W6

Question 1

What are the advantages of taking a lease instead of buying a freehold from a business perspective?

Answer 1

From a business perspective, there are various advantages to taking a lease instead of buying a freehold. These include not needing to spend capital that may be in short supply or needed for other purposes, having the flexibility to leave the premises at the end of the lease or in certain instances, and the ability to experiment with new or additional premises.

Question 2

Who are commercial landlords and what are their objectives?

Answer 2

Commercial landlords can be private investors or financial institutions like pension funds and life assurance companies. Their objectives include treating the property primarily as an investment, maximizing their investment by ensuring a clear rental stream and retaining control over the premises, and assessing the covenant strength of tenants to ensure compliance with lease obligations.

Question 3

What is asset management in the context of commercial leases?

Answer 3

Asset management involves assisting a commercial landlord, which may be an institutional investor, with the day-to-day management of the estate. This includes granting new leases, considering applications for consent, advising on breaches of the lease, and dealing with issues at the end of the lease.

THIS IS WHAT LAWYERS DO

Question 4

What are the objectives of landlords and tenants when negotiating lease terms?

Answer 4

Landlords generally aim to maximize their investment by ensuring a clear rental stream, retaining control over the premises, and having provisions that favor their interests. Tenants want a lease that allows them to use the premises for their intended purpose, has a satisfactory term, provides flexibility, and avoids onerous restrictions or unfair provisions.

Question 5

What are the principal terms of a lease and what do they involve?

Answer 5

The principal terms of a lease include the term (fixed or periodic), break clauses, rent, and rent review. The term refers to the duration of the lease, break clauses allow for early termination, rent is the amount payable by the tenant, and rent review provisions determine how the rent may change over time.

Question 6

What are the typical lease terms for commercial leases?

Answer 6

Typical commercial lease terms can range from 3 to 15 years, depending on the business sector and the preferences of landlords and tenants.

Question 7

What is the difference between a residential long lease and a commercial lease?

Answer 7

A residential long lease is usually for a longer term (e.g., 99 or 999 years) with low rents, while a commercial lease is typically for a relatively short term (up to 15 years) with market rents. Commercial leases are also more varied in terms of uses and have different considerations compared to residential leases.

Question 8

What are the concerns of institutional investors when it comes to property investments?

Answer 8

Institutional investors, such as pension funds and life assurance companies, view property as a safe and valuable investment that offers income through rent and long-term capital growth. They compare property investments to other investments in their portfolio and consider factors like covenant strength, rent deposits, and the effect of market trends on property demand and rent.

Question 9

What is the role of commercial property solicitors in asset management?

Answer 9

Commercial property solicitors play a role in asset management by assisting institutional landlords with the legal work generated by the property asset on an ongoing basis. This includes granting leases to new tenants, considering tenant applications during the lease, advising on breaches of the lease, and dealing with issues when a lease comes to an end or when a tenant wants a new lease.

Question 10

What are the different options for rent review in commercial leases?

Answer 10

Different options for rent review in commercial leases include stepped rent (increasing at set intervals), index-linked rent (adjusted based on an index), turnover rent (based on the tenant’s sales), and open market rent (determined through a hypothetical lease with assumptions and disregards). Open market rent review can be complex and contentious but aims to achieve a fair result.

Open market rent review is the most common type and involves determining the rent based on comparable premises and certain principles.

Question 11

Why have shorter and more flexible leases become more popular in recent years?

Answer 11

Shorter and more flexible leases have become more popular in recent years due to reasons such as business plans being drafted in 5 or 10 year cycles, business tenants not wanting to commit to a property longer than this, and tenants potentially paying less Stamp Duty Land Tax or Land Transaction Tax on a shorter tenancy.

Question 12

What is the term commencement date in a lease agreement?

Answer 12

The term commencement date is the date on which the lease term starts. It may be the date of completion of the lease when it becomes legally binding, but it can also be before or afterwards. It is common for the term commencement date to be earlier than the lease is dated.

Question 13

What is a reversionary lease?

Answer 13

A reversionary lease is a lease where the term starts after the lease is dated. It is commonly used when parties want to extend the letting in advance of the expiry of the current lease.

Question 14

How is the expiry of a lease term calculated?

Answer 14

The expiry of a lease term depends on how the term is defined in the lease. If the term is defined as ‘from and including’ a certain day of the year, the term expires on the day before that day of the year in the relevant year. If the term is defined as ‘from’ a certain day of the year, the term starts the day after that day and expires on that day of the year in the relevant year.

Question 15

What is a break clause in a lease agreement?

Answer 15

A break clause is a provision in a lease agreement that allows either the landlord or the tenant to bring the lease to an end before the end of the fixed term without the agreement of the other party. It can be a landlord break, a tenant break, or a mutual break.

