease

Question 41

Disadvantage of underlease for landlord regarding the direct tenant

Answer 41

1. landlord might end up with the undertenant as their direct tenant, ie if headtenant’s lease is forfeited and the undertenant, whose underlease would normally come to an end at the same time, successfully applies to court for relief from forfeiture.
   * can also occur if the headtenant’s lease is surrendered, or disclaimed by the headtenant’s liquidator, or if both leases expire and the undertenant exercises their statutory right to stay on in the property and apply for a new lease under the Landlord and Tenant Act 1954, but the headtenant does

Question 42

Who is liable to the landlord

Answer 42

Although legally the head tenant will remain liable to the landlord for the performance of the tenant’s covenants under the lease, in reality it is the undertenant who will be in occupation and who will have physical control of the property. The landlord will have very limited day-to-day control over what is happening at the property as the rights reserved to the landlord, such as inspection and serving notices to repair, will be exercisable by the head tenant and the landlord will have to go through the head tenant to get anything done.

Question 43

Underletting - landlord’s protection?

Answer 43

• Landlord’s protection - can impose absolute prohibition of underletting, or only permit underlettings of whole rather than part
  o If underlettings of whole or part are permitted, there will be a requirement for the tenant to obtain the landlord’s consent:
   s19(1)(a) Landlord and Tenant Act 1927 - implies into any qualified covenant (not to underlet without the landlord’s consent) that it be deemed to be subject to a proviso that such consent is not to be unreasonably withheld
   s1 Landlord and Tenant Act 1927 - where there is a fully qualified covenant on underletting (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:
   (a) give consent, except in a case where it is reasonable not to give consent
   (b) serve on the tenant written notice of its decision whether or not to give consent specifying in addition:
   (i) if the consent is given subject to conditions, those conditions,
   (ii) if the consent is withheld, the reasons for withholding it.

Question 44

o Common conditions for underletting that might be imposed in the alienation covenant?

Answer 44

 that the annual rent reserved by the underlease is at least as high as the annual rent reserved by the headlease and that the underlease annual rent must be reviewed at the same time and on the same terms as the annual rent payable under the headlease

A compromise is a condition that says that the underlease rent must be at the market rent at the time of the underletting.

 any underletting must exclude s 24–28 in Part II of the Landlord and Tenant Act 1954, which give business tenants the statutory right to stay on the property and renew their leases at the expiry of the contractual term: only way the landlord will get stuck with the undertenant at the end of the underlease is if it agrees to the undertenant being granted a new lease.

 that the undertenant enters into a ‘direct covenant’ with the landlord to perform the tenant’s covenants in the underlease and the headlease. Only the obligation to pay the annual rent payable under the headlease is excluded from the direct covenant. The direct covenant is necessary because ordinarily there is no liability between the landlord and the undertenant, so the direct covenant creates a contractual relationship. This means that the landlord can sue the undertenant for breaches of either lease, other than the covenant to pay the headlease rent.
 that no further underletting of the property is permitted.

Question 45

• Rationale behind the INITIAL Code - tried to introduce fairness and flexibility in leasehold transactions by advocating

Answer 45

o giving tenants a choice of leasing terms, where this was practicable;
o the relaxation of alienation provisions;
o that restrictions, beyond the standard ‘consent not to be unreasonably withheld,’ should be imposed only where necessary to protect the landlord’s interests, and in particular that guarantees of the incoming tenant by the outgoing tenant under a new lease (AGAs) should be required only where the incoming tenant was of lower financial standing than the outgoing tenant

Question 46

• The RICS Code for leasing business premises

Answer 46

o all RICS members must observe those parts which are mandatory
o a justifiable good reason is needed to depart from its other best practice statements
o failure to observe the code will support a negligence claim against the surveyor and may lead to disciplinary action
o landlords are not bound by it, nor are their solicitors, non-RICS surveyors, or agents

Question 47

Mandatory requirements in RICS code

Answer 47

1. Lease negotiations must be approached in a constructive and collaborative manner.
2. Any party not represented by an RICS member or other property professional must be advised of the existence of the code and must be recommended to obtain professional advice.
3. Transaction terms must be recorded in writing, subject to contract and must summarise specified details as a minimum:
4. identity and extent of the premises, together with any special rights to be granted
5. length of term including details of any renewal or break rights
6. amount of rent, frequency of rent payments and frequency and basis of any rent review
7. liability for payment of insurance premiums
8. ability to assign, underlet, charge or share the premises
9. repairing, permitted use and alterations obligations.

