PLP - Core knowledge areas of leasehold real estate law and practice

Question 1

What are the essential requirements of a lease ?

Answer 1

There are three essential requirements:

1.The estate must be for a duration permitted for a leasehold estate.
2. The grant must give exclusive possession.
3. The grant must have the correct formalities

Question 2

Differences between leases and licenses

Answer 2

Lease vs licence

• If there is no exclusive possession, then there can only be a licence. Often, the landowner wishes to deny exclusive possession to ensure that the occupier does not obtain the benefits of a lease.

The landowner retains control

• The landowner retaining a key does not negate exclusive possession. However, if the occupier lacks general control there will be no exclusive possession.

Question 3

Types of Leasehold Covenants

Answer 3

1. Absolute Covenant

This means the tenant absolutely cannot carry out the stated action according to the lease. The landlord may decide to allow it, either by way of a one-off consent or a permanent variation of the lease, but the landlord has total discretion on the matter.

2. Qualified Covenant

This type of covenant allows the tenant to carry out the stated action, but only if it obtains landlord’s consent first.

3. Fully Qualified Covenant

This type of covenant allows the tenant to carry out the stated action if it obtains landlord’s consent first, but goes on to say that the landlord will not be able to withhold consent unreasonably.

Question 4

Covenant to Repair

Answer 4

• It 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.
• The tenant should beware of repairing covenants with additional wording. A covenant to ‘keep’ a building in repair also means ‘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.
• A covenant to ‘keep the property in good condition’ is more onerous than a plain covenant to keep it in repair. It can mean that the tenant is obliged to carry out some works, even though there is no actual disrepair.

Question 5

Interplay between the landlord’s insurance covenants and the tenant’s repair covenant (insured risks and vitiation)

Answer 5

• Where the landlord is insuring the building, the tenant should ensure that they are not responsible for repairing damage arising as a result of insured risks as this type of damage should be covered by the insurance provisions in the lease.
• However, there is usually a clause stating that if the damage to the property has been caused by the negligence or omission of the tenant, then the tenant is responsible for repairing damage. If that is the case it is considered that insurance policy has been vitiated.

Question 6

Alterations and absolute covenants - Section 3 notice

Answer 6

Section 3 Notice

A tenant of business premises can use the provisions of s 3 Landlord and Tenant Act 1927 to enable it to carry out ‘improvements’, even where the lease contains an absolute prohibition.

Timing

A tenant who wants to carry out improvements can serve a notice on the landlord detailing its proposals. The landlord has 3 months within which to object and if it does, the tenant has the right to apply to the court for authorisation to carry out the improvements.

Add value to the property

The court can authorise the improvements if they add to the letting value of the property, are reasonable and suitable to the character of the property and do not diminish the value of any other property of the landlord.

Question 7

Alterations and absolute covenants - Section 3 notice (Landlord to do the works himself)

Answer 7

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 the rent.

• A tenant is under no obligation to accept an offer by the landlord to carry out the works and may withdraw its notice, the landlord then has no right to carry out the works and increase the rent.
• However, if the tenant rejects the landlord’s offer, the court cannot give the tenant authority to do the works itself.
• If the landlord does not offer to carry out the works itself, or object to the improvements within 3 months (or if the court authorises the work), then the tenant may lawfully carry them out, even if the lease contains an absolute covenant against the works.

Question 8

Alterations and qualified and fully qualified covenants

Answer 8

Qualified covenant

A qualified covenant against alterations prohibits alterations without the landlord’s prior consent. Under s 19(2) of the Landlord and Tenant Act 1927, a term is implied into a qualified covenant against making ‘improvements’ that the landlord cannot unreasonably withhold its consent.

• In relation to improvements, therefore, the landlord will not be able to withhold their consent unreasonably.

Fully Qualified covenant

• However, a tenant would prefer a fully qualified covenant that makes it clear that the landlord cannot withhold their consent unreasonably to an alteration, whether or not it amounts to an improvement.

