UNIT 6 - Assigning a Lease and Rent Review Flashcards
(20 cards)
A solicitor acts for the tenant of a retail unit (the ‘Property’) under a lease granted in 2015. The lease contains a covenant not assign, underlet, charge, hold on trust, part with or share possession or occupation of the property in whole or in part, except that the tenant may, with the landlord’s consent, assign the whole of the property. There are no other provisions relating to alienation in the lease. The tenant wishes to dispose of the lease and has found another retailer who is interested in the Property. However, the tenant is concerned that the landlord may refuse consent to an assignment of the lease because the other retailer is not as financially strong as the tenant.
Which of the following is the best advice to the tenant about whether the landlord will be able to refuse consent for the proposed assignment of the lease?
A) The landlord cannot prevent the tenant from assigning the whole of the Property as it wishes.
B) Provided the tenant has made a written application for consent, the landlord must give consent for the assignment unless it is reasonable not to do so.
C) Statute allows the landlord to insist on the tenant giving an authorised guarantee agreement for the assignee as a condition of giving its consent to this proposed assignment.
D) The landlord will be prevented from withholding its consent because statute implies into this covenant for assignment a proviso that the landlord’s consent will not be unreasonably withheld.
E) If the tenant is unable to obtain the consent of the landlord, the tenant should enter into a licence with the other retailer instead.
CORRECT ANSWER B - The covenant against assignment of whole of the property in the
lease is a qualified covenant and s19(1)(a) Landlord and Tenant Act 1927 implies into any qualified covenant that it be deemed to be subject to a proviso that such consent is not to be unreasonably withheld. Where there is a qualified covenant on assignment (whether the proviso that consent is not to be unreasonably withheld is express or implied by statute) and the tenant has made a written application for consent, the landlord must within a reasonable time give consent, except in a case where it is reasonable not to give consent (s 1 Landlord and Tenant Act 1988).
Option A is not the best advice as it would be reasonable for a landlord not to consent to an assignment to a proposed assignee who is not financially strong enough to pay the rent and perform the other covenants in the lease.
Option C is wrong; s 19(1A) Landlord and Tenant Act 1927 allows for the landlord and the tenant to agree conditions and circumstances in which it would not be unreasonable for
the landlord to refuse consent and such conditions often include that the assignor agrees
to give an authorised guarantee agreement for the assignee, but such conditions and circumstance must be agreed in advance. The facts indicate that the lease does not contain any such conditions and circumstances.
Option D correctly states the effect of s 19(1)(a) Landlord and Tenant Act 1927 on a qualified covenant, but the landlord is still able to withhold consent where it is reasonable to do so, eg if the proposed assignee is not financially strong enough to pay the rent and perform the other covenants in the lease.
Option E is not good advice as the lease contains an absolute covenant against sharing occupation, which would include allowing the other retailer into the property under a licence.
A solicitor acts for a landlord of a high street retail unit (the ‘Property’). The tenant wants to remove the existing shop front, enlarge the hole in the front wall and install bi-folding doors instead. The lease contains tenant covenants not make any external or structural alteration to the Property and not to make any non-structural alteration to the Property without the consent of the landlord.
Which of the following statements is the best advice to the landlord in this situation?
A) The landlord will have to consent to the alterations as if it does not, the tenant will be able to use a statutory procedure to carry out the alterations and claim compensation from the landlord at the end of the term.
B)The landlord can prevent the alterations being carried out as the relevant covenant in the lease is absolute.
C) The landlord can insist that the alterations are carried out by the landlord in return for an increase in the annual rent.
D) The landlord cannot refuse consent for the alterations as statute implies into the relevant covenant in the lease a term that the landlord cannot unreasonably withhold its consent.
E) The landlord can refuse consent to the alterations, but the tenant may be able to carry them out using a statutory procedure.
