Alienation Flashcards

Question

Pre-exchange – drafting the underlease

Answer 1

The tenant’s solicitor will need to draft the underlease. Unlike a freehold owner granting a lease, a tenant granting an underlease is usually very limited in what provisions they can offer. For example, the tenant’s lease will usually require the underlease to contain obligations no less onerous than the tenant’s (eg, if there is a full repairing covenant in the lease, there must also be a full repairing covenant in the underlease). The underlease may be a full form lease, which will look similar to the tenant’s own lease, or it may be a lease by reference, which incorporates sections of the tenant’s lease by reference (eg, it may define the “tenant’s covenants” as the tenant’s covenants in the tenant’s lease, and then contain a covenant for the undertenant to observe the tenant’s covenants). The term granted by the underlease must be less than the remaining term of the tenant’s lease, even if only one day less.

Answer 2

As with a grant of lease, it is not always necessary to have exchange at all. If exchange does take place, then the tenant’s solicitor will draft an agreement for underlease. As with an agreement for lease, this may set the completion date in the future and may make the completion conditional on various matters. Example: The tenant has applied to the landlord for consent to the underletting. The consent application is taking a long time through no particular party’s fault, but both tenant and underlessee are anxious to commit themselves to the underletting. They may exchange an agreement for underlease conditional upon the landlord’s consent, allowing them to complete as soon as the landlord is ready to give it.

Answer 3

The undertenant’s solicitor should generally carry out the same investigation of title, searches and enquiries as the tenant’s solicitor in a grant of lease (see the element on grant of lease procedure). However, one important difference is that rather than the landlord deducing its freehold title, the tenant will need to deduce its leasehold title as follows: * if the lease is over 7 years, then the tenant need only provide an official copy of its registered leasehold title; * if the lease is 7 years or under, then the tenant will need to provide an official copy of the landlord’s freehold title together with a copy of the lease. As with the grant of lease, it is possible that the undertenant may not want their solicitor to do full scale investigations if it is a short term letting.

Answer 4

On exchange of an agreement for underlease: * the tenant's solicitor and undertenant’s solicitor exchange in similar manner as for a freehold contract (usually adopting Law Society B) * no deposit is usually payable * the agreement for lease may set a fixed completion date, but more likely will set out what conditions need to be satisfied and by when for completion to take place * the agreement for underlease will usually have a draft of the agreed form of underlease annexed to it, so it can only be exchanged once the terms of the underlease have been agreed

Answer 5

Landlord’s solicitor · Engrosses agreed form of licence to underlet and circulates for execution Obtain's landlord's execution to licence to underlet Tenant’s solicitor · Prepares original and counterpart underlease, obtains tenant’s signature to original and sends counterpart to undertenant for signature · Prepares and sends a completion statement, detailing the money due on completion (eg, any apportioned annual rent, service charge and insurance rent) · Obtains tenant’s execution to licence to underlet Undertenant’s solicitor · Arranges for undertenant to sign counterpart underlease · Obtains funds from client needed to complete as per completion statement · Raises pre-completion searches · Obtains undertenant’s execution to licence to underlet

Answer 6

A completion statement will be prepared, just as with a grant of lease. Note that it is the rent under the underlease that is payable, however, not the rent under the tenant’s lease. The underlease will likely require an appropriate sum from the undertenant for service charge and insurance rent to cover the corresponding obligations of the tenant. If it is an underletting of the whole of the tenant’s interest, then an OS1 search is carried out against the tenant’s registered leasehold title. If it is an underletting of part of the tenant’s interest, then an OS2 search is carried out against the appropriate part of the tenant’s registered leasehold title. Where the underlease is not registrable, an OS3 search may be carried out against the tenant’s interest to check whether any adverse entries have been made since the date of the last copy of the tenant’s title register. It would not be appropriate to carry out a search with priority against the landlord’s freehold interest, as the underlease is not granted out of the freehold. Assessment tip: There are slight differences with the pre-completion steps for a grant of lease, assignment of lease and underletting. It is easier to think about and understand the differences than try to learn the pre-completion steps for each type of transaction.

