L&L

Question 1

What are the objectives of the RICS professional standard ‘Code for Leasing Business Premises’ (2020)?

Answer 1

-To improve the quality and fairness of negotiations on lease terms
-To promote the use of a new set of comprehensive heads of terms to make legal drafting of leases more efficient

Question 2

What are the mandatory elements of the Code?

Answer 2

-Negotiations over the lease must be approached in a constructive and collaborative manner
-A party that is not represented by an RICS member/property professional must be advised by the other party of the existence of this Code and advised to obtain professional advice
-The agreement as to the terms of the lease on a vacant possession letting must be recorded in written heads of terms, stating ‘subject to contract’ and summarising the position on e.g.:

-The premises
-Special rights
-length of term
-Break options/renewal rights
-security of tenure
-rent, frequency of payment
-VAT on rent
-Incentives
-Rent reviews
-Alienation
-Service charge
-Repairing obligations
-User
-Alterations
-Conditions of the letting

-HoTs must comply with the above for lease renewals/extensions

-Negotiations should produce letting terms that achieve a fair balance between the parties having regard to their respective commercial interests

Question 3

What is included in the appendices of the Code?

Answer 3

Model heads of terms template and check list; guide for landlords and tenants on leasing and letting issues

Question 4

What is the minimum information that should be requested from a prospective tenant?

Answer 4

-Bank, accountant and 2 trade references
-Previous/existing LL reference
-3 years audited accounts/business plan/credit rating

Question 5

What are the key requirements of a rental deposit?

Answer 5

-Personal to the tenant
-Legally documented in rent deposit deed and money held in separate bank account
-Interest to tenant
-Agreed terms of release for the monies (may be stated in the deed)
-Can include top up mechanism for RR uplifts

Question 6

What is the relationship between tenant covenant and investment value of the property?

Answer 6

The greater a tenant’s covenant strength, the higher the investment value of a property and vice versa

Question 7

What devices might you employ for a tenant with lower covenant strength?

Answer 7

Rent deposit or guarantee (must consider the market conditions and demand for the property)

Question 8

What are the common profile tests to assess viability of a tenant?

Answer 8

Net profit for proposed business must be 3x the rent for 3 consecutive years

OR/ the net asset value of the business must be more than 5 times the rent

Question 9

What are the key lease terms that affect value?

Answer 9

-Lease length/term certain
-Break clauses
-Alienation
-Repairing obligations
-User clauses
-RR pattern and basis of valuation
-Security of tenure provisions
-Restrictive lease clauses
-Planning use
-Security of tenure

Question 10

Is time of the essence with a break clause?

Answer 10

Yes, strict timescales for serving notice in prescribed form and often subject to compliance with conditions

Question 11

What should be considered if your client plans to exercise a break?

Answer 11

-Is it mutual or one party only?
-Does notice need to be served?
-What is the notice period?
-Is time of the essence? (i.e. is it a rolling break or fixed)
-Is there a break penalty?
-Is it personal to the original tenant?
-Are there any pre-conditions e.g. full payment of rent and returning premises in good order

Question 12

What are typical break conditions?

Answer 12

-Compliance with tenant covenants
-Payment of all rent and other monies due
-Vacant possession

Question 13

Why might a tenant consider a pre-letting?

Answer 13

If there is a market shortage or they need specific facilities to satisfy their needs

Advantage- delivery of bespoke building designed to suit their needs
Disadvantage- entering into a lengthy and complex process; risk in the event developer/contractor not performing

Question 14

What documents must be attached to an agreement for lease?

Answer 14

-The lease (pre-agreed form, executed upon practical completion of the work)
-License for alterations
-Spec and plans of proposed scheme
-Developer’s guarantee/bond
-Warranties (from professional team/contractor/sub-contractor with design input)
-Collateral waranty- gives tenant direct contract with construction team
–> most developers unwilling/unable to give guarantees for latent defects and may have decennial insurance for this risk

Question 15

What is a surrender and regrant?