Question 9

Landlord’s consent for user and planning covenants

Answer 9

• Unlike alienation covenants, there is no statutory implication that the landlord’s consent cannot be unreasonably withheld for user covenants.
• The landlord cannot charge a fine or an increased rent as a condition of giving consent, if no structural alteration is involved (s 19(3) of the Landlord and Tenant Act 1927.

Question 10

Who drafts a lease ?

Answer 10

The landlord’s solicitor will draft the lease and submit it to the tenant’s solicitor for approval.

The tenant’s solicitor will probably make amendments.

Question 11

What is the purpose of an agreement for lease ?

Answer 11

Because it will be useful where there is going to be a delay between agreeing the lease/ underlease and actually granting it but one (or both) of the parties requires the other to be bound into the transaction.

Question 12

Deduction and investigation of title for leases ?

Answer 12

• Landlord is required to deduce the freehold title for leases for a term of more than 7 years to enable the tenant to obtain registration with an absolute title.
• If the lease is for 7 or less, Landlord is not required to deduce title.

Question 13

Pre-contract enquiries and searches for leases ?

Answer 13

The landlord’s solicitor should provide the tenant’s solicitor with the following documents:

(a) draft agreement for lease (if applicable);
(b) draft lease/ underlease;
(c) evidence of the freehold/ headlease title;
(d) copies of any relevant planning consents; and
(e) evidence of the lender’s consent to the grant of the lease/ underlease (where relevant).

• The tenant’s or undertenant’s solicitor will want to undertake the same searches and enquiries as if the client were buying the freehold.
• There will normally be some additional queries relating specifically to a lease. For example, the tenant will want to see details of the landlord’s insurance policy.

Question 14

Pre-completion formalities of leases ?

Answer 14

• The lease/ underlease is normally prepared in two identical parts, the lease and counterpart.
• The lease is executed by the landlord and the counterpart by the tenant. On completion, these are exchanged.
• Parties sign a top copy of the lease.
• The landlord will sign the lease itself in readiness for completion and the counterpart should be sent to the tenant’s solicitor for execution by the tenant (at least 5 days before the completion date)

Question 15

Completion and post-completion steps for leases ?

Answer 15

On completion, in addition to matters relevant to a freehold transaction, the landlord will receive:

(a) the counterpart lease/ underlease executed by the tenant/ undertenant;

(b) any premium payable for the grant (less any deposit paid on exchange of contracts);

(c) an apportioned sum representing rent payable in advance under the lease/ underlease.

The landlord should give to the tenant:

(a) the lease/ underlease executed by the landlord;

(b) if not already done, properly marked or certified copies of the freehold title deeds (unregistered land only);

(c) where relevant, a certified copy of the consent of the landlord’s lender to the transaction.

Tenant’s solicitor to:

a) Register lease for a term over 7 years

b) If the new lease has been mortgaged, the new mortgage will be registered on the same time

c) Pay SDLT or LTT

Question 16

Registration of leases and timing of registration

Answer 16

Unregistered Freehold

• For the grant of a lease for a term which exceeds seven years, the tenant’s application to the Land Registry is for first registration and the application must be made within two months of completion of the grant of the lease.
• In unregistered land, a legal lease for seven years or less is binding on all subsequent owners of the land, irrespective of notice.

Registered Freehold

• For the grant of a lease for a term which exceeds seven years, application must be made within the priority period conferred by the OSR1 search result.
• A legal lease for seven years or less is not capable of being registered with its own title at the Land Registry. In registered land, such a lease will take effect as an overriding interest.

Question 17

What are SDLT and LTT chargeable on for leases ?

Answer 17

SDLT (England)

• SDLT is chargeable on the VAT inclusive amount of the premium and the net present value of the rent so it is necessary to determine if VAT is chargeable because the landlord has opted to tax the property.
• Payment must be submitted to HMRC within 14 days of completion of the grant of the lease.

(b) LTT (Wales)

LTT is charged on the leases of non-residential property in a similar way to SDLT, ie on the premium and on the rental element using the NPV of the rent.