Question 48

RICS code best practice

Answer 48

o The identity of the property should be clearly defined, a lease plan should be provided and the tenant should be granted all necessary rights for the intended use of the property
o The length of term and any break provisions should be stated
o Leases should allow either party to start the rent review process. Tenants should be made aware of the method or formula for review where appropriate to allow time to take professional advice
o Leases should contain standard provisions for assignment of whole, underletting of whole or part (where appropriate) charging and sharing with group companies
o Repairing obligations should be appropriate to the length of the lease and the condition of the premises
o Controls on alterations and change of use should be no more restrictive than are necessary to protect the value of the property and any adjoining or neighbouring premises of the landlord

Question 49

Who is responsible for drafting the heads of terms?

Answer 49

• It is the landlord’s responsibility to ensure that the heads of terms containing the specified provisions are agreed before the draft lease is sent to the tenant’s solicitor for approval

Question 50

Drafting the lease considerations?

Answer 50

o Landlord’s solicitor will draft the lease and submit it to the tenant’s solicitor for approval
 T’s solicitor will probably make amendments
 draft lease will go back and forth until it is finally agreed
 eventually, the lease should allow the tenant to operate from the building without unnecessary restrictions but allow the landlord to maintain the necessary degree of control to protect the investment
* Underlease:
o scope for negotiating will be more restricted
o likely that the headlease requires the terms of the underlease to mirror the terms of the headlease

Question 51

Agreement for lease - purpose?

Answer 51

• Common in leasehold transactions to bypass the contract and proceed straight to completion by granting the lease
  o Rationale - time consuming to negotiate a commercial lease, and the parties are already financially committed
• Agreement for lease (contract) - will be useful where there is going to be a delay between agreeing the lease/underlease and actually granting it, but one (or both) of the parties requires the other to be bound into the transaction

Question 52

Examples for when a contract would be useful?

Answer 52

1. the landlord is in the process of constructing the property and wants to know that the tenant is bound to take the lease on completion of the works so that there will be rental income to help offset the building costs
2. the landlord is carrying out works of repair or refurbishment at the request of the tenant (in which case the landlord may not be able to secure funding for the works unless there is a legally enforceable commitment from the tenant)
3. the tenant is carrying out major works to the property prior to the grant of the lease
4. the landlord requires the consent of a lender or a superior landlord to the grant of the lease
5. the landlord is negotiating a surrender from a current tenant and wants to tie in the surrender with the grant of the new lease
6. the tenant needs to obtain planning permission for the proposed use.

Question 53

Lease agreement contents

Answer 53

o Where an agreement for lease is required - L’s solicitor drafts it
 particulars of sale must state that property is a leasehold
 gives details of the term to be vested in T
 final agreed form of the lease/underlease should be attached to the agreement with an obligation in the agreement for the tenant to take a lease/underlease in that form on the date of completion
 incumbrances affecting the superior title must be disclosed
 attached lease/underlease should contain an indemnity in respect of future breaches of any covenants affecting title

Question 54

Form of lease agreement under SC 8.2 (SCPC 11.2.3) ?

Answer 54

provides for the lease/underlease to be in the form annexed to the draft contract, and for the landlord to engross the lease/underlease and supply the tenant with the engrossment at least five working days before the completion date.

Question 55

What if the property is subject to an existing mortgage?

Answer 55

it will commonly prohibit or restrict the borrower/landlord’s ability to grant a lease of the property so the lender must be contacted and its permission obtained before the transaction proceeds

Question 56

Absence of freehold title?

Answer 56

• Unless freehold is already registered, the absence of a freehold title will usually prevent Tenant from obtaining an ABSOLUTE leasehold title on subsequent registration of the lease

Question 57

Deduction of freehold title?

Answer 57

• General law - tenant is not entitled to call for deduction of the freehold title unless the transaction is the grant of a lease for a term of more than 7 years
  o Where ^ is the case and there is to be an agreement for lease, SC 8.2.4 (SCPC 11.2.4) - requires the landlord to deduce such title as would enable the tenant to obtain registration with an absolute title at the Land Registry.
  o If landlord’s title is registered, the tenant will be able to check it under the Open Register rules

Question 58

Deducing an underlease with a headlease of registered absolute leasehold title?

Answer 58

o If headlease is registered with absolute leasehold title, there will be no need to see the freehold title
 headlease and official copies for headlease title should be reviewed

Question 59

Deducing an underlease with an unregistered headlease?

