🏡Property 5: Grant of a Lease and Underlease Flashcards
(97 cards)
1
Q
Leases disadvantages for landlords
A
□ Tenant may be unreliable/not pay rent
□ Tenant might not take care of premises=depreciation of investment
□ Income/capital not guaranteed, dependent on state of property market
2
Q
Leases disadvantages for tenants
A
□ Depreciating asset
□ No visible return
□ Landlord probs retain control and specify what tenant can do
□ Repairing obligations=expenditure
3
Q
Leases advantages landlord?
A
□ Positive covs easily enforced against subsequent owners in freehold land
□ Retain interest in freehold (asset)
□ Retain control of management=ensure value preserved
□ Can recover all expenditure (service charge)
□ Steady income
4
Q
Leases advantages tenant?
A
□ Flexible-short term
□ Can negotiate break clause to terminate before end of fixed term
□ No capital outlay (but may need to pay capital sum (premium) at start)
□ Business capital not tied up in premises
5
Q
11
What will a typical commercial lease contain?
A
- Prescribed clauses
- Commencement
- Interpretation (definitions)
- Grant of the Lease (operative part)
- Ancillary rights
- Rights excepted and reserved
- Annual rent
- Rent review
- Tenants covenants
- Landlords right to enter on breach and repair covenant
- Re entry and forfeiture
6
Q
What do the prescribed clauses contain in a typical commercial lease and what leases are they relevent to?
A
Summary of important details in lease and info needed by LR to complete registration
Relevant to leases:
□ after 19 June 2006
□ Granted from registered land
□ Compulsorily registrable
7
Q
What will the commencement of the lease detail in a typical commercial lease?
A
*Starts with ‘this lease’
*Date of grant
*Names/addresses of parties
*Registered: LR heading at top of 1st page
8
Q
What are the ‘interpretations’ and ‘grant of lease’ for in a typical commercial lease?
A
Interpretation (definitions)
Grant of the Lease (operative part)
9
Q
What are ancillary rights in a typical commercial lease?
A
Tenants rights over other land enabling them to use property better
eg. Lease of part will contain to use common reception areas
10
Q
What are ‘Rights excepted and reserved’ in a typical commercial lease?
A
rights in favour of landlord
11
Q
What is a Self help/Jervis v Harris clause?
A
Allows landlord to recover cost of repairs as a debt NOT a damages claim so can avoid statutory limitation on pursuing damages claims:
1. LL can enter property to check compliance with tenants repair covenant
2. If breach, serve notice specifying works needed to remedy
3. If T fails to start work within specified period or is not proceeding diligently with works, landlord may enter, carry out works and recover costs from tenant
12
Q
What are the 3 options for term of a lease?
A
- Fixed term: lease automatically expires at end of fixed term (may have a break clause)
- Periodic tenancy: continues indefinatley from period to period until party gives notice
- Tenancy at will: Tenant occupies indefinitely with permission of landlord on terms that tenancy may be terminated by either party at any time
13
Q
Notice length to end a periodic tenancy?
A
length of 1 period of lease EXCEPT yearly=6mo notice
14
Q
Why are tenancy at wills not good for commercial tenants
A
uncertain
15
Q
What are the types of leasehold covenant?
A
- Absolute: Tenant CANNOT do stated action according to lease
- Qualified: Tenant CAN with landlord consent
- Fully qualified: Tenant CAN with landlord consent which cannot be unreasonably witheld
16
Q
What is a full Repairing and insuring lease (FRI)
A
Protect landlord from incurring any expenditure that cant be recovered from tenant =landlord gets clear rental stream
17
Q
Repair covenant
Which parts of the building are tenants and landlords normally responsible for?
A
Tenant: non-structural parts of building
Landlord: structural parts and common areas
18
Q
Repair covenant
How do landlords normally pass the cost of repair to tenants in lease of part?
A
service charge
19
Q
Repair covenant
Must there be disrepair before a tenant has to repair?
A
Yes, physical condition deteriorated from previous physical condition
20
Q
Repair covenant
Does the prop need to be kept in perfect repair?
A
No, just render it fit for occupation of a reasonably minded tenant of the class likely to take it
21
Q
Repair covenanr
Is repair the same as renewal?
A
No, repair is restoration by renewal/replacement of parts/whole not renewal/replacement of whole
Q of fact-nature/age of prop at date of lease
22
Q
Repair covenant
What does ‘keep in repair’ mean
A
Put in repair=may have to do work even if no disrepair
23
Q
Repair covenant
Does a tenant have to give back landlord a prop ‘wholly different’ from that leased to them
A
No but can oblige tenant to remedy an inherent defect in design/construction if the only way is repair
24
Q
Insurance
When the landlord is ensured, what should the tenant check?
