Leasehold - Memory

What is the role of 'Repair' in a lease?

Repair clauses explain what the tenant and landlord must do to maintain the property in good condition.

What does FRI stand for in commercial leasing?

'FRI' means Fully Repairing and Insuring, which requires the tenant to handle all repairs and insurance costs for the property.

What are the repair responsibilities for a lease of the whole?

tenant is responsible for all repairs, including interior, exterior, and structural aspects.

What are the repair responsibilities for a lease of part?

tenant handles only interior repairs, while the landlord manages common area upkeep.

What is a full repair covenant?

‘To keep the Premises in good repair’

What is a qualified repair covenant?

• ‘to keep the Premises in good repair but not to put the Premises in any better state of repair than it was in at the date of this lease as evidenced by the Schedule of Condition’

• Unlikely to be accepted by an institutional lender

What are the limits of repairing obligation in a lease?

Tenants are responsible for repairs only if the damage is beyond economic repair; they do not have to rebuild the property.

What is an inherent structural defect?

This is a flaw due to construction issues

• New construction building should have warranty for landlord

• Not tenant responsibility; should exclude that from tenant responsibility and service charge contribution

Who is responsible for building insurance in a commercial lease?

The commercial landlord is responsible for ensuring the building is insured.

What costs can the landlord recover from the tenant regarding insurance?

The landlord can recover the insurance premium, either the whole amount or a portion if it's a lease of part.

What is 'insurance rent'?

Insurance rent refers to the portion of rent that covers the insurance costs associated with the leased property.

What are some common insured risks in commercial property insurance?

Common insured risks include fire, explosion, lightning, earthquake, storm, flood, water tank overflow, and damage from vehicles or aircraft.

What types of damage are typically covered in commercial insurance?

Coverage can include damage from riot, civil commotion, strikes, malicious damage, subsidence, heave, and ground slip.

What are alterations in a lease context?

any changes made to the premises by the tenant.

What is the doctrine of waste regarding property alterations?

The doctrine of waste prevents tenants from making changes that would lower the property's value.

What types of alterations are typically permitted?

Internal, non-structural alterations are usually allowed under typical lease terms.

What is an absolute covenant regarding alterations?

alterations are not permitted at all, with no obligation for the landlord to consider changes.

What does a qualified covenant entail for alterations?

A qualified covenant permits alterations but requires the landlord's consent.

What does a fully qualified covenant require?

allows alterations with consent, and the landlord cannot unreasonably withhold consent.

What does 'consent' mean in the context of alterations?

Consent is a license for alterations, allowing tenants to make changes under certain conditions.

What are the usual conditions when a tenant receives consent for alterations?

• using good quality materials,

• complying with planning permissions,

• covering landlord costs, and

• reinstating the premises at lease end.

What does s19(2) LTA 1927 allow regarding alterations?

upgrade the qualified to fully qualified if it is an improvement from tenant's view

What is the statutory procedure for a tenant wishing to carry out improvements?

1. tenant must notify the landlord of their intention to improve

2. the landlord can object within three months.

What are the court’s considerations to approve improvements?

• Increase value of the property

• Reasonable and suitable to the character of the property

• Not reduce the value of other property to the landlord

• Landlord may offer to do the work and increase the rent, tenant does not have to agree but cannot ask court for permission

Can a landlord offer to complete the work for a tenant?

Yes, the landlord may offer to undertake the improvements themselves and negotiate a rent increase; the tenant can decline this offer.

User and planning clause

• What the lease allows what the tenant use the pemise for

• if silent in the lease, tenant can use in whatever way

• Be specific: a bread bakery or retail purpose

Preference for user clause

Landlord wish keep it narrow (specific)

tenant wish to have more flexibility

Change of use prohibition

• Depends on Absolute covenant, Qualified covenant or Fully qualified covenant

Details to change of use

• No upgrade from qualified to fully qualified user clause

• Landlord can give consent but cannot charge a lump sum or increase the rent

  • unless structural alterations are involved

• change of use require planning permission

What type of rent is typical for commercial leases?

Commercial leases typically involve market rent with short lease terms.

How is rent usually paid in commercial leases?

Rent in commercial leases is generally payable in advance.

What type of rent applies to residential leases?

Residential leases often involve ground rent associated with long lease terms.

How is rent typically paid in residential agreements?

Rent in residential agreements is usually paid in arrears.

What is strap rent?

Strap rent is a fixed increase in rent established for specific years throughout the lease.

What is turnover rent?

Turnover rent is calculated based on the tenant's sales performance at the property, common in retail leases.

What is index-linked rent?