Answer 59

 undertenant can call for the headlease and all subsequent assignments under which the headlease has been held for the last 15 years
 undertenant is only entitled to call for deduction of the freehold title where the transaction is the grant of a lease for a term of more than seven years

Question 60

Requirement to prove title

Answer 60

o Requirement to provide details of the freehold may cause issues to a headtenant if it did not call for the deduction of the freehold title when it took the headlease
 if unable to comply, headtenant will need to exclude this requirement by a special condition in the contract
❗ NB investigation of title is done in exactly the same way as if the solicitor was acting in a freehold transaction

Question 61

Pre-contract enquiries?

Answer 61

• L’s solicitor should provide T’s solicitor with the following documents:
  o draft agreement for lease (if applicable);
  o draft lease/underlease;
  o evidence of freehold/headlease title;
  o copies of any relevant planning consents; and
  o evidence of the lender’s consent to the grant of the lease/underlease (where relevant)
• T/UT’s solicitor will want to carry out the same searches and enquiries as if the client were buying the freehold
• When reporting to the client, the solicitor should explain the tenant’s obligations under the lease/underlease and the danger of losing the lease through forfeiture for breach of covenant

Question 62

Licence to underlet - consent procedure

Answer 62

• Most head-landlords will require formal consent to the underletting to be given in the form of a licence to underlet
  
  • method for the head-landlord to give consent to the headtenant to underlet the property to the undertenant
  • must be given by or on completion of the underletting, otherwise the headtenant is likely to be in breach of the alienation covenant in the lease

Question 63

Usual condition for granting consent of licence?

Answer 63

undertenant is to enter into a direct covenant with the head-landlord to perform the covenants in both the headlease and underlease
o Direct covenant usually excludes the headlease covenants to pay rent and only applies in so far as the headlease covenants relate to the underlet property

Question 64

Liability between head landlord and undertenant?

Answer 64

• Generally - no liability between head landlord and an undertenant
  o Head-landlord cannot sue an undertenant in respect of any breaches of the terms of the headlease
  o BUT the direct covenant creates a contractual relationship which enables the head-landlord to sue the undertenant for any breaches of the headlease (other than non-payment of rent) or the underlease
   NB the head-landlord will need to obtain a new direct covenant on each and every assignment of the underlease from the proposed assignee

Question 65

Key provisions in the licence?

Answer 65

• Key provisions are:
  o consent of the head-landlord to the grant of the underlease
  o direct covenant from the undertenant to the head-landlord
• Licence is also likely to contain an obligation on the part of the headtenant to pay the head-landlord’s costs for approving the underletting and granting the licence

Question 66

Pre-completion parts?

Answer 66

• Lease/underlease is normally prepared in two identical parts:
  o lease; and
   executed by the landlord
  o counterpart
   executed by the tenant
• A top copy (or engrossment) of the lease/underlease and counterpart will need to be made and it is these that the parties will sign
  o landlord will sign the lease itself in readiness for completion and the counterpart should be sent to the tenant’s solicitor for execution by the tenant (at least five working days before contractual completion date if SC 8.2.5 or SCPC 11.2.5 apply)

Question 67

Payment of rent?

Answer 67

• Most leases provide that rent is payable in advance, not in arrears
  o Unless completion takes place on a day when rent under the lease/underlease falls due, a proportionate amount of rent calculated from the date of completion until the next rent payment day will be payable by the tenant on completion and this should be agreed in advance

Question 68

What should the landlord receive on completion?

Answer 68

o the counterpart lease/underlease executed by the tenant/undertenant;
o any premium payable for the grant (less any deposit paid on exchange of contracts);
o an apportioned sum representing rent payable in advance under the lease/underlease.

Question 69

What should the tenant receive on completion?

Answer 69

o the lease/underlease executed by the landlord
o if not already done, properly marked or certified copies of the freehold title deeds (unregistered land only)

Question 70

What should the parties ensure on the grant of the underlease?