A
that they’re not responsible for repairing damage arising as a result of insured risks
25
# Insurance
Who is normally responsible for insuring the property?
*Letting of whole=tenant could be solely responsibly
*BUT more common to use Multi occupation method -where landlord insures with cost passed to tenant as separate insurance rent
26
# Insurance
Insurance: what are 'insured risks' and what is it common to end a list of insured risks with ?
Inclusive list of risks landlord must insure against
End with: 'such other risks as the landlord may reasonably require' (as may insure against unlikely/expensive risks and new ones aren't covered )
27
# Insurance
What value should a property be insured to?
'full reinstatement value' (will inc cost of demolition, site clearance, professional fees, allowance for inflation)
28
# Insurance
What covenants will ususally be in insurance for commercial property?
1. By tenant to **pay** for insurance policy (usually as sum reserved as rent for policy and loss of rent if tenant unable to use)
2. By landlord to use insurance proceeds to **reinstate** property
29
# Insurance
What is a rent suspension provision in insurance of commercial property and why will a landlord normally be happy to include one?
Suspends rent during period prop cant be occupied following insured risks (or would continue to be payable)
LL happy bc they can insure against loss of rent (however, this is normally limited to 3y so landlord may try to limit rent suspension accordingly)
30
# Insurance
Why may a termination provision be included?
Because otherwise, lease will only be frustrated in exceptional circumstances=lease will often give landlord right to terminate lease if reinstatmenet impossible
Tenant should try and insure they have the same right
31
# Insurance
What is the interplay between the landlord’s insurance covenants and the tenant’s repair covenant?
1. Landlord uses insurance proceeds to reinstate property, the premium having already been recovered from the tenant as rent.
2. Wont receive rent during reinstatement but will get equivelent sum under loss of rent insurance policy also paid for by T
32
# Alterations
Why will a landlord want an alterations covenant in the lease?
Because in the absence of alterations covenant, tenant can make any changes it wants
33
# Alterations
What are absolute covenants against alterations commonly used for?
structural and exterior alterations
34
# Alterations
Does an absolute covenant against alterations mean the tenant cant do absolutely anything?
No, s3 LTA: tenant of **business premises** can carry out **improvements** even if lease contains absolute prohibition:
1. serve notice on LL w proposals
2. LL has 3mo to object and if they do, court can authorise improvements if:
* add to letting value
* easonable and suitable for character
* dont diminish value of LL other props
4. OR Landlord can offer to carry out works for reasonable increase in rent
35
# Alterations
Under s3 LTA if the landlord offers to carry out the work in a reasonable time, is the tenant obliged to accept?
No, may withdraw notice BUT then court cant give tenant authority to do the work itself
36
# Alterations
Why may a landlord include a qualified/fully qualified covenant against alterations?
So they can retain control by imposing conditions about how works are done and if they'll need to be removed and prop reinstated at end of term
37
# Alterations
Will landlord normally allow demountable partitioning without their consent?
Yes
38
# Alterations
What improvements can a tenant usually claim compensation for and how?
* Tenant using **s3** can claim compensation for improvements at and of term that **'add to letting value of holding'**
* Must claim **within statutory time limits**
39
# User
Why are landlords unlikely to restrict user to a single use and what will they do instead?
Might put off tenant and depress rent on rent review
SO may use qualified cov to keep use within 1 use category
40
# User
Does statute imply that landlords consent cannot be unreasonably withheld for user covenants?
No
41
# User
Can a landlord charge fine or increase rent as condition of giving consent for change of use?
No (provided no structural alteration involved)
42
What is alienation? What are the 5 types?
Generic term inc diff ways of creating an interest in the prop for benefit of a 3rd party
Types:
1. Assignment (transferring lease to someone else)
2. Underletting (allowing someone else to occupy)
3. Charging (mortgaging)
4. Sharing occupation (eg. licence)
5. Parting with possession
43
Why will a landlord usually insist on restrictions in lease against tenants dealing with leasehold interest and what type of covenant regarding alienation is contained within most leases?
Because in the absence of restriction in lease, tenant can dispose of interest in anyway they like
Most commonly inc: absolute covenant against all types of alienation but permit certain types of alienation on controlled terms
44
# Assignment
What will a commercial lease normally allow in terms of assignment?
Assignment of whole property
45
# Assignment
What statutory provisions re relevant to assignment of a lease?