Question 18

Deduction and investigation of title for the assignment of a lease

Answer 18

• The provision for deduction of the freehold title must be dealt with by special condition in the contract because neither set of standard conditions require the assignor to deduce the freehold title.
• If leasehold is registered with absolute title then there is no need to deduce.

Question 19

Pre-contract enquiries and searches for the assignment of a lease

Answer 19

• Same enquiries and searches as on a purchase of a freehold property.
• Additionaly:

a) See the insurance policy relating to the property
b) The receipt for the last insurance premium due.
c) See a copy of the receipt for the last payment of annual rent due under the lease to check that the assignor is not in breach of the lease.

Question 20

Landlord’s consent for the assignment of a lease

Answer 20

• If landlord consent is required then the existing tenant will apply for this.
• Landlord will want to investigate the assignee by requesting references, accounts etc.
• Landlord must notify the tenant/assignor within a reasonable time.

Question 21

Failure to obtain landlord’s consent before or on the completion date of the assignment

Answer 21

• The landlord’s consent must be given by or on completion of the assignment, otherwise the assignor is likely to be in breach of the assignment covenant in the lease.
• Assignment may fall through when the landlord refuses consent, whereas the dependent transaction would still be binding.
• SCs :
• Either party may rescind the contract by notice if the consent has not been given three working days before the completion date or if, by that time, consent has been given subject to a condition to which the buyer reasonably objects.

Although this allows contracts to be exchanged before the landlord’s consent is obtained, it gives rise to uncertainty as to whether the transaction will complete.

• SCPCs:
• Completion is postponed until five working days after the assignor notifies the buyer that consent has been given.
• The contract may not be rescinded until six months have passed since the original completion date. Either party can then rescind by serving notice on the other.

Question 22

Formality to assign eg TR1, Deed of assignment

Answer 22

Registered leases : TR1

Unregistered leases: deed of assignment

Question 23

Covenants for title (assignment of lease) - Conflict between repairing covenant and caveat emptor

Answer 23

• If an assignor is in breach of a repairing covenant in the lease, the lack of repair could involve them in liability to the assignee after completion under the covenants for title which will be implied in the transfer deed.
• However, the principle of caveat emptor makes it the assignee’s responsibility to check the physical state of the property and the assignor should not be expected to make any promises about it.
• The conflict between the promise implied by the covenants for title and caveat emptor is resolved by expressly modifying the covenants for title to exclude references to repair.

A suggested form of wording is as follows:

The covenants set out in section 4 of the Law of Property (Miscellaneous Provisions) Act 1994 will not extend to any breach of the tenant’s covenants in the lease relating to the physical state of the property.

Question 24

Breach of covenants, Indemnity covenant and AGA - Assignment of leases

Answer 24

Old Leases (granted before 1996)

For the assignment of old leases granted before 1 January 1996, an indemnity covenant from the assignee to the assignor is implied. That means assignor will remain liable for the assignee’s breaches.

New Leases (granted after 1996)

The assignor will usually be automatically released from future liability on the assignment and so will not require an indemnity.

However, assignor’s liability may be extended by an AGA in which case an express indemnity should be sought from the assignee.

Question 25

Pre-contract steps for the assignment of a lease

Answer 25

**Seller/Assignor** - See the lease for the requirement of consent - Apply for Landlord’s consent to the assignment and provide undertaking for Landlord’s costs - Prepare pre- contract package: draft contract, evidence of leasehold title (and possibly Landlord’s reversionary title), lease etc) - Send license to assign prepared by the landlord to the buyer **Buyer/assignee** - Investigate title (leasehold and possibly Landlord’s reversionary title), consider lease - Raise pre- contract searches and enquiries - Co-operate with assignor to obtain details Landlord will need to consider, eg references - Approve draft contract

Question 26

Pre-completion formalities for the assignment of a lease

Answer 26

1) Pre-completion searches (OS1 or K15 - against the name of the assignor) 2) License to assign a) The landlord’s solicitor will supply the final version (or ‘top copies’) of the licence, which must be by deed if it contains covenants. b) The assignor’s AGA can be contained in the licence or created as a separate deed.