Answer 15

where variations to a lease are so inconsistent with the continuation of the existing relationship that the law deems the existing lease to have been surrendered and a completely new lease brought into being.

Question 16

What is a surrender and renewal?

Answer 16

The parties may agree to simultaneously surrender the existing lease and agree a new lease (on modified terms). The existing lease is replaced with a new lease commencing now.

Question 17

Why did you recommend a surrender and a renewal over a surrender and regrant?

Answer 17

-Less complicated than a surrender & regrant
-Provides LL more certainty because there is no new legal relationship
-Terms remain the same except by agreement e.g. to extend the term, becomes a ‘new lease’ i.e. not subject to privity of contract, could remove restrictive user clause
-This is what I was advised to do by our solicitor and the option the LL was agreeable to

Question 18

What concerns are there about a surrender and renewal?

Answer 18

-Stamp Duty- as the original lease was issued prior to 2003, there is no ability for overlap relief and as such SD liability could be higher
-However, as the lease is only a peppercorn this reduces any potential liability
-I sought advice from property tax specialist

Question 19

What is a yield?

Answer 19

The return on investment, usually expressed as a percentage. Factors in element of risk and market conditions

Question 20

What does a high yield suggest about the market?

Answer 20

Suggests office market may be facing challenges due to lower demand, higher risk or wider economic downturn. Investors therefore require a higher return to compensate for these uncertainties.

Question 21

What does a low yield suggest about the market?

Answer 21

Suggests a strong office market due to high demand, low vacancy rate and potentially rising property values. Investors accept lower yield in exchange for perceived stability and long term prospects.

Question 22

How is a yield calculated?

Answer 22

Income (rent) / Value x 100

Question 23

What are the key principles of the Estate Agent’s Act (1979)?

Answer 23

Regulates UK Estate Agents. Ensures agents act fairly and transparently, protects buyers and sellers.

Key principles:
-Must disclose any personal or financial interest in property
-Specify costs/fees in terms of business
-Client money handling- separate accounts
-Act prohibits misrepresentation, aggressive tactics and discrimination

Question 24

What are the key principles of the Landlord & Tenant Covenant’s Act (1995)?

Question 25

What are the penalties under the Estate Agent's Act?

Answer 25

-Policed by National Trading Standards Estate & Letting Agency Team (NTSEAT) -Can ban estate agents from practicing -Issue warning notice

Question 26

What are the key principles of the Misrepresentation Act (1967)?

Answer 26

-Agent has a duty of care to check information/advice is accurate -Vendor and/or agent can be sued for damages and rescind contract -Protects anyone in a contract who has been misled

Question 27

What are the key principles of the Consumer Protection (from Unfair Trading) Regulations (2008)?

Answer 27

Promotes fair, honest and transparent business practices. Relates to business to consumer work and protects consumers. -Mustn't misrepresent -Mustn't omit -Mustn't coerce or harass -Professional diligence, audit trail -Duty of care to clients and interested parties *Policed by Trading Standards Office- unlimited fine/prohibition order + up to £25k to the complainant in damages

Question 28

What are the key principles of the Consumer Rights Act (2015)?

Answer 28

Protects consumers’ rights when buying goods, services, or digital content -Letting agents must clearly display their charges in office and on website -Policed by Local Authority, up to £5000 per breach

Question 29

How about the key principles of the Business Protection Regulations (2008)?

Answer 29

Regulate business to business activities. -Prohibits misleading advertising -No unfair comparisons

Question 30

How do you physically collect rent from a tenant?

Answer 30

Direct debit- though there could be a fee associated with this Online payment portals For smaller companies, they may consider sending an invoice for rent payment

Question 31

How would you address a tenant in rental arrears?

