Unit 5 – Procedure for Granting Lease / Underlease

Question 1

Who drafts the lease?

Answer 1

Landlord’s solicitor.

Question 2

When to use an agreement for lease?

Answer 2

– The contract is useful in situations where there will be a delay between the agreement of the lease/underlease and the granting of it, and one (or both) of the parties requires the other to be bound by the transaction.

– Agreement for a lease must:

• Be in writing,
• Contain all the terms expressly agreed by the parties
• Be signed.

Question 2

What should the lease document contain?

Answer 2

– Particulars of sale must state that the property is leasehold and give details of the term to be vested in the tenant.

– Final agreed lease/underlease should be attached to the agreement with an obligation in the agreement for the tenant to take a lease/underlease in that form on the date of completion.

– Incumbrances must be disclosed and the attached lease/underlease should contain an indemnity for future breaches of any covenants affecting the title.

– SCPC 11.2.3 / Standard Condition 8.2 = provides for the lease/underlease to be in the form annexed to the draft contract, and for the landlord to engross the lease/underlease and supply the tenant with the engrossment at least 5 workings days before completion date.

– “Engrossment” = The final printed version of a particular document that is then going to be signed by the parties.

Question 3

When is a tenant entitled to call for a deduction of freehold title?

Answer 3

General rule = a tenant is not entitled to call for a deduction of the freehold title unless the transaction is the grant of a lease for a term of more than seven years.

– Where the grant of a lease has a term of more than 7 years, SC 8.2.4 (SCPC 11.2.4) requires the landlord to deduce such title as would enable the tenant to obtain registration with an absolute title at the Land Registry.

– If landlord’s title is registered, the tenant will be able to check the landlord’s title under the Open Register rules.

Question 4

If the tenant is one of an underlease, when are they entitled to a deduction of title?

Answer 4

Registered:

• If headlease is registered with absolute leasehold title, there is no need to see the title to the freehold.
• The headlease itself and the official copies for the headlease title must be reviewed.

Unregistered:

– The general law entitles the undertenant to call for the headlease and all subsequent assignments under which the headlease has been held for the last 15 years.

– General law = undertenant is only entitled to call for deduction of the freehold title where the transaction is the grant of a lease for more than 7 years.

Question 5

What documents should the landlord’s solicitor provide the tenant’s solicitor with?

Answer 5

1. Draft agreement for lease
2. Draft lease/underlease
3. Evidence of the freehold/headlease title
4. Copies of any relevant planning consents; and
5. Evidence of the lender’s consent to the grant of the lease/underlease.
6. Details of landlord’s insurance policy.

Question 6

What is a licence to underlet?

Answer 6

Licence to underlet = tripartite document entered into by the head-landlord, headtenant and undertenant by which the head-landlord gives consent to the headtenant to underlet the property to the undertenant.

– Landlord’s consent must be given by or on completion of the underletting, otherwise the headtenant is likely to be in breach of the alienation covenant in the lease

Question 7

What is a typical condition to granting a licence to underlet?

Answer 7

Direct Covenant:

Typical condition of granting consent is that the undertenant is to enter into a direct covenant with the head-landlord to perform the covenants in both the underlease and the headlease.

– Direct covenant usually excludes the headlease covenants to pay rent and only applies in so far as the headlease covenants relate to the underlet property.

– Direct covenant creates a contractual relationship which enables the head landlord to sue the undertenant for any breaches of either the headlease (other than for non-payment of rent) or the underlease.

– Note – the head-landlord will need to obtain a new direct covenant on each and every assignment of the underlease from the proposed assignee.

Question 8

What are the key provisions in a licence to underlet?

Answer 8

 Consent of the head-landlord to the grant of the underlease

 Direct covenant from the undertenant to the head-landlord.

 Obligation on the part of the headtenant to pay the head-landlord’s costs for approving the underletting and granting the licence.

Question 8

Pre-completion formalities of a lease/ underlease

Answer 8

1) A top copy/engrossment of the lease/underlease and counterpart will need to be made and it is these that the parties will sign.

2) Counterpart must be sent to the tenant’s solicitor within at least 5 working days before contractual completion date (if SC 8.2.5 or SCPC 11.2.5 apply).

3) The lease must be created with the correct legal formalities (in writing, a deed and signed). (check chapter 5.3).

