Unit 5 – Structure & Content of Lease

Question 1

What is a fixed term lease?

Answer 1

Fixed term is best for tenants who know exactly how long they wish to occupy the property and do not object to being locked in for that period of time.

– Most commercial properties leased to the tenant for a fixed term. Fixed period can be any length of time.

– Longer leases will have a break clause (e.g., an option to terminate the lease after a specific amount of time has passed, e.g., after 10 years they’re able to terminate the lease).

– At the end of the fixed term, the lease expires – neither landlord nor tenant have to serve notice.

Question 2

What is a periodic tenancy?

Answer 2

For tenants who are not certain as to how long they wish to occupy the property.

– Granted for a fixed period but continues indefinitely from one period to another. A periodic tenancy can be from one month to another, six monthly or yearly.

– Runs until either party decides to terminate it by giving the other party notice that they want to end it.

– Notice should be the length of one period of the lease (e.g., One month’s notice for a monthly tenancy).

– Key exception = A yearly tenancy can be terminated on six months’ notice.

Question 3

What is a tenancy at will?

Answer 3

Where a 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.

 Is indefinite and can last any number of days/weeks.

 Tenancy at will often occur where the parties are not expecting them (e.g., where tenant remains in occupation at the end of a formal lease) or where parties wish to create an informal agreement, like between family members.

Question 4

3 types of leasehold covenant …

Answer 4

1) Absolute covenant

2) Qualified covenant

3) Fully qualified covenant

Question 5

Asbolute covenant

Answer 5

 Means the tenant cannot carry out the stated action according to the lease.

 Landlord has total discretion – can allow it by one-off consent or a permanent variation of the lease.

Question 6

Qualified covenant

Answer 6

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

Question 7

Fully qualified covenant

Answer 7

 Allows the tenant to carry out the stated action if it obtains landlord’s consent first, but the landlord is not able to withhold consent unreasonably.

Question 8

What is a FRI lease?

Answer 8

FRI lease = a lease where the costs of all repairs and insurance are borne by the tenant.

Question 9

Covenant to repair under a FRI lease ..

Answer 9

 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.

 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.

 Renewal / Repair – 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. Question of fact/degree & the work the tenant has to carry out depends on the age and nature of the property at the date of the lease.

 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 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 10

Additional wording in repair covenants to look out for …

Answer 10

 ‘Keep’ a building in repair 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 into the lease.

 Covenant to ‘keep the property in good condition’ is more onerous than a plain covenant to keep it in repair – may mean the tenant is obliged to carry out some works, even though there is no actual disrepair.

Question 11

Rent suspension clause…

Answer 11

In the absence of an express term to the contrary, rent continues to be payable even if the property is rendered unusable.

 Tenant, therefore, 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.

 Landlord may try to limit the rent suspension to the duration that insurance against loss of rent allows for.

Question 12

Absolute covenants against alteration

Answer 12

Absolute covenant against alteration stipulates that a tenant cannot make any alterations.

Question 13

What is S 3 Landlord and Tenant Act?

Answer 13

 Allows a tenant to carry out ‘improvements’, even where the lease contains an absolute prohibition.

 A tenant can serve a notice on their landlord detailing their proposals for improvements.

 Landlord has 3 months to object. If it does, the tenant has the right to apply to the court for authorisation to carry out the improvements.

Question 14

When can the courts authorise the improvements?

Answer 14

1. They add to the letting value of the property,
2. Are reasonable and suitable to the character of the property and do not diminish the value of any other property of the landlord.

 Instead of objecting or consenting to the works, a landlord can offer to carry out the works itself, in return for a reasonable increase in rent.

 Tenant not obliged to accept and can withdraw their notice. If it does so, then the landlord has no right to carry out the works and increase the rent. If the tenant rejects the landlord’s offer, the court cannot give the tenant authority to do the works itself.

 Where landlord does not offer to carry out the works itself, or object to the improvements within three months (or the court authorises the work), then the tenant may lawfully carry them out, even where the lease contains an absolute covenant against the works.

Question 15

Compensation for improvements

Answer 15

A tenant which has obtained prior authorisation to make the improvements by using the s 3 statutory procedure is entitled to claim compensation for improvements at the end of the term that ‘add to the letting value of the holding’ under s 1 Landlord and Tenant Act 1927

Question 16

Qualified and fully qualified covenants against alterations

Answer 16

Qualified covenant = A qualified covenant against alterations prohibits alterations without the landlord’s prior consent.