**1. S19(1)(a) LTA 1927:** Implies consent wont be unreasonably witheld for qualified cov(=converts qualified cov into fully qualified cov)
**2. S19(1A) LTA**: Can pre-agree:
1. **conditions** required for consent
2. **circumstances** where consent can be refused
And **neither can be held to be unreasonable**
**3. S1(3) LTA:** Where theres a **qualified cov on assignment** and the tenant has made a **written application** for consent, landlord must within a reasonable time:
1. Give consent (except where reasonable not to)
2. Serve written notice of decision, also specifying:
– conditions if relevant
– Reasons for withholding (if withholding)
46
# Assignment
What are the CoA guidelines on landlords reasonableness under s19(1)(a):
1. purpose of a fully qualified cov is to protect LL from having its premises used/occupied in an undesirable/ by undesirable tenant
2. landlord cant refuse consent to assignment on grounds which have nothing to do with of landlord- tenant relationship
3. Unnecessary for LL to prove conclusions which led it to refuse consent were justified, if they were conclusions which might be reached by a reasonable person in the circumstances.
4. may be reasonable for LL to refuse consent on the ground of the proposed assignees purpose, even if purpose is not forbidden by lease.
5. generally LL must only consider own relevant interests. But unreasonable not to consider detriment to T if consent refused, if detriment would be extreme and disproportionate in relation to the benefit gained by LL.
6. Q of fact in each case, depending on all the circumstances.
47
# Assignment
Examples of when consent to assign has been reasonably withheld (6)
1. references unsatisfactory
2. longstanding and extensive breach of repairing cov
3. Assignee could compete with landlords business
4. Assignment would reduce value of reversion
5. intended use detrimental to premisis/landlords tenant mix policy
6. Assignee would (unlike assignor) acquire protection under Part II Landlord and Tenant Act 1954
48
# Assignment
Examples of where consent to assign has been unreasonably withheld (3)
1. refused in attempt to obtain advantage for itself
2. Minor breaches of repairing cov
3. Premises on market for 18mo, rent was significant and slight harm to landlord would be outweighed by prejudice to tenant
49
# Assignment
What should be considered when considering if it would be unreasonable to refuse if landlord anticipated breach of user covenant bt an assignee?
what reasonable landlord would do (may be reasonable for landlord to withhold consent where assignee proposed to use premises in breach of terms of lease but sometimes refusal on just this ground would be unreasonable)
50
# Assignment
What leases does S19(1A) Landlord and Tenant Act 1927 apply to?
commercial leases made after 1 Jan 1996
for assignment only
51
# Assignment
What conditions and circumstances are commonly agreed under S19(1A) Landlord and Tenant Act 1927?
CONDITIONS
1. assignor gives AGA
2. assignee provides guarantors
CIRCUMSTANCES
1. Assignor **up to date with rent**
2. and/or assignee is of **sufficient financial strength** to enable it to comply with tenants covenants in lease
52
# Underletting
What is an underlease?
* Lease created by someone whos already a tenant
* Is an estate in land
53
# Underletting
How long can an underlease last and why
Must be at least 1day shorter than headlease
OR is assignment of headlease
54
# Underletting
where does the risk of new occupier not being able to pay rent rest?
with head tenant rather than landlord
55
# Underletting
If an under tenant defaults who is probably liable and why?
Original tenant as will probs have given AGA to landlord on assignment
56
# Underletting
How can the origional tenant control an under tenant?
□ If tenant retains headlease, can exercise landlords control over undertenant and may be able to prevent undertenant going into default
57
# Underletting
What may be a landlord concerns re underletting
**1. May end up with undertenant as direct tenant**
a.HT lease forfeited and UT (whos lease normally forfeited at same time) appliesfor relief from forfeiture
b. HT lease surrendered or disclaimed by liquidator
b. Both leases expire and UT exercises statutory right to app for a new lease under Landlord and Tenant Act 1954 but HT doesn’t
2. **Landlord has to go through head tenant to get anything done** because Head tenant legally remains liable for tenant covs under lease but undertenant is in occupation and has physical control of prop
58
# Underletting
what statutory provisions apply when the landlords consent is needed?
**S19(1)(a) LTA 1927:** turns qualified to fully qualified cov
**S1 Landlord and Tenant Act 1988:**
Where theres a fully qualified cov on underletting and the tenant has made a written application for consent, landlord must within a reasonable time:
*Give consent (except where reasonable not to)
*Serve written notice of decision, also specifying:
- Any conditions if relevant
-Reasons for withholding (if withholding)
59
# Underletting
What happens if conditions for underletting imposed in the alienation covenant arent complied with?
lease is at risk of forfeiture (and underlease could be at risk too)
60
# Underletting
What conditions for underletting are commonly imposed in the alienation covenant?