Question 16

What is the difference between a five-year tenant-only break clause and a five-year term in a lease?

Answer 16

The difference between a five-year tenant-only break clause and a five-year term in a lease is that with a break clause, the tenant has the option to bring the lease to an end at five years, while with a five-year term, the tenant is obligated to stay for the full term unless there are compelling reasons to move. Landlords may offer longer leases with break clauses in the hope that tenants will not use them.

Question 17

What are the two types of rent commonly seen in leases?

Answer 17

The two types of rent commonly seen in leases are market rent (also known as rack rent) and ground rent. Commercial leases usually have a market rent, while residential leases may have a ground rent.

Question 18

How is rent usually expressed in a commercial FRI lease?

Answer 18

Rent in a commercial FRI (Full Repairing and Insuring) lease is usually expressed as a yearly figure, such as £80,000 per annum, but payable quarterly. The year is divided into approximate quarters, and the rent is usually due in advance on the quarter day.

Question 19

What is an upwards only rent review in a commercial lease?

Answer 19

An upwards only rent review is a provision in a commercial lease that allows the rent to increase but not decrease. If market rents have fallen on the date of the rent review, the rent stays the same. The lease usually provides a mechanism for valuers to determine the new rent based on assumptions and disregards.

Question 20

What are some common assumptions and disregards in a rent review?

Answer 20

Some common assumptions in a rent review include the tenant complying with all its covenants under the lease and the premises being repaired or rebuilt if damaged or destroyed. Some common disregards include the effect of the tenant’s occupation on the rent and the terms of the actual lease other than the rent payable.

Question 21

Why would a landlord accept a longer lease with a break clause instead of a shorter term?

Answer 21

A landlord may accept a longer lease with a break clause instead of a shorter term because exercising a break clause is not easy, similar to cancelling internet subscriptions. A surveyor valuing the landlord’s reversion is likely to consider a lease with a break clause more valuable than a shorter lease. The longer lease with a break clause provides the landlord with more security and potential for longer-term income.

Question 22

What is the purpose of a rent review memorandum?

Answer 22

A rent review memorandum is a short document that records the new rent agreed upon after a rent review. It is signed by the landlord and tenant and kept with the lease for future reference.

Question 23

What happens if the rent review is before the 5th anniversary of the term commencement date?

Answer 23

If the rent review is before the 5th anniversary of the term commencement date, the tenant may have to pay further Stamp Duty Land Tax or Land Transaction Tax, as it is calculated on the first five years’ rent.

Question 24

What factors are considered in a rent review for a tenant with a 10-year FRI lease?

Answer 24

In a rent review for a tenant with a 10-year FRI lease, factors such as the rental market, the landlord’s neglect of common areas, and the tenant’s compliance with covenants are considered.

Question 25

What is the purpose of the Code for Leasing Business Premises?

Answer 25

The Code for Leasing Business Premises aims to make commercial lease negotiations fairer and more transparent. It applies to RICS members and regulated firms and provides mandatory requirements and good practice guidelines for lease negotiations and heads of terms.

Question 26

Who does the Code for Leasing Business Premises apply to?

Answer 26

The Code for Leasing Business Premises applies to members of the Royal Institution of Chartered Surveyors (RICS) and RICS regulated firms. Property professionals who deal with commercial property lettings and are RICS regulated must follow the Code.

Question 27

What are the mandatory requirements of the Code for Leasing Business Premises?

Answer 27

The mandatory requirements of the Code include approaching lease negotiations in a constructive and collaborative manner, advising unrepresented parties about the Code, and ensuring that heads of terms compliant with the Code are agreed upon before the draft lease is circulated.

Question 28

What should be included in the heads of terms according to the Code for Leasing Business Premises?

Answer 28

The heads of terms should clearly define the premises, specify the length of the term and any break rights, state the initial rent and frequency of payment, and address repair obligations and rights to assign or underlet the lease. They should also address rights to alter the property and any obligations to restore it.

Question 29

What is the purpose of a schedule of condition in a lease?

Answer 29

A schedule of condition is required when a tenant gives a qualified repairing obligation limited to the initial state of the premises. It provides protection for the tenant by documenting the condition of the premises at the start of the lease.

Question 30

What happens if the premises are damaged by an insured risk?

Answer 30

If the premises are damaged by an insured risk (unless the damage is due to something the tenant has done or not done) or an uninsured risk, the lease should suspend the rent.

Question 31

What is the purpose of exchange in a lease agreement?

Answer 31

Exchange in a lease agreement is not always necessary, but it may be required if the parties have conditions to satisfy before completing the lease. If exchange takes place, the contract is referred to as an agreement for lease.

Question 32

What are the stages involved in the grant of a lease?