Answer 31

1.Initial conversation to find out why tenant in arrears, look at measures like payment plan. 3.Consider using rent deposit or pursuing guarantor/former tenant if applicable 4.Serve statutory demand 5.Commercial rent arrears recovery scheme (no CRAR for crown bodies) 6.Forefeiture

Question 32

What are marketing particulars?

Answer 32

Key details used to advertise a property, included in brochures, online listings or on boards Key details: Property address and location Key features Photos/floorplans Asking price/rent Material defects/restrictions e.g. user EPC

Question 33

How did you advise your client on the marketing strategy for Parthenon Drive?

Answer 33

Reviewed the existing marketing strategy, noting that interest limited to date due to Covid-19 pandemic (originally marketed March 2020) Recommended a marketing board due to location on the road, visibility from cars driving past Also brochure, online listing and agent mailing list

Question 34

What are the rules around marketing signage?

Answer 34

Under the Town and Country Planning Regs, planning permission is required for non-residential boards over 2sqm- only one board per building. -Must get LL approval -Must remove 14 days after completion of transaction

Question 35

What is caveat emptor?

Answer 35

'Let the Buyer be Beware'- Buyer should satisfy themselves on all matters relating to the property

Question 37

What is the new guidance that has recently been released for letting agents regarding financial sanctions?

Answer 37

Due diligence checks must be done on their clients for all rental property with no minimum monthly income threshold. Must check financial sanctions list and report to OFSI if they think their client is sanctioned/breached regs.

Question 38

What are the three types of agency?

Answer 38

Sole agency- one agent Joint agency- two or more joint agents sharing fee on pre agreed basis Multiple agency- any number of agents but only the successful one gets a fee

Question 39

On your Runcorn L2 example, why would you agree rent review settlement if you were going to terminate the lease via break anyway?

Answer 39

This was an outstanding rent review- 1st November 2023- which the LL had agreed to settle at nil increase. Due to program delays, the lease was varied to move the break date (original 31/10/23, then March-November 2024) to 31st March 2025. As such, there was a risk the LL could pursue an increase in rent, therefore recommended that the RRM should be signed at the same time as the new lease and licence to alter.

Question 40

What due diligence checks did you do on the Runcorn acquisition?

Answer 40

Asbestos Register, Management Plan, Surveys Fire and Risk Assessment Electrical compliance e.g. PAT Testing EPC certificate Business Rates Legionella Report Planning history and compliance Flooding

Question 41

Did you consider any other options than waiting for the design work to progress at Runcorn?

Answer 41

Another option could have been an agreement for lease. However, my client is risk adverse and wanted flexibility to walk away in case the designs revealed the property was unsuitable.

Question 42

What is a MOTO? How does it differ from a lease?

Answer 42

Refers to a memorandum of terms of occupation. Essentially an inter-governmental license to occupy. Differs from a lease because it doesn't give exclusive possession, cannot claim protection under LTA 1954, no legal interest.

Question 43

How did you ensure the agreement reflected the staggered occupation?

Answer 43

Negotiated with HSE to ensure they were agreeable to the principles. Calculated pro rata annual charge based on actual occupation periods for each wing. Then specified in the MOTO agreement the reduced charge for year 1, with subsequent years at the full charge of 450k per annum due to staggered occupancy dates.

Question 44

What were your client's requirement in Irlam (L3) ?

Answer 44

200sqm office space in Irlam, or within the conurbation as an outreach location so member's of the public unable to reach the nearest JC (Eccles, Worsley) could still access DWP services

Question 45

When you recommended widening the search in Irlam, what areas did you have in mind?

Answer 45

Based on market research using CoStar to look at available properties and instructing C&W to contact local agent's, Urmston (£10-12), Stretford (£12-14 psf) and Leigh (£7-9) looked promising

Question 46

What is the market like in Irlam?

Answer 46

Best for industrial parks, average rents of £6-£8 psf and yields 6-7% vs prime office rents of £45 psf in Manchester.

Question 47

What terms did you achieve for the license in Irlam?