CORRECT ANSWER E - The proposed works are external and structural alterations and thus fall within the scope of the absolute covenant. However, they are not necessarily ‘improvements’ for the purposes of s 3 Landlord and Tenant Act 1927 so even though the tenant has a right to serve notice and apply for authorisation to carry out the alterations, it will be up to the court to decide 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. Option A therefore overstates the position. It also overstates the position on compensation; even if the alterations do add to the letting value of the holding, the lease is likely to contain a tenant’s covenant to remove all tenant’s alterations at the end of the term so there will be nothing left in respect of which to claim compensation.
Option B is not the best advice as the tenant may use the statutory procedure in s 3 Landlord and Tenant Act 1927 even where the relevant covenant in the lease is an absolute prohibition.
Option C also overstates the position; the landlord cannot insist on being able to do the alterations itself in return for an increase in the annual rent. This will only become possible if the tenant serves a notice under s 3 and even if it does, the tenant is under no obligation to accept an offer by the landlord to carry out the alterations and may withdraw its notice.
Option D is wrong as the relevant covenant in the lease is absolute, so there is no term implied by statute that consent will not be unreasonably withheld.
A landlord is proposing to let some retail premises to a clothes shop which has only just begun trading. The prospective tenant is concerned that it might not be able to afford the rent, should it increase on review, as its business is not yet established and it cannot predict the performance of its business over the 15-year term with any certainty at this stage. The landlord insists that there must be some form of rent review provision in the lease.
Which of the following types of rent review provision is the most appropriate to address the tenant’s concerns?
A) A fixed increase rent review.
B) An index linked rent review.
C) A rent review based on the tenant’s turnover.
D) An open market rent review.
E) An upwards-only open market rent review.
CORRECT ANSWER C - A turnover rent review will be directly linked to the turnover of the tenant’s business and should therefore only increase in line with the turnover of the business.
A fixed increase rent review (option A) would not be as suitable on the facts, as the tenant does not want to commit to any predictions as to the success of the business over the term. An index linked rent review (option B) is linked to an external index, such as the Retail Prices Index, so will increase in line with inflation regardless of the fortunes of the tenant’s particular business.
Open market rent reviews (options D and E) will reflect the rental market as a whole, not
the tenant’s particular business, so do not address the tenant’s concerns. Option E will be particularly harsh on the tenant as it locks in increases achieved in previous rent reviews even if the rental market has fallen and/or the tenant’s business is in trouble.
A solicitor is acting for a tenant who is taking a lease of a shop for a term of exactly seven years. The landlord’s freehold title is unregistered. The lease has now been completed.
Does the lease have to be registered with its own title at the Land Registry?
A) Yes, because the landlord’s freehold title is unregistered.
B) Yes, because the lease is for a term of over three years.
C) Yes, because the lease is for a term of seven years.
D) No, because it is not possible to register a lease unless the freehold is already registered.
E) No, because it is not possible to register a lease unless the term exceeds seven years.
CORRECT ANSWER E - This is a lease for a term of exactly seven years. A legal lease for seven years or less is not capable of being registered with its own title at the Land Registry, so options A, B and C are wrong. Option D is not the best answer as leases of over seven years must be registered with their own title at the Land Registry irrespective of whether the freehold title is registered.
Yesterday a landlord granted a lease of office premises in England to a tenant for a term of 10 years. The consideration for the lease is the payment of a commercial, open-market rent with a premium of £100,000. The landlord opted to tax the property for VAT purposes before the lease was granted.
Which of the following statements best describes the position on taxation for this transaction?
A) The tenant may need to pay stamp duty land tax (‘SDLT’) on the VAT-inclusive amount of the rent.
B) The tenant may need to pay SDLT on the VAT-inclusive amount of the premium.
C) The tenant may need to pay SDLT on the rent, exclusive of VAT.
D) The tenant may only have to pay SDLT on the VAT-inclusive amount of the premium.
E) The tenant may need to pay SDLT on the VAT-inclusive amounts of the rent and the premium.