Answer 70

• the parties must also ensure that, on or before completion, the head-landlord has given its consent to the grant of the underlease, usually in the form of a licence to underlet

Question 71

SDLT on the lease

Answer 71

SDLT (England):
* Land transaction return must be submitted to HMRC on the grant of a lease in the usual way
* In the case of a lease, SDLT is potentially chargeable both on any capital sum being paid (aka ‘premium’) and on the amount of the rent
o Non-residential/Commercial property - SDLT payable on any premium is calculated on the same basis as for the consideration on the sale of freehold land
o Complex formula used to identify the Net Present Value (’NPV’) of the rent and SDLT is then calculated on this figure
 Calculating NPV - consists of working out how much rent is payable in total over the term of the lease (including any VAT) and then discounting rental payments to be made in future years by 3.5% per annum to compensate for the fact that future rent received will have a lower value than rent received today
o SDLT chargeable on the VAT inclusive amount of the premium and the rent so it is necessary to determine if VAT is chargeable because the landlord has opted to tax the property
o SDLT is chargeable on the NPV as follows:

0-150k = 0%
150,001 - 5m - 1%
5m + = 2%

o Online calculator is provided on HMRC’s website
o the SDLT1 and payment must be submitted to HMRC within 14 days of completion of the grant of the lease

Question 72

LLT on the lease

Answer 72

LTT (Wales):
* LTT is charged on the leases of non-residential property in a similar way to SDLT, i.e., on the premium and on the rental element using the NPV of the rent
o LTT payable on any premium is calculated on the same basis as for the consideration on the sale of freehold land, except that the 0% band for premiums extending to £225,000 is not available where the ‘relevant rent’ exceeds £13,500
 The rent of 1% will apply instead
 Relevant rent is usually the highest rent payable in any year across the entire term of the lease
o LTT is chargeable on the NPV (including any VAT) as follows:

0 - 225k = 0%
225k+ - 2m = 1%
2m+ = 2%

o The Welsh Government sets the rates and bands for LTT
o Online calculator available on Gov.UK website
o Land transaction return and payment must be submitted to the Welsh Revenue Authority within 30 days of completion of the grant of the lease

Question 73

Legal lease of 7 yrs or less in registered land?

Answer 73

• legal lease of 7 years or less is not capable of being registered with its own title at the Land Registry
  o in registered land, it will take effect as an overriding interest under the LRA 2002, whether or not T is in actual occupation
   leases of 3+ years can be noted against the landlord’s title

Question 74

Legal lease of 7 yrs or less in unregistered land?

Answer 74

o in unregistered land, a legal lease is binding on all subsequent owners of the land, irrespective of notice

Question 75

Legal leases of 7+ years?

Answer 75

• legal leases of 7+ years can be registered in their own right after completion, irrespective of whether the freehold title is registered

Question 76

Legal lease of 7+ years if freehold title is unregistered?

Answer 76

T’s application to the LR for its first registration and the application must be made within 2 months of completion of the grant of the lease

Question 77

Legal lease of 7+ years if freehold title is registered?

Answer 77

T’s application is for registration of a dealing with the freehold title and the application must be made within the OSR1 priority period

Question 78

Good leasehold title

Answer 78

• Good leasehold title will be given by the LR where the title to the freehold reversion is unregistered and the applicant for first registration of the leasehold title does not submit title to the freehold reversion with the application, or where the freehold is registered with less than absolute title.
  
  • NB Good leasehold title may be regarded as a title defect as it may make it difficult to sell or mortgage the lease.

Question 79

What is a self-help clause?

Answer 79

• Most leases provide a contractual ‘self-help’ remedy for the landlord, allowing the landlord to recover the cost of repairs as a debt and not a damages claim

Question 80

Advantage of self-help clause?

Answer 80

o Advantage - landlord is able to avoid the statutory limitations on pursuing damages claims imposed by the LTA 1927 and Leasehold Property (Repairs) Act 1938:
 s18 LPA 1927 - limits the amount of damages to the amount by which the landlord’s reversion (usually the freehold building) has diminished in value as a result of the disrepair.
 Leasehold Property (Repairs) Act 1938 - applies to leases granted for more than 7 years with more than 3 years left to run. If it applies and the landlord wants to sue for damages, a special procedure must be followed - notice must be served on the tenant, and the tenant has a right to serve a counter-notice within 28 days. If the tenant does so, the landlord cannot proceed any further with the claim without leave of the court.

Question 81

What does a self-help clause permit the landlord to do?

Answer 81

o landlord can enter the property to check compliance with tenant’s repair covenant
o if there has been a breach, landlord can serve a notice specifying works required to remedy the breach
o if tenant fails to start the work within a specified period after landlord’s notice, or is not proceeding diligently with the works, landlord can enter, carry out the works, and recover the cost from tenant as a DEBT
* Main effect - converts a claim for damages into a claim for debt

Question 82

Define security of tenure

Answer 82

• a type of statutory protection which prevents leases from being terminated other than in prescribed ways, and allows the tenant to renew or extend them

Question 83

Effluxion of time?