Answer 47

2 year license to March 2025, mutual break option on 12m notice for LL and 6m notice for DWP. Rent of £23k per annum, no rent review.

Question 48

Why did you opt for an informal tender to collect offers (Parthenon Drive)?

Answer 48

I discussed this with the client and my agent, highlighting that informal tender (best and final offers) offered more flexibility for the client as you can negotiate after. Ensured that the letter to the parties stated that my client was under no obligation to accept the highest, or any offer, made

Question 49

What are the 4 methods of sale?

Answer 49

Informal Tender Formal Tender Private treaty Auction

Question 50

What's the difference between formal and informal tender?

Answer 50

Informal- best offers, further negotiations can take place after Formal- sealed bids, single chance to bid so can't change after, highest offer accepted (unless stated otherwise)

Question 51

What should be included in a letter to interested parties informing them of informal tender?

Answer 51

My agent drafted the letter, which I reviewed and approved, prior to sending it out. It must include: Required date and time of receipt of offer Name and address of applicant's solicitor Confirmation of any finance arrangements Vendor reserves the right not to accept the highest bid, or any bid (to ensure it doesn't become a binding tender)

Question 52

What were the break conditions at Runcorn?

Answer 52

Vacant possession Payment of rent

Question 53

What was the marketing strategy you recommended for Parthenon Drive?

Answer 53

Reviewed how the property had been marketed to date, noting limited interest in part due to Covid-19 pandemic. Recommended a brochure, online listing, inclusion in agent's mailing list and signage board outside the property, given it's location on a busy road

Question 54

What risks did you advise your client about regarding your proposed approach for Parthenon Drive?

Answer 54

-Landlord refuses to give consent for the deal (the lease is silent on alienation) -Landlord refuses to complete the transactions at the same time, leaving DWP potentially liable for the new 99 year lease (unless a personal break is agreed or conditional agreement for sale with the proposed assignee) -Landlord requires an AGA for the assignment

Question 55

Why did you not recommend/agree a surrender and new lease direct with the new tenant? (PD)

Answer 55

The LL refused to complete the transaction in this way due to their internal procedures, they advised they would not be able to obtain internal approval for this. Likely due to the potential risk of the proposed tenant backing out and the LL losing the good covenant strength of a government department

Question 56

What is an AGA?

Answer 56

Authorised Guarantee Agreement. Brought in by the Landlord & Tenant Covenants Act (1995).

Question 57

What is the benefit of going through the surrender and renewal to subsequently assign- why not a straight assignment?

Answer 57

1) Unlikely to find a tenant willing to take on a lease of a property for such a short unexpired term (52 years) with restrictive user and poor quality property 2)Prospective parties that would consider this likely to be of lower covenant strength 3) A straight assignment means DWP remains liable across multiple potential assignments under privity of contract vs surrender and renewal would mean this no longer applies because the lease is defined as a 'new' lease under the Covenants Act 1995

Question 58

What is the difference between privity of contract and an AGA- your client remains liable either way?

Answer 58

Privity of contract means my client is liable for the whole lease term across multiple potential assignments An AGA 1) May not be required at all and 2) liability ends should the assignee assign the lease to a new party- therefore lower risk, more time limited -Protect client position by doing due diligence checks on the tenant and confirming of good covenant strength

Question 59

What could a LL do if the assignee failed to pay rent/became insolvent?

Answer 59

Pursue the guarantor, following the timetable set out in Section 17 of the Covenants Act (1995) within 6 months of the start of the arrears.

Question 60

How did you advise your client as to the costs associated with this approach?

Answer 60

I advised my client on the likely annual running costs of retaining the property for the full unexpired term- £2.8 million vs paying the costs of the other side's legal fees for the two transactions and premium for extending the lease term- c.14k (5% of sale price)

Question 61

Which leases are classed as 'old leases' under the Covenants Act 1995?

Answer 61

Any signed before 1st Jan 1996