CORRECT ANSWER A - On the grant of a lease, SDLT is potentially payable both on any premium charged by the landlord and the rent reserved by the lease. Where VAT is chargeable (because the landlord has opted to tax the property before the grant of
the lease), SDLT is charged on the VAT-inclusive amounts. This means that option C is incorrect on VAT. However, SDLT will not be charged on the premium in this instance as
the applicable rate for consideration not exceeding £150,000 is 0%. Here the VAT-inclusive amount of the premium is £120,000. So options B, D and E are wrong as they all refer to the payment of SDLT on the premium.
A solicitor is acting for a proposed undertenant who is taking an underlease of a commercial property for a term of five years. The proposed landlord is the tenant under
a lease of the property granted last year for a term of 10 years. The lease was registered with absolute leasehold title. The superior landlord is the freehold owner of the property and the superior landlord’s title to the property is unregistered. The undertenant wants the solicitor to investigate the superior landlord’s freehold title.
Which of the following statements is the best advice as to what the proposed landlord should be expected to deduce by way of title to the freehold?
A) The proposed landlord will not have to deduce title to the freehold because it is unregistered.
B) The proposed landlord will have to deduce title to the freehold as the proposed undertenant is legally entitled to call for it.
C) As the proposed landlord’s title is registered with absolute leasehold title, there will be no need for it to deduce the freehold title.
D) The proposed landlord may not be able to deduce title to the freehold as it was not entitled to call for it when its lease was granted.
E) The proposed landlord should not have to deduce title to the freehold as the undertenant will be able to obtain this information under the open register rules.
CORRECT ANSWER C - The proposed landlord will have registered its lease within two months of grant because leases of over seven years must be registered with their own title at the Land Registry irrespective of whether the freehold title is registered. As the proposed landlord’s lease is registered with absolute leasehold title, the best class of title available, then there is no need to see the freehold title.
Option A is oversimplified as there are circumstances in which a tenant would be expected to deduce title to the freehold to a prospective undertenant. Option B is misleading on two counts; the general law allows an undertenant to call for the freehold title only when the headlease is unregistered, and then only where the underlease is for a term of more than seven years; here the headlease is registered and this underlease is for a term of five years. Option D is misleading as the proposed landlord was entitled to call for the freehold interest last year as its lease was granted for ten years, ie a term of more than seven years. Option E is wrong as the open register rules allow third parties to inspect registered titles and in this case, the freehold is unregistered.
TRUE OR FALSE:
The list below is an accurate list of all the documents that would be included in the pre-contract package:
A draft contract,
Official copies of the leasehold title
FALSE - The seller’s solicitor should provide a copy of the lease. Note: there is no need to include the freehold title because the lease is registered with absolute title.
TRUE OR FALSE:
The pre-contract searches and enquiries on assignment of a lease are the same as on the sale of a freehold property
TRUE - The searches are largely the same but in addition the assignee will need to see the insurance policy relating to the property and the receipt for the last insurance premium due and also 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.
TRUE OR FALSE:
After exchange of contracts, the landlord’s solicitor will prepare a completion statement for the buyer’s solicitor which will include a figure for the apportionment of the rent.
FALSE - Completion is unlikely to take place on the date rent is due to be paid under the lease and so the assignor will have paid the rent in advance. Consequently, the buyer needs to be informed how much it needs to pay on completion to reimburse the seller proportionately for the rent already paid. However, this statement will be prepared by the assignor’s/seller’s solicitors, not the landlord’s solicitors.
TRUE OR FALSE:
the sellers solicitor will be responsible for drafting the purchase deed.
FALSE - Conventionally, it is the buyer’s solicitor that drafts the purchase deed (which will be a transfer). This is the same as in a freehold transaction.
TRUE OR FALSE:
The transfer will need to contain a clause modifying the covenants for title in respect of repair.