Answer 83

o With a fixed-term lease, when the contractual term ends, the lease automatically determines by what is known as ‘effluxion of time’
o No notice is needed
o Most leases of commercial property are fixed-term leases
(common law remedy)

Question 84

Notice to quit?

Answer 84

o Periodic tenancies are determined by the appropriate period’s notice to quit given by the landlord or tenant.
 A yearly tenancy is determined by at least half a year’s notice expiring at the end of a completed year of the tenancy.
 Other periodic tenancies are determine by one full period’s notice (i.e., one quarter, month, etc.)
 e.g., if a tenant has a monthly tenancy which starts on the first of each month and the landlord wants to serve a notice to quit on 14 August, the earliest date the landlord can specify for expiry of the notice is 30 September (ie the notice must be at least one month long and must expire at the end of a completed month)
(common law remedy)

Question 85

• Surrender?

Answer 85

o Occurs where the tenant yields up the lease to the landlord who accepts the surrender
o Accordingly, surrender can only be achieved if both the landlord and tenant agree to it.
o Effect - the lease is said to merge in the landlord’s reversion and is extinguished
o Requirement - to be legal, surrender must be by deed (s52 LPA 1925)

Question 86

Merger?

Answer 86

o Occurs where the tenant acquires the immediate reversion to the lease (i.e., acquires the landlord’s estate in the land)

 Opposite of surrender.
o Can also occur where a third party acquires both the lease and the reversion
o As with surrender, once the lease and reversion are with the tenant or third party, the lease automatically merges with the reversion and is extinguished (unless the tenant/third party expressly preserves the lease in the documentation)

Question 87

When does the 1954 act apply?

Answer 87

o a tenancy (not a licence)
o of a property which is occupied by the tenant (personally, or through the medium of an agent or manager)
o for business purposes

• If a tenancy comes within its ambit, the common law methods of termination may not apply
• Tenancies under the 1954 Act may continue until terminated in accordance with the Act’s provisions

Question 88

Definition of ‘business’ for 1954 act?

Answer 88

widely defined and includes ‘a trade, profession or employment and in the case of a body of persons any activity carried on by them’
o The activity need not be a business or commercial activity

Question 89

1954 act exclusions?

Answer 89

o Tenancies at will
 Can be terminated at any time by either party
o Fixed-term tenancies not exceeding 6 months, HOWEVER:
 if a tenancy does not exceed six months but contains a provision allowing renewal or extension of the term beyond the six months, then the tenancy will be protected by the Act
 if the tenant (or a predecessor in the same business) has already been in occupation for more than 12 months when another lease is granted, that tenant will gain protection of the Act even if the new lease is for six months or less
o Tenancies of agricultural holdings, farm business tenancies, mining leases
o Fixed-term tenancies that are ‘contracted out’ of the 1954 Act, BUT
 Requires a strict statutory notice procedure to be adhered to before the start of the lease:
 Landlord must give tenant notice in a prescribed form warning the tenant that they are agreeing to a lease without security of tenure
 Tenant must make a declaration in the prescribed form that they have received the notice and agree that the lease should be contracted out
 If the tenant is given notice less than 14 days before grant of the lease, their declaration must be made in the form of a statutory declaration before an independent solicitor
 Reference to the service of the notice and the tenant’s declaration must be contained or endorsed on the lease itself

Question 90

1954 Act effect

Answer 90

A tenancy to which this Part of the Act applies shall not come to an end unless terminated in accordance with the provisions of this Part of the Act.
* Tenancy will continue until terminated in accordance with the 1954 Act
* Even then, a tenant has the right to apply to court for a new tenancy which can only be opposed by the landlord on one of the s30 grounds.
* The 7 methods of termination under the 1954 Act are:
1. Service of a landlord’s notice under s25
2. Service of a tenant’s request for a new tenancy under s26
3. Forfeiture
4. Surrender
5. In the case of a periodic tenancy, by the tenant giving landlord a notice to quit
6. In the case of a fixed-term lease, by the tenant serving 3 months’ written notice on the landlord under s27 (so long as the notice does not expire before the contractual expiry date)
7. In the case of a fixed-term lease, by the tenant ceasing to be in occupation for business purposes at the end of the lease under s27(1A)