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1. Terms of underlease mirror headlease
2. Annual rent at least as high as headlease and reviewed at same time/ terms
3. exclude rights under LTA 1954
4. Undertenant enters direct cov with landlord to perform tenants covs in underlease and headlease
5. No further underletting of prop permitted
61
# Charging
What do most leases say about charging?
Mostly prohibited as if borrower defaults on mortgage, lender may take possession of prop or exercise its power of sale
62
# Sharing occupation
Is sharing occupation usually permitted in a lease?
Sometimes permitted but only with companies in the same group as the tenant and on terms such that no tenancy is created
63
# Parting with possession
Is Parting with possession usually permitted in a lease and what does it include?
* Normally prohibited other than assignment or underletting
* Is a catch all inc assignment, underletting and informal arrangements
64
# Leases general
What is the RICS Code for Leasing Business Premises?
Is a professional statement=all RICS (Royal Institute of Chartered Surveyors) members must observe mandatory parts and need a justifiable good reason to depart from its other best practice statements
Failure to observe=negligence claim/disciplinary action
65
# Leases general
Who is not bound by the RICS Code for Leasing Business Premises
* Landlords
* Landlords solicitors
* Non-RICS surveyors and agents
66
# Leases general
What are the mandatory requirements in RICS code for leasing business premises?
1. Lease negotiation approached in **constructive and collaborative** manner
2. Any party not represented by RICS member/other prop professional must be **advised of codes existence and recommended to obtain professional advice**
3. Transaction terms recorded in **writing**, subject to contract and as a minimum, specify:
□ **Identity and extent of premises** and special rights granted
□ **Length** of term, inc renewal/break rights
□ Rent **amount** , frequency and frequency and basis of rent review
□ Liability for payment of **insurance** premiums
□ **Ability to assign**, underlet, charge or share premises
□ Repairing, permitted use and alterations **obligations**
67
# Leases general
What are the best practice parts of the RICS Code for Leasing Business Premises?
*Prop clearly defined, lease plan provided and tenant granted all necessary rights for use
*State length of term and break provisions
*Allow either party to start rent review and tenant made aware of method where appropriate to allow time to take professional advice
*contain standard provisions for assignment of whole, underletting of whole/part, charging, sharing with group companies
*Repairing obligations appropriate to length of lease and condition of premises
*Controls on alterations/use no more restrictive than necessary to protect the value of the property and any adjoining or neighbouring premises of the landlord
68
# Granting a lease
What will a landlord accept a tenant on the basis of and what will they consider for this?
**Strength of covenant:**Ts ability to pay rent and perform covs
To assess, will consider:
1. **References** from prev landlord
2. **Guarantee** from parent company/bank financing transaction/one or more directors
3. **Rent deposit**
69
# Lease general
What is a rent deposit?
sum from which landlord can withdraw sums if rent due under lease is unpaid
70
# Granting a lease
Who drafts the lease?
Landlords solicitor who'll submit to tenants sol for approval/amendments
71
# Granting a lease
Why is the scope for negotiating an underlease more restricted than a lease?
Because:
*it must be at least 1d shorter
*AND it is likely the headlease requires terms of underlease mirrors the terms of headlease
72
# Granting a lease
What is an agreement for lease, who drafts it and when it is useful
* Contract
* Common to by pass straight to completion BUT useful if there will be a delay between agreeing the lease/underlease and actually granting it and a party requires the other to be bound by the transaction
* Drafted by landlords solicitor (in same way sellers sol drafts contract)
73
# Granting a lease
In an agreement for lease, what must the particulars of sale state?
1. Prop is leasehold
2. Term to be vested in tenant
74
# Granting a lease
What should be attached to the agreement for lease?
Final agreed form of lease/underlease
75
# Granting a lease
What do the SC/SCPC provide about an agreement for lease
□ lease/underlease to be in form annexed to draft contract
□ Landlord should engross lease/underlease and supply tenant with the engrossment at least five working days before completion date
76
# Granting a lease
Who deducts title
Landlords solicitor to check their client is entitled to grant it
77
# Granting a lease
Why might a landlords mortgage cause problems for deduction of title?
will probs contain prohibition or restriction on borrower/landlords ability to grant lease of prop so lender permission must be obtained
78
# Granting a lease
why will a tenant want the landlord to deduce the freehold title?
Because unless freehold already registered, absence of freehold title will prevent tenant from obtaining absolute leasehold title
( If landlords title registered, tenant can check under open register)
79
# Granting a lease
Deduction of title: when can the tenant/under tenant call for the deduction of freehold/leasehold title?