Question 27

Pre-completion searches for the assignment of a lease

Answer 27

**Registered lease** - (OS1) should be carried out to check for any new entries - Gain a priority period (30 days) within which to register the transfer. **Unregistered lease** - Another land charges search (K15) should be made against the name of the assignor to check that no adverse entries have been made since the pre- exchange land charges search. - Ensure that the priority period of 15 working days covers completion of the assignment. **Company search**

Question 28

What is an Authorised guarantee agreement ? When is it entered and why ?

Answer 28

**Authorised Guarantee Agreement** - A written obligation (AGA) where the assignor (the outgoing tenant) is acting as the guarantor for the assignee (the new tenant). - The AGA should provide that the assignor’s liability does not extend beyond that of the assignee. **When is an AGA entered ?** - If the lease is a new lease granted on or after 1 January 1996, the landlord may have inserted the need for an AGA in the lease as a pre-condition to giving consent. **Why is an AGA entered ?** - Because in the assignment of new leases the assignor will usually be automatically released from future liability on the assignment. To be able to impose liability on the assignor and ensure the assignee complies with the covenants an AGA is entered.

Question 29

Completion steps for the assignment of a lease (exchange of documents between the assignor and assignee)

Answer 29

**The assignor will hand to the assignee**: (a) the lease (b) the transfer deed (TR1 or deed of assignment, as appropriate) (c) the licence to assign executed by the landlord (d) evidence of the freehold title in accordance with the contract (lease not registered or not registered with absolute title) (e) evidence of discharge of the assignee’s mortgage (f) copies of duplicate notices served by the assignor and its predecessors on the landlord in accordance with a covenant in the lease requiring the landlord to be notified of any dispositions (g) insurance policy (or copy if insurance is effected by the landlord) and receipt (or copy) relating to the last premium due (h) receipt for rent (and other outgoings for which the assignor wishes to claim reimbursement). **The assignee should hand to the assignor**: (a) money due in accordance with the completion statement (b) duly executed counterpart licence to assign (c) a release of deposit (only likely where the assignee is paying a premium).

Question 30

Post-completion steps for the assignment of a lease

Answer 30

**SDLT/LTT** o SDLT/ LTT is **payable only on any purchase price (not rent)** charged by the assignor, and is due at the same rates using the same procedure as for the sale of freehold land **Registration** - Registered leases Where the lease is already registered at the Land Registry, an application for registration of the transfer to the assignee should be made within the priority period given by the pre- completion OS1 search. - Unregistered leases a) An unregistered lease which, at the date of the transfer to the assignee, still has over seven years of the term unexpired will need to be registered at the Land Registry within two months of the assignment or will be void in respect of the legal estate. b) If the lease has seven years or less unexpired, it is incapable of registration with separate title **Notice of assignment** o If the lease provides for that the buyer's solicitor will serve notice to the landlord of the assignment to the buyer and notice of any new mortgage created

Question 31

Privity of contract and privity of estate - Assignment of leases

Answer 31

**Old leases (granted before 1996)** - Original tenant remains liable for the covenants under the lease for the full term of the lease, regardless of the fact that they may have assigned it to another tenant. - Landlord can sue the current tenant in privity of estate and - Landlord can sue the original tenant in privity of contract. **New leases (granted in or after 1996)** - Original tenant is released from liability for the covenants in the lease as soon as it assigns the lease to another tenant. - Current tenant is liable, original tenant can be liable if there is an AGA

Question 32

Remedies for breach of covenant to pay rent

Answer 32

1) Action in debt 2) forfeiture 3) Commercial Rent Arrears Recovery (only for commercial arrears) 4) pursue guarantors and/or rent deposit 6) damages

Question 33

Remedies for breach of covenant to repair

Answer 33

1) forfeiture 2) specific performance 3) damages 4) self-help/Jervis v Harris clause.

Question 34

Action in debt

Answer 34

Non-payment of rent is a debt and so if the current tenant, or one of the other parties mentioned above is liable for the rent, it can be recovered through the High Court or County Court. The Limitation Act 1980 puts a limitation of six years on recovery of rent.