Answer 32

The stages involved in the grant of a lease can be divided into three main stages: pre-exchange, pre-completion, and post-completion. However, in some cases, a grant of lease transaction may not require an exchange, resulting in just two stages: pre-completion and post-completion.

Question 33

What tasks are involved in the pre-exchange stage of a lease transaction?

Answer 33

n the pre-exchange stage, the landlord’s solicitor takes instructions, prepares the draft lease (and agreement for lease if applicable), deduces title, responds to queries on title, and answers pre-contract enquiries. The tenant’s solicitor reviews the draft lease and agreement for lease, investigates title, raises queries on title, raises pre-contract enquiries and searches, and arranges for the tenant to sign the counterpart lease.

Question 34

What is the purpose of an agreement for lease in a lease transaction?

Answer 34

An agreement for lease is needed when the parties want to commit to completing the lease but are not yet ready or there are conditions that need to be satisfied. It allows the parties to sign an agreement and complete the lease at a later date

Question 35

What tasks are involved in the pre-completion stage of a lease transaction?

Answer 35

In the pre-completion stage, the landlord’s solicitor prepares the original and counterpart lease, obtains the landlord’s signature, and sends the counterpart to the tenant’s solicitor. They also prepare and send a completion statement detailing the money due on completion. The tenant’s solicitor arranges for the tenant to sign the counterpart lease, obtains funds from the client, raises pre-completion searches, and ensures all necessary steps are taken before completion.

Question 36

What happens during the completion stage of a lease transaction?

Answer 36

During the completion stage, the tenant’s solicitor sends the completion monies to the landlord’s solicitor. Both solicitors agree to complete and date the executed leases that they are holding. The completed original and counterpart leases are then sent to each other.

Question 37

What tasks are involved in the post-completion stage of a lease transaction?

Answer 37

In the post-completion stage, the landlord’s solicitor sends a summary of the main provisions of the lease to the client. The tenant’s solicitor arranges to submit the necessary tax returns and payments, registers the lease if required, and ensures all post-completion tasks are completed.

Question 38

What is the responsibility of the tenant in terms of repair in a lease agreement?

Answer 38

In a lease of whole, the tenant is responsible for repairing the entire building. In a lease of part, the tenant is responsible for repairing their specific demise, which will be defined in detail. The tenant’s repairing obligation may be a full repairing obligation or a qualified repairing obligation, depending on the terms of the lease.

Question 39

What are the different types of repairing covenants in a lease?

Answer 39

The different types of repairing covenants in a lease are full repairing obligation and qualified repairing obligation.

Question 40

What is the difference between a full repairing obligation and a qualified repairing obligation?

Answer 40

A full repairing obligation requires the tenant to keep the premises in good repair, while a qualified repairing obligation allows the tenant to keep the premises in good repair but not put them in any better state of repair than they were at the start of the lease, as evidenced by the Schedule of Condition.

Question 41

What determines whether an item of disrepair should be repaired or replaced by the tenant?

Answer 41

Unless the lease states otherwise, the tenant generally has the choice to repair or replace an item of disrepair. If the lease does state that damaged items must be replaced, the tenant will only be obligated to do so if the item is beyond economic repair.

Question 42

What should a tenant do if the premises have inherent or structural defects?

Answer 42

A tenant taking a lease of a newly constructed property should ensure that inherent and structural defects are excluded from their repairing obligation and service charge contributions. The landlord should have warranties from the contractors to cover these defects.

Question 43

Who is responsible for insuring the building in a commercial lease?

Answer 43

In a commercial lease, the landlord is almost always responsible for insuring the building. The cost of insurance will be recovered from the tenant under the lease.

Question 44

What risks are typically covered by the insurance policy taken out by the landlord?

Answer 44

The typical insured risks in a lease include fire, explosion, lightning, earthquake, tempest, storm, flood, bursting and overflowing of water tanks, apparatus or pipes, damage to underground water, oil or gas pipes or electricity wires or cables, impact by aircraft and aerial devices and articles dropped from them, impact by vehicles, subsidence, ground slip, heave, riot, civil commotion, strikes, labour or political disturbances, and malicious damage.

Question 45

Where should a solicitor look to determine the tenant’s responsibility for repairing?

Answer 45

A solicitor should look at the tenant’s repairing covenant and the definition of the premises to determine the tenant’s responsibility for repairing.

Question 46

What is the purpose of obtaining a full building survey in an FRI lease of a newly constructed building?

Answer 46

The purpose of obtaining a full building survey is to identify any problems arising from poor design or construction that will be the tenant’s responsibility in the lease. This ensures that the tenant is aware of any major items of repair before entering into the lease.

Question 47

What is the insurance rent in a commercial lease?

Answer 47

The insurance rent refers to the money that the tenant or tenants pay to the landlord for the cost of insuring the building. It is usually recovered under the lease.