TRUE - If the assignee sells with full or limited title guarantee, the covenants for title include a promise that the assignee has complied with the tenant’s covenants in the lease, including repair. 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 modifying the covenants for title to exclude references to repair. This is covered in both sets of standard conditions in the contract, but there must be an express modification of the implied covenants for title in the transfer deed itself.
TRUE OR FALSE:
If your client gives an authorised guarantee agreement (‘AGA’), there will be no need for the assignee to give your client an indemnity covenant in the transfer.
FALSE - If the assignor gives an AGA, it will remain responsible for non-performance of the tenant’s covenants under the lease. Therefore, it will insist that the assignee gives it an indemnity covenant which will be included in the transfer.
TRUE OR FALSE:
Once a buyer is found, two pre-completion searches that will be carried out by the buyer’s solicitor are an OS1 search at the Land Registry and a Company Search.
TRUE - The buyer’s solicitor would update their Company Search before completion (the seller is a company) and the Land Registry search would be an OS1 search.
TRUE OR FALSE:
After completion of the assignment, a notice confirming that completion has occurred should be sent by the buyer to the landlord.
TRUE - . Most leases and licences to assign require the assignee to notify the landlord of the assignment.
TRUE OR FALSE:
Stamp Duty Land Tax (‘SDLT’) will definitely be payable on the assignment.
FALSE - The key word in this statement is “definitely”. SDLT will only be payable if there is a premium (or purchase price) payable on the assignment above the threshold for SDLT (the same rates apply as in freehold transactions). At this stage, the client has yet to find a buyer, let alone agree terms, so we cannot say for certain whether any SDLT will be payable
TRUE OR FALSE:
Following completion of the assignment of the lease, the time limits for payment of any Stamp Duty Land Tax and registering the transaction with the Land Registry are the same as on the purchase of a registered freehold property.
TRUE - The time limits are the same.
A lease contains a qualified covenant to assign and one of the pre-agreed conditions in the lease is that the assignor enters into an authorised guarantee agreement (“AGA”).
Which one of the following statements is correct?
A. The landlord can insist on the assignor providing an AGA only where it is reasonable to do so.
B. The landlord can insist on the assignor providing an AGA whether or not it is reasonable to do so.
C. The entering into of an AGA by the assignor means that the assignor is released from future liability on any assignment.
D. The entering into of an AGA by the assignor means that only the assignor will be liable for breaches of the tenant’s covenants by an assignee.
E. The entering into of an AGA by the assignor means that the landlord must consent to the assignment.
CORRECT ANSWER B - . Where the requirement to enter into an AGA is pre-agreed and set out in the lease, the landlord can insist on its compliance whether it is reasonable to do so or not.
Option A is wrong because where the requirement to enter into an AGA is pre-agreed and set out in the lease, the landlord is not limited to requiring its compliance only where it is reasonable to do so.
Option C is wrong as this is the position if no AGA is entered into. If an AGA is entered into, the assignor is made liable for future breaches of the lease by the assignee.
Option D is wrong because if the assignor enters into an AGA, both the assignor and the assignee will be liable for breaches by the assignee.
Option E is wrong because even though an AGA has been provided, the landlord may still refuse its consent where it is reasonable to do so.
A rent review provision contains an assumption that the property is available to let in the open market “on the terms of this lease other than as to the amount of the annual rent and excluding the provisions for review of the annual rent”.
Considering just the wording of this assumption, which one of the following statements is correct?
A. This assumption will benefit the landlord.
B. This assumption will benefit the tenant.
C. This assumption is of neutral effect and will benefit neither the landlord nor the tenant.
D. This assumption means that the annual rent specified in the lease will be incorporated into the hypothetical lease of the property.
E. This assumption is fair because it means that the provisions for review of the annual rent will be taken into account on rent review.
CORRECT ANSWER A - This assumption should benefit the landlord because it states that the provisions for rent review are to be excluded from the hypothetical lease and this means that the reviewed rent is likely to be higher; a hypothetical tenant would pay more for the certainty of knowing that the rent would not go up for the whole of the term.