Answer 7

On completion of the underlease * the parties’ solicitors agree to date and complete the licence to underlet * the undertenant’s solicitor sends the tenant’s solicitor the completion monies * the tenant’s solicitor and undertenant’s solicitor agree over the telephone to complete and date the executed underleases that they are holding * the tenant’s solicitor and undertenant’s solicitor send the completed original and counterpart underleases to each other

Answer 8

Tenant’s solicitor · Sends notice of underlease to the landlord’s solicitor Undertenant’s solicitor · Arranges to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary · Registers underleases if necessary

Answer 9

An assignment or underletting by the tenant will require the landlord’s consent. A commercial lease will typically require that any consent is given by deed (except in limited circumstances). The deed that gives the consent is the licence for assignment or licence for underletting as appropriate. The requirement of consent to be in a deed is safer from the landlord’s point of view because it lessens the risk that the landlord inadvertently consents to something that it doesn’t mean to! Nonetheless, the landlord’s solicitor should take care not to say anything that could be construed as consent (even in principle) on behalf of the landlord. It also ensures that the tenant’s covenants and any variations to the lease are given the requisite formality. The licence will usually contain a time limit on consent, so that the appropriate underletting or assignment must be completed within, say, three months. This avoids uncertainty on the part of the landlord, who will not want the process to go on indefinitely. In practice, the licence is usually completed just before completion of the transaction itself. Unlike a licence for alterations, which contains numerous obligations about the work that is to be carried out, there are comparatively few obligations in a licence to assign or licence to underlet. If the licence is for assignment of an old lease or an underletting, the licence will contain a direct covenant by the assignee or undertenant to the landlord to comply with the tenant covenants in the tenant’s lease. A direct covenant to the landlord is not strictly necessary with the assignment of a new lease, but the landlord may want it anyway. If the outgoing tenant on an assignment is giving an authorised guarantee agreement (see element on assignment), then this may be contained in the licence to assign, or it may be a standalone deed. Assessment tip: Make sure you are clear on the liability of the parties to the landlord after an underletting, an assignment of an old lease, or an assignment of a new lease, and where the authorised guarantee agreement is appropriate (only for the assignment of a new lease).

Answer 10

Common to both licence to assign and licence to underlet · Consent for limited time (say 3 months) and limited to specific transaction · Tenant agrees to pay landlord’s costs · Assignee or underlessee covenants directly with the landlord to observe lease obligations (not necessary in a licence to assign a new lease, but landlord may request anyway) Different for different types of licence: · Tenant guarantees assignee’s performance of tenant obligations (authorised guarantee agreement) – licence to assign new lease only · Tenant not released from outstanding obligations – licence to assign new lease only (not necessary for old leases or underlettings) · The draft licence to underlet will have a draft of the underlease attached

Answer 11

Following an assignment, the assignee, and following an underletting, the tenant, will be required to give the landlord formal notice within a month that the transaction has been completed. There will usually be a fee for the landlord’s solicitors receipting this notice. For a long residential lease, it is often the case that the lease may be freely assigned (eg, on a sale of the house or flat), or underlet on short tenancies, without landlord’s consent. However, there will usually be a requirement to give notice of dealing for assignments of the lease. This is mainly so that the landlord for the time being knows to whom they should address the ground rent demands!

Answer 12

Assignment and underletting are not the only forms of alienation. There are other ways in which the tenant may be able to deal with their interest. This slide looks at charging the lease and sharing occupation. Charge A tenant may create a charge over their lease, just as a freeholder owner charges their interest to a mortgage lender. A commercial tenant may do this as part of a floating charge over their business generally. The bank taking the charge will want the benefit of the lease if taking the business into administration. A residential leaseholder will do this when taking a mortgage. Share occupation A tenant may want to share occupation with a third party without creating an underlease. Usually a commercial lease will allow sharing with group companies. This is because from the landlord’s point of view, they can regard the tenant and its group companies as one entity – the landlord can still enforce the covenants against the tenant.

Answer 13

The Code has various requirements on alienation. Some important ones: * Lease should allow tenants to assign or underlet the whole of the premises with the landlord’s consent not to be unreasonably withheld or delayed * Leases should allow tenants to share with group companies without consent. * Leases should allow tenants to charge the lease to a bank or reputable lending institution without consent (with a limited exception).

Alienation Flashcards

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