Question 35

Commercial Rent Arrears Recovery (Requirements)

Answer 35

- At least 7 days of rent must be outstanding. - CRAR permits the landlord to enter the property and seize and sell goods belonging to the current tenant. - The landlord must give seven days’ notice of its intention to enter the premises and must use an enforcement agency to enter the premises to remove goods. - The landlord is not allowed to remove goods up to the value of £1350 which are necessary for the tenant’s business, such as computers or telephones. - Any items which are leased or bought on hire purchase cannot be taken. - If the tenant does not pay the arrears, the landlord may sell the goods, provided that this is done at a public auction and that the tenant is given at least seven clear days’ notice of the sale.

Question 36

Pursue guarantors and/or rent deposit

Answer 36

**a) Pursue guarantors** - If it is a new lease guarantor can only be pursued if there is an AGA - Whether under a new or an old lease, the landlord must serve a ‘default notice’ on any former tenants or their guarantors. - The default notice must be served within six months of the current tenant’s breach, otherwise the landlord will be unable to claim from the former tenant or their guarantor. **(b) Rent deposits** - Provided there is no breach of the terms of the rent deposit deed by the landlord, the landlord can draw upon the money as soon as the tenant is in breach of a relevant covenant in the lease, without taking court action for debt or exercising any other remedy in respect of the breach.

Question 37

Forfeiture for non-payment of rent

Answer 37

- Unlike the other remedies for non-payment of rent, forfeiture will bring the lease to end immediately and enable the landlord to gain vacant possession of the property. - To be able to use forfeiture, the lease must contain a forfeiture clause. - The landlord could forfeit either by taking possession through ‘peaceable re-entry’ (ie without force) or, if that is not possible, by obtaining a court order. - Court order is likely if the premises are not vacant - No formal demand is necessary - Tenant can apply for relief from forfeiture - A landlord can waive its right to forfeit by carrying out any act demonstrating an intention to continue the relationship of landlord and tenant so must be careful not to demand or accept rent after the breach has arisen.

Question 38

Relief from forfeiture

Answer 38

- The tenant can apply to the court for relief from forfeiture, subject to a condition that the tenant paid all arrears and costs.

Question 39

Forfeiture for breach of repair covenant

Answer 39

- The landlord must serve a s 146 notice on the tenant which will: 1) specify the breach. 2) require the breach to be remedied within a reasonable time if it is capable of remedy. 3) require the tenant to pay compensation for the breach. - If the tenant does not comply with the notice, then the landlord can forfeit either by peaceable re- entry or by court order. **Leases that were originally for seven years or more and has at least three years left unexpired** - In this case, the Leasehold Property (Repairs) Act 1938 applies and requires the s 146 notice to include notification of the tenant’s right to serve a counter notice within 28 days. - If the tenant serves a counter notice, then the landlord can only proceed to forfeit with the leave of the court.

Question 40

Specific Performance

Answer 40

Specific performance is available to force the tenant to comply with the positive covenant. However the courts will grant this relief only where other remedies are not appropriate.

Question 41

Damages (breach of repair covenant)

Answer 41

In the case of a breach of the covenant to repair, two important statutory provisions may mean that the landlord cannot recover the full cost of the repairs: (i) Damages are limited to the amount by which the landlord’s freehold building has diminished in value as a result of the disrepair. ii) The diminution in the capital value of the building attributable to the disrepair may be less than the cost of the repairs, so this course of action may not be attractive to the landlord. (iii) If the landlord wants to sue for damages for a lease granted for 7 or more years with more than 3 years left to run notice must be served on the tenant. iv) The tenant has a right to serve a counter notice within 28 days and if the tenant does so, the landlord cannot proceed any further with the claim without leave of the court.

Question 42

Self-help/Jervis v Harris clause

Answer 42

If the lease has a self-help clause: - Landlord can carry out the repair themselves and recover the cost of repairs from the tenant as a debt.