4) Unless completion takes place on a day when rent under the lease/underlease falls due, a proportionate amount of rent calculated from the date of completion until the next rent payment day will be payable by the tenant on completion (should be agreed in advance). // Apportionment of rent etc.

Question 9

On completion, what does the landlord receieve?

Answer 9

(a) 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.

Question 10

On completion, what does the landlord give the tenant?

Answer 10

(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.

Question 11

Is SDLT chargeable where a lease is granted and on what?

Answer 11

1. Any capital sum being paid (referred to on the grant of a lease as a ‘premium’) and
2. On the amount of the rent.

Question 12

How to calculate SDLT chargeable on the amount of rent?

Answer 12

For non-residential property, the SDLT payable on any premium is calculated on the same basis as for the consideration on the sale of freehold land.

Rental element = first calculate the ‘Net Present Value’ (NPV) of the rent and SDLT is then calculated using this figure. 

NPV calculations = Work out how much rent is payable in total over the term of the lease (including any VAT) and then discount rental payments to be made in future years by 3.5% per annum to compensate for the fact that future rent received will have a lower value than rent received today.

 SDLT is chargeable on the VAT inclusive amount of the premium and the rent so it is necessary to determine if VAT is chargeable because the landlord has opted to tax the property.

Question 13

When does SDLT need to be paid to HMRC?

Answer 13

Within 14 days of completion of the grant of lease.

Question 14

When does LTT need to be submitted to Welsh Revenue Authoirty?

Answer 14

Within 30 days of completion of grant of lease.

Question 15

Registration of a legal lease for 7 years or less …

Answer 15

– Not capable of being registered with its own title at the Land Registry.

– Registered land = this type of lease will take effect as an overriding interest under the Land Registration Act 2022, whether or not the tenant is in actual occupation of the land. It is possible to note leases of over 3 years against the landlord’s title voluntarily.

– Unregistered land = a legal lease is binding on all subsequent owners of the land, irrespective of notice.

Question 16

Registration of a legal lease for a term exceeding 7 years …

Answer 16

– Registrable at Land Registry in its own right after completion, irrespective of whether the freehold title is registered. It will be registered with its own separate title and title number.

– Registered land = If landlord’s title is registered, it will also be noted against the landlord’s title. Tenant’s application is for registration of a dealing with the freehold title and the application must be made within priority period conferred by the OSR1 search result.

– Unregistered land = tenant’s application to the Land Registry is for first registration and the application must be made within 2 months of completion of the grant of the lease.

Question 17

What is “good leasehold title”?

Answer 17

Good Leasehold title:

 Will be awarded where the registrar is satisfied that the title to the leasehold interest is sound, but, having no access to the superior title, they are not prepared to guarantee the lease against defects in the freehold title or guarantee that the freeholder has the right to grant the lease.

 Good leasehold title will be given where the title to the freehold reversion is unregistered and the applicant for first registration of the leasehold title does not submit title to the freehold reversion with the application, or where the freehold is registered with less than absolute title.

 Good leasehold title may be regarded as a title defect as it may make it difficult to sell or mortgage the lease.

Question 18

What is a self-help / Jervis v Harris Clause?

Answer 18

Self-help’/ Jervis v Harris clause is a remedy for the landlord, allowing them to recover the cost of repairs as a debt and not a damages claim.

 Benefit of this is that the landlord is able to avoid the statutory limitations on pursuing damages claims imposed by the LTAs.

 Self-help clauses allow the landlord to enter the property to check compliance with the tenant’s repair covenant.

 Where there has been a breach, landlord can serve a notice specifying the works required to remedy the breach.

 If T fails to start the work within a specified period after service of notice, or is not proceeding diligently with these works, the landlord may enter, carry out the works and recover the cost from the tenant as a debt.

 I.e., a claim for damages is converted into a claim for debt, avoiding the statutory restrictions on recoverability.

Question 19

What is the effect of a direct covenant between a landlord and an undertennant?

Answer 19

The direct covenant creates a contractual relationship which enables the Landlord to sue the Undertenant for any breaches of either the Lease (other than for non-payment of rent) or the Underlease.

Question 20

What is excluded from the direct covenent between the landlord and undertenant?

Answer 20

The obligation to pay the annual rent is excluded from the direct covenant between the landlord and the undertenant and so the landlord can only recover the rent from the tenant and not the undertenant.