Week 6- Grant of lease

Question 1

List the 4 requirements for the grant of a legal lease?

Answer 1

1) Exclusive possession
2) Fixed term or periodic tenancy
3) Formalities
* Over 3 yrs = deed
* 3 yrs or younger = in writing/orally

4) Reversion: Landlord holds a reversionary interest in the property i.e. at the end of the lease term, the property reverts to the landlord

Question 2

What does the grant of a full repairing and insuring lease entail?

Answer 2

Any costs are met by the tenant, whether directly or indirectly. This means that rent paid by tenants is clear of deduction.
* Repair: Tenant undertakes **full repairing obligation **
* Insurance: **Landlord recoups cost of insuring premises/demise from tenant **

Question 3

FRI leases are usually granted for what type of term

Answer 3

Fixed term

Question 4

What are shorter, more flexible leases increasingly common?

Answer 4

2 reasons:
1. Business tenants may not want to commit to a property longer than their **business plans, which are often drafted in 5/10 yr cycles .
2. A tenant may pay less SDLT/LTT on a shorter tenancy.

NB Leases of 7 years or less often attract lower SDLT charges or may be exempt from the NPV-based SDLT entirely if the NPV of the rent does not exceed certain thresholds.

Question 5

Must the term commencement date be the date on which the lease is dated?

Answer 5

No- common for commencement date (date on which term starts) to be earlier. If commencement date is before date on which tenant moves in, then he is not generally expected to pay rent for the period he hasn’t used.

Also possible for commencement date to be after moving in date.*

Question 6

The term of the lease is “10 years from and including 11 November 2019” - when does it expire?

Answer 6

10 November 2029

-1

Question 7

The term of the lease is “10 years from 11 November 2019” - when does it commence and expire?

Answer 7

Commences 12 Nov 2019
Expires 11 November 2029

Question 8

What is a break clause and why is it used?

Answer 8

A clause allowing a party (or parties) to terminate the lease before the expiry of the term.

Used As compromise when tenant is unsure about the commitment of a lease term, and the landlord is unwilling to grant a shorter term.

Question 9

If there is no break clause, what is the general rule about termination of a lease?

Answer 9

neither party can terminate before end of fixed term without the agreement of the other. And if they do so, comp will be payable for boc.

Question 10

What is the most common type of break clause

Answer 10

Tenant break

Question 11

Give 2 reasons why a landlord would prefer to insert a a break clause into a longer lease over granting a shorter lease term?

Answer 11

1) YouTube Premium scheme: First month free, in the hope that I’ll forget to cancel. Similarly, landlords will offer a longer lease with a break clause hoping that the tenant will not use it.
2) Higher value from surveyor: A surveyor valuing the landlord’s reversion is likely to consider a 10 year lease with a 5th anniversary tenant’s break more valuable than a 5 year lease.

Question 12

In an FRI commercial lease where rent is paid quarterly, when is rent due?

Answer 12

In advance of the quarter deadline.

Question 13

What rent is payable where a break clause is exercised part way through a quarter?

Question 14

List and explain the 4 types of rent review

Answer 14

1) Stepped rent: Years 1 and 2 £25k, Years 3 and 4, £30k, and so on…
2) Turnover rent: Rent calculated based on the tenant’s turnover at the property. This is mostly commonly seen with retail leases (eg, shops).
3) Index-linked rent: Rent is increased by ref to an agreed measure of inflation, such as the retail prices index (RPI).
4) Open market rent review (most common in FRI leases): Involves ascertaining the rent based on comparable premises and certain principles.

Question 15

What happens if, upon rent review, the landlord and tenant cannot agree a new rent between themselves?

Answer 15

Then the lease will set out a mechanism for a **specialist valuer **to determine the new rent.

The valuer will consider:
1. The rent payable for comparable premises (ie, premises of similar size and location) plus
2. The terms of the hypothetical lease – an imaginary lease based on the actual lease but assuming certain matters and disregarding others

Question 16

What is the ‘hypothetical lease’ based on?

Answer 16

From the starting point of the actual lease, the rent review provision instructs the valuers on assumptions (matters to assume) and disregards (matters to be disregarded).

Question 17

What is a disregard on which the hypothetical lease is usually based?

Answer 17

Anything the tenant does voluntarily is disregarded. If the tenant has voluntarily (ie. not under obligation) taken action to make improvements to the demise, he should not be penalised by this.

Question 18

Is the following assumption fair?

The tenant has complied with all its covenants under the lease

Answer 18

Fair: If the tenant, for eg, lets the premises fall into disrepair in breach of its covenants of repair, it should not be rewarded with a lower rent.

Question 19

Is the following assumption fair?

The landlord has complied with all its covenants under the lease

Answer 19

Unfair: Imagine the lift in an office block never works (i.e. ab initio in breach of landlord’s covenant to ensure property is delivered in full working order). This would affect the rent that tenants would pay. From the tenant’s perspective, the assumption is unfair, as the landlord is not suffering the consequences of its inaction.

Question 20

Is it fair for the valuer to take into account the terms of the actual lease when forming the hypothetical lease?

Answer 20

Yes- The hypothetical lease should include the express terms of the actual lease.

If the actual lease, for eg, has clauses that are very restrictive on the tenant’s use of the property, the tenant is stuck with those and should not have to pay a higher rent as if those clauses do not exist.

Question 21

Is this a fair assumption in the hypothetical lease?