**LEASE:**Only for grant of lease over 7y (SC/SCPC-LL must deduce such title so T can obtain absolute title)
**UNDERLEASE**
a. Headlease registered with absolute title: n/a (but check headlease)
b. Headlease unregistered:
* UT can call for headlease and all subsequent assignments for last 15y
* Can only call for deduction of freehold for grant of lease over 7y
* (if HT unable to comply, must exclude this requirement by special condition)
80
# Granting a lease
What will need to be done if the head tenant is unable to comply with a request to provide head lease and all subsequent assignments within last 15y?
need to exclude this requirement by special condition
81
# Granting a lease
How is title investigated?
same as freehold
82
# Granting a lease
Pre contract searches and enquiries: what should landlords sol should provide tenants sol with:
| 5
1. draft agreement for lease (if applicable)
2. draft lease/ underlease;
3. evidence of the freehold/ headlease title
4. copies of relevant planning consents
5. evidence of the lender’s consent to the grant of the lease/ underlease (where relevant).
83
# Granting a lease
What pre contract searches and enquiries should the tenant/undertenants solicitor do?
same searches as freehold PLUS landlords insurance
84
# Granting a lease
When reporting to the client, what should the tenants solicitor explain?
tenant’s obligations under the lease/ underlease and the danger of losing the lease through forfeiture for breach of covenant
85
# Granting a lease
For completion of a lease, what additional things will the landlord receive and also give the tenant?
RECIEIVE
1. counterpart lease/underlease executed by tenant/ undertenant;
2. premium payable for the grant (less deposit paid on exchange)
3. an apportioned sum representing rent payable in advance under the lease/ underlease.
GIVE TENANT
· executed lease/ underlease (executed by them)
· if not already done, properly marked or certified copies of the freehold title deeds(unregistered land only);
· where relevant, a certified copy of the consent of the landlord’s lender
86
# Granting a lease
What is a licence to underlet?
formal consent to underletting in form of tripartite doc entered into by head-landlord, head tenant and undertenant
87
# Granting a lease
What is a normal condition of consent to underlet?
* Undertenant must enter **direct cov** with head landlord to perform covs in both headlease and underlease (EXCEPT to pay rent and only applies as far as headlease covs relate to underlet prop)
* Likely obligation on part of head tenant to pay head landlords costs for approving underletting and granting the licence
88
# Leases general
How is a direct covenant enforceable by the landlord?
Direct covenant creates contractual relationship enabling head landlord to sue undertenant for any breaches of headlease or underlease
89
# Granting a lease
How is SDLT calculated and what are the rates?
Potentially payable on **VAT inclusive amount of premium and rent**
Non residential:
Calculate SDLT on premium same as freeholf
Rental element:
1. Identify Net Present Value (NPV) (rent payable over term +discount future payments by 3.5% per annumn)
2. SDLT payable on NPV at following RATES:
* NPV £0-£150k=0%
* portion of NPV from £150,001-£5mill=1%
* portion of NPV above £5mill=2%
90
# Granting a lease
How is LTT calculated and what are the rates?
Charged on leases of non residential prop on permium and rental element using NPV
1. Premium: same as freehold BUT 0% band for premiums extending to £225k not avaliable if relevent rent is over £13,500, rate of 1% applies instead. ('Relevent rent' normally highest rent payable in any year across term of lease)
2. Charged on NPV at following RATES:
* NPV £0-£225k=0%
* Portion of NPV from £225,001-£2mill=1%
* Portion of NPV above £2mill=2%
91
# Granting a lease
Timeframe for paying SDLT to HMRC and LTT to WRA
SDLT: within 14d completion of grant of lease
LTT: 30d completion of grant of lease
92
# Granting a lease
What leases are not capable of being registered with their own title and how are they binding?
Legal lease for 7y or less:
a. Registered land=is overriding interest under LRA 2002, whether or not tenant in actual occupation
b. Unregistered land=binding on all subsequent owners of land, irrespective of notice
93
# Granting a lease
What types of leases can be registered and where?
legal lease EXCEEDING 7y registerable with own separate title number and if landlords title is registered, will also be noted on landlords file
94
# Granting a lease
What will a tenant need to do if its granted a lease out of an unregistered freehold?
app to LR for first registration, within 2mo completion
95
# Granting a lease
On first registration, how may the leasehold title be classed as?
◊ Absolute
◊ Possessory
◊ Qualified
◊ Good
96
# Granting a lease
What does good leasehold title mean?
registrar satisfied title to leasehold sound but has no access to superior title (where freehold registered with less than absolute title, good leasehold title may be regarded as title defect)
97
# Granting a lease
Time limit for tenant applying for registration of lease where the freehold is registered?
within priority period conferred by OSR1