Question 43

Methods of Lease Termination

Answer 43

1) Effluxion of time 2) Surrender 3) Merger 4) Notice to quit (periodic tenancy) 5) Forfeiture 6) Termination by the landlord - s25 7) Break clause

Question 44

Termination of a lease - Effluxion Of Time

Answer 44

The expiration of a lease term due to a natural passing of time rather than from a specific action or event

Question 45

Termination of a lease - Notice To Quit (periodic tenancies) (provided no security of tenure/ LTA 1954)

Answer 45

- A notice to quit is a document from a landlord or owner notifying a tenant that they need to leave the rented premises. Notices of this nature give a tenant a specific date to vacate and settle unpaid rent or rectify other concerns which violate the terms of the lease. - A yearly tenancy is determined by at least half a year’s notice expiring at the end of a completed year of the tenancy

Question 46

Termination of a lease - Surrender

Answer 46

- Both parties agree the tenant will give up possession to the landlord. - To negotiate a surrender landlord often gives a financial incentive. - On surrender, the lease is said to merge in the landlord’s reversion and is extinguished. - To be legal, surrender must be by deed.

Question 47

Termination of a lease - Merger

Answer 47

The parties agree that the landlord will transfer the reversion to the tenant i.e tenant will buy the freehold.

Question 48

What is 'Security of Tenure' ?

Answer 48

- The security of tenure provides the tenant with the automatic right to remain in possession of leasehold business premises after the lease term reaches its natural end. If the landlord or the tenant is seeking to end the lease, this can only be done if a notice to quit is issued. - To be protected by the LTA 54 there must be a tenancy (not a licence) of a property which is occupied by the tenant (personally, or through the medium of an agent or manager) for business purposes.

Question 49

Tenancies outside the scope of Landlord and Tenant Act 1954 and Security of Tenure

Answer 49

1) Licence 2) Tenancy at Will 3) Fixed-term contracted out of LTA 54 4) Short leases: Fixed-term leases whose term does not exceed six months provided that: (a) the lease does not contain a term allowing for its renewal or extension beyond this; and (b) the tenant has not been in occupation for more than 12 months when the lease comes to be granted.

Question 50

Termination by the landlord - Section 25 notice

Answer 50

- A section 25 notice informs the tenant that the landlord requires the premises back at the end of the term or that they wish to enter into a new lease with the tenant. - The landlord must serve the notice between 6 and 12 months before they wish the existing tenancy to end. - The notice must state a statutory ground for termination of the lease.

Question 51

Landlord’s grounds of opposition – s 30 grounds

Answer 51

**Discretionary Grounds** a) Tenant’s failure to repair (b) Tenant’s persistent delay in paying rent (c) Tenant’s substantial breach of other obligations (e) Tenancy is an underletting of part (rarely used) **Mandatory Grounds** (d) Landlord has offered alternative accommodation (which must be suitable to the tenant’s needs and on reasonable terms) (f) Landlord intends to demolish or reconstruct and could not reasonably do so without obtaining possession (i) L to show it has a firm and settled intention to carry out the relevant work (will need to obtain evidence in the form of builders quotes or planning permission if it is required). (ii) work needs to be extensive (reconstruct or demolish) (g) Landlord intends to occupy the holding for its own business or as a residence. (i) This ground is **not open to a landlord who has owned the freehold for less than five years, unless it was the landlord who granted the tenancy**

Question 52

Renewal lease by the tenant - Section 26 notice and Compensation

Answer 52

**Section 26 Notice** - A tenant may serve a section 26 notice on the landlord requesting a new lease at the end of their lease term. - The notice must be served within 6 to 12 months before the end of the lease term. - The landlord then has 2 months to inform the tenant whether they are willing to enter into a new lease or to raise a statutory ground to terminate the tenancy. **Compensation** - If the landlords opposition grounds are not based on the fault of the tenant, the tenant is entitled to statutory compensation. - However, compensation is not available if suitable alternative premises are available.

Question 53

Amount of compensation - section 26 notice

Answer 53

* If occupied for less than 14 years, the rateable value of the holding. * If occupied for at least 14 years, twice the rateable value of the holding * Rateable value is set by the UK Government Valuation Office Agency