The term of the hypothetical lease is the term remaining of the actual lease

Answer 21

Maybe fair: This is a tricky point, and can depend on the particular market, and whether prospective tenants favour short or long lease terms. Say that 5 years are left at rent review, and prospective tenants want 5 year leases. This would work against the tenant who initially took a 10 year lease.

Question 22

When forming the hypothetical lease, Is it fair for the valuer to take into account any repairs/rebuilding done in the event of the demise being damaged/destroyed?

Answer 22

Yes- This is because the lease will usually have detailed provisions for what happens in this instance (including suspending the rent). It would be unfair on the landlord if the tenant continues to pay a decreased rent as if the premises have been destroyed once they have been rebuilt.

Question 23

Imagine the tenant’s business has done really well, and a surveyor concludes that a rival business would pay a higher rent for the premises. Can this be taken into account when forming the hypothetical lease for the purposes of rent review?

Answer 23

No - The rent will be increased to the open market rent. The increase due to the tenant’s business (goodwill) would normally be disregarded.

Question 24

Is it fair to disregard the fact that the premises will be worth more to the current tenant than to a prospective tenant

Answer 24

Yes

Question 25

What are the consequences if a rent review takes place before the 5th anniversary of the commencement date?

Answer 25

If the lease is not an exempt lease (i.e. 7 yrs or less for certain value), then tenant may have to **pay further SDLT/LTT. **

Therefore, you would expect rent review in a commercial (eg FRI) lease to take place within 5 yrs of the commencment date.

Answer 26

If the new rent has only been agreed sometime after the rent review date set out in the lease, the new rent is backdated to the rent review date. This means that the tenant will have to pay an additional sum plus interest at a rate set out in the lease (this should not be a punitive rate of interest).

Question 27

To whom does the Code for Leasing Business Premises apply?

Answer 27

Members of the RICS (Royal Institution of Chartered Surveyors) and RICS regulated firms

Question 28

Which types of tenancies are exempt from the Code?

Answer 28

The Code applies to most commercial lettings but there are exceptions (eg,** tenancies of 6 months or less).**

Question 29

List 3 mandatory reqs under the Code?

Answer 29

• Lease negotiations must be approached in a constructive and collaborative manner
• An unrepresented party must be advised about the existence of the Code and recommended to seek professional advice
• The landlord (or its letting agent) is responsible for ensuring that heads of terms compliant with the Code are agreed before the draft lease is circulated.

Question 30

What is the difference between mandatory and good practice provisions of the Code?

Answer 30

Mandatory must be followed in all circumstances. RICS members and regulated firms are obliged to follow good practice unless there are excptional reasons for not doing so which justify it.

Question 31

Is an Agreement to Lease always needed?

Answer 31

No - only needed where the ps want to commit to completing the lease, but either are not yet ready, or there are conditions that need to be satisfied.

Remember the AtL is a contract so the ps become bound

Question 32

5 tasks

If there is an Agreement to lease, what must the landlord’s solicitors do at the pre-exchange stage?

Answer 32

1) Take instructions from landlord
2) Prepare draft lease based on heads of terms and, if relevant, Agreement for lease (ie, if there is to be an exchange)
3) Deduce landlord’s freehold title (and check that lender will consent to letting) and respond to any queries on title
4) Answer pre-contract enquiries
5) Once agreed, engross the Agreement for Lease, get landlord to sign it, and send counterpart to tenant’s solicitor.

Question 33

If there is an Agreement to lease, what must the tenant’s solicitors do at the pre-exchange stage?

Answer 33

1) Take instructions from tenant
2) Review draft lease and agreement for lease and amend as required
3) Investigate title and raise any queries on title
4) Raise pre-contract enquiries and searches
5) Arrange for tenant to sign counterpart lease

Question 34

What pre-exchange enquiries and searches should be carried out by the tenant’s solicitor?

Answer 34

Enquiries:
* CPSE1 (same as freehold)
* CPSE3 (specific to leasehold)

Searches: Same as in freehold so -
* LLC1
* Drainage and water enquiries
* Desktop environmental search
* Chancel repair liability
* Company search

Question 35

What should you do if your tenant client tells you not to carry out any searches, for eg, because it’s a shorthold tenancy and searches would be disproportionately expensive (in his view)?

Answer 35

You should advise the tenant of the risks of not carrying out the searches and enquiries. However, ultimately the decision rests with the client.

Question 36

What are the landlord’s solicitor’s tasks pre-completion?

Answer 36

1) Prepare original and counterpart lease, get landlord’s signature to both
2) Prepare and send completion statement, detailing the money due on completion (eg, any apportioned annual rent, service charge and insurance rent)

Question 37

What are the tenant’s solicitors tasks pre-completion?

Answer 37

1) Get tenant’s signature for lease
2) Obtain funds from tenant needed to complete as per completion statement
3) Raise pre-completion searches
OS1 with a lease of whole, OS2 with a lease of part of a property.
If the lease is not registrable, then an OS3 search could be used. This does not confer priority, but will check that the landlord is free (or not) to grant the lease.

Question 38

What 3 things happen on completion?

Answer 38

1) Money: The tenant’s solicitor sends the landlord’s solicitor the completion monies
2) Phonecall: The landlord’s solicitor and tenant’s solicitor agree over the telephone to complete and date the executed leases that they are holding
3) Contract: The landlord’s solicitor and tenant’s solicitor send the completed original and counterpart to each other

Question 39

What happens post-completion?

Answer 39

Landlord’s solicitor:
* Send summary of main provisions of lease to client

Tenant’s solicitor:
* Pay tax (SDLT/LTT)
* Registration if needed