Fully qualified covenant = provides that the landlord cannot withhold their consent unreasonably to an alteration, whether it is an improvement or not.

Question 17

What is the effect of S 19(2) Landlord and Tenants Act on qualified covenants?

Answer 17

Provides an implied term into a qualified covenant against making ‘improvements’ that the landlord cannot unreasonably withhold its consent.

Case law = If the works in question increases 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 18

For user / planning covenants, is there a statutory implication that the landlord’s consent cannot be unreasonably withheld?

Answer 18

NO. Landlord can unreasoably withold consent for user / planning covenants.

Question 19

Alienation & reasonableness provision …

Answer 19

‘Alienation’ = Refers to tenant disclaiming / transferring their interest in the lease, e.g., by assigning it or subletting.

Reasonableness provision:

– Any clause which prohibits assignment, sub-letting etc. without the consent of the landlord is subject to a requirement that the landlord’s consent may not be unreasonably withheld:

Question 20

What is the effect of Section 19 Landlord and Tenants Act 1927 on qualified covenants on alientation?

Answer 20

S 19(1)(a) LTA 1927 – Applies to qualified covenants which refer to any form of alienation by the tenant, in all forms of leases. It upgrades those qualified covenants to fully qualified covenants. I.e., means that the landlord cannot withhold their consent to alienation unreasonably.

Question 21

A Landlord must act reasonably in deciding whether or not to give consent to the proposed alienation. What is “reasonable”?

Answer 21

Examples of reasonable withholding of consent:

 Where the proposed assignee’s references were unsatisfactory.

 Where there was a long-standing and extensive breach of the repairing covenant by the assignor and the landlord could not be reasonably satisfied that the assignee would be in a position to remedy the breach.

 Where the assignee would be in a position to compete with the landlord’s business.

Examples of unreasonable withholding of consent:

 Where the landlord has refused consent in an attempt to obtain some advantage for itself.

 Where there are minor breaches of the repairing covenant.

 Where premises had been on the market for 18 months, the rent was significant and the slight harm to the landlord would be outweighed by prejudice to the tenant.

Question 22

Can the landlord recover any costs reasonably incurred by the giving of their consent for an assignment?

Answer 22

YES.

Question 23

Where T makes a written application to landlord for their consent to alienation when must the landlord respond?

Answer 23

STATUTORY REQUIREMENT to respond within a “reasonable time” = 28 days.

Question 24

If L places reasonable conditions to the grant of consent, do they need to give written notice of these conditions?

Answer 24

YES.

Question 25

If L refuses consent to assign, do they need to give written reasons?

Answer 25

Yes.

Question 26

What is an underlease?

Answer 26

“Underlease” = a lease created by someone who is already a tenant (headleaser) and the term of which is shorter than the ‘headlease’, even just by one day. (e.g., someone has a lease on a two-floor property and underleases one of the floors)

 If the ‘underlease’ is created for the same duration as the headlease, then it becomes an assignment.

 When T grants an underlease, there are two leases in existence in relation to the same property.

Question 27

Can landlords prohibit underletting within the lease?

Answer 27

Yes.

Question 28

Where under leasing is permitted, there will be a requirement for the tenant to obtain the landlord’s consent. What statutory provisions apply here?

Answer 28

S 19 LTA = This implies into any qualified covenant (not to underlet without the landlord’s consent) that consent is not to be unreasonably held.

S 1 LTA = where there is a fully qualified covenant on underletting (whether the provision is 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 and what they are;
(ii) If the consent is withheld, the reasons for withholding it.

Question 29

Is all of the RICS code mandatory?

Answer 29

all RICS members must observe the mandatory parts of the code and need a justifiable good reason to depart from its other best practice statements.

Question 30

1) Mandatory requirements in RICS Code

Answer 30

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. Specified details which need to be included:

o Identity and extent of the premises, together with any special rights to be granted
o Length of term including details of any renewal or break rights
o Amount of rent, frequency of rent payments and frequency and basis of any rent review
o Liability for payment of insurance premiums
o Ability to assign, underlet, charge or share the premises
o Repairing, permitted use and alterations obligations.

Question 31

2) Best practice / non compulsory requirements

Answer 31

o 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 32

Does RICS code bind lanldord or their solicitors?

Answer 32

No – only RICS members.