Options B and C are wrong for the reason stated above.
Option D is wrong because the assumption means the opposite of what is stated; it means that the annual rent specified in the lease will not be incorporated into the hypothetical lease. As the aim of the rent review is to vary the amount of rent, the rent specified in the lease should not therefore be incorporated into the hypothetical lease.
Option E is wrong because as drafted, the provisions for rent review will not be taken into account. It is therefore unfair on the tenant.
A rent review clause contains a provision disregarding “any effect on the rent attributable to any physical improvement to the property carried out after the date of this lease with all necessary consents, approvals and authorisations and not pursuant to any obligation to the landlord”.
Which one of the following statements is correct?
A. This is the only disregard found in a typical commercial property lease.
B. This is an unusual disregard as the landlord should benefit from such improvements made to the premises.
C. This is a common disregard and ensures the tenant does not pay increased rent for improvements it has carried out.
D. This provision allows the tenant to carry out improvements to the premises provided it obtains all necessary consents.
E. This provision contains an agreement that the tenant is not obliged to carry out improvements.
CORRECT ANSWER C - It is common for a tenant’s voluntary improvements to be ignored (disregarded) on rent review, because otherwise they would be taken into account and this could lead to the tenant paying an increased rent if they have added value.
Option A is wrong as a typical lease for a commercial property will contain a number of disregards. Other common disregards include, for example, disregarding goodwill attached to the property which has been generated by the tenant.
Option B is wrong because it is a common disregard; it is common because it is considered to be unfair for a landlord to get a benefit from such improvements (that is improvements made voluntarily by the tenant with all necessary consents etc).
Option D is wrong because it does not allow the tenant to carry out improvements to the property; it is simply an instruction to the parties on how to treat any such improvements which have been made when they are determining the level of rent on review. The question of whether or not the tenant is allowed to carry out the improvements is typically addressed in an alterations clause elsewhere in the lease.
Option E is wrong because the wording “and not pursuant to any obligation to the landlord” does not mean that there is no obligation on the tenant to carry out improvements. It means that for the improvements to be disregarded, they must have been done voluntarily by the tenant, not in compliance with a lease obligation.
Question 4
A rent review clause contains a provision assuming “that the tenant has fully complied with their obligations in this lease”.
Considering just the wording of this assumption, which one of the following statements is correct?
A. The result of this provision is that any disrepair of the property will lower the open market rent.
B. This provision is unfair on the landlord because it means that any disrepair of the property for which the tenant is liable will not be taken into account at rent review.
C. This provision is unfair on the tenant because it means that the landlord will not be penalised if the property falls into disrepair.
D. This provision is unfair on the tenant because it means that the landlord will benefit from a windfall.
E. This provision is needed because otherwise any disrepair caused by the tenant’s failure to comply with its repair obligations could result in a lower rental value.
CORRECT ANSWER E - Without this assumption, any disrepair caused by the tenant’s breach of the repairing covenant could adversely affect the rental levels as a hypothetical tenant would not pay as much for a hypothetical lease of a poorly repaired property as it would for one where the tenant had kept the property in the state of repair required by the lease.
Option A is wrong as the effect of this provision is the opposite of that stated; it means that the revised rent is assessed as if the tenant had complied with its lease covenants (including its repair obligation), so that the rental value should not be adversely affected.
Option B is wrong because the effect of this provision is that any disrepair caused by the tenant will not be taken into account and this benefits the landlord.
Option C is wrong because such an assumption is not generally considered to be unfair on tenants; instead, to allow a tenant to benefit from a lower rent caused by their own breach of covenant would be considered to be unfair to a landlord.
Option D is wrong because what is being described here is the unexpected benefit that a landlord would receive if the rent review took account of a tenant’s voluntary improvements, not the effect of an assumption based on a tenant’s compliance with obligations which it agreed to perform in the lease.