Index-linked rent adjusts based on inflation measures, such as the retail price index.

What is an open market rent review?

most common type of rent review adopted by FRI leases; usually upward only

review based on comparable premises and certain principles

Process of open market rent review

1. comparison of rents of similar properties - size and location

2. Hypothetical lease - based on actual lease with assumptions and disregards

3. Independent valuer determine the rent

4. agreed by both parties

5. concluded with a rent review memorandum

What assumptions are considered for a hypothetical lease?

1. Vacant premise

2. Willing landlord and tenant

3. The tenant has complied with all its covenants under the lease

4. On the terms of the actual lease other than the rent payable

5. If damaged or destroyed, the premises have been repaired or rebuilt

What are disregarded improvements in the context of rent review?

1. Voluntary improvement by tenant

2. The effect of the tenant’s occupation on the rent

3. Goodwill attached to the tenant’s business

What happens if a rent review is completed within the 5th anniversary term?

Further Stamp Duty Land Tax (SDLT) may be payable

What is the implication if a rent review is not completed by the 5th anniversary?

No need to pay further SDLT

What is alienation?

• Existing tenant assigning the lease to a new tenant

• Disposal of all or part of tenant interest in the lease

Covenant against assignment

Usually an absolute covenant against assignment of part of the premise

s19(1)(a) landlord and tenant act 1927

• upgrade a qualified covenant into a fully qualified covenant

• Landlord must act reasonably to withhold consent

• Landlord must give decision in a reasonable time

  • Days or weeks; 28 days in case law

• Favour the tenant over the landlord

Reasonable ground to withhold consent

• Must relate to landlord tenant relationship

• Tenant mix policy in a shopping mall

• Inability to pay the rent / justifiable concerns (no reference)

Commercial lease concerns of assignment

1. Contain circumstances that parties agree - reasonable grounds for withholding consent 

2. Conditions may be imposed on assignment

3. Unregistered → use deed of transfer; registered → TR1

4. Institutional strength → covenant strength

Privity of contract

the ability of the original parties to a contract to enforce the obligations against each other, even after the contract has been assigned

Privity of estate

the ability of the landlord and tenant for the time to enforce the provisions of a lease against each other

Not all obligations are enforceable under privity of estate

Old lease

• Original tenant remains liable to pay rent and perform obligation - privity of contract

• New tenant only liable for certain covenants - privity of estate

New lease

• Landlord and Tenant Act 1995

• Lease after 1st of January 1996 - new lease

  • The original tenant is released from liability

  • All tenant covenants are passed to the new tenant

Authorised guarantee agreement

• Original tenant agree to guarantee the obligations of the next tenant

• A condition of assignment in commercial lease

• If lease is silent - landlord can only insist on an AGA if it is reasonable

Aims of Code for Leasing Business Premises

• Improve the quality and fairness of negotiations on lease terms 

• Promote the issues of heads of terms → more efficient

What are 'mandatory requirements' in lease negotiations?

• ‘Must’ - RICS members and regulated firm must follow

• Constructive and collaborative lease negotiation

• Unrepresented party advised about the existence of the Code and recommended to seek professional advice

• Landlord is responsible for heads of terms compliance before the draft lease is circulated

What is included in the content of heads of terms of mandatory requirements

• Extent of the premises

• Length of terms and break rights

• Rent and rent review

• Repairing obligation

• Right to assign or underlet the lease

• Permitted use of property and if it can be changed

• Right to alter the property and obligations to put it back to original state

What defines 'good practice' in lease negotiations?

Good practice is indicated by 'should' statements, which members and firms must follow unless there are exceptional circumstances.

What are some considerations regarding rent in lease agreements?

• initial rent

• frequency of payment

• VAT implications

• rent-free periods

• rent review processes

• right to suspend rent if premises are damaged.

Repairing terms in good practice

• Obligation correspond to the length of term and premise condition 

• Schedule of conditions if having a qualified repairing obligation

• Protection against inherent construction defect in new built premise

Pre exchange Process for granting a lease or under lease - Landlord

1. Deduce the title

2. answer the enquiries

3. draft the lease

4. agreeement for lease if parties are not ready

5. Get the landlord signature and authority to exchange

6. Exchange of an agreement for lease

pre completion process for granting a lease or underlease - landlord

1. Prepare original and counterpart lease

2. Get the landlord signature and authority to complete

3. send to the counterpart for tenant to sign

4. prepare completion statement

   1. Apportion the annual rent, service charge and insurance rent

      • Caluclate the daily rate multiply the days

   2. Money due on completion

Pre exchange Process for granting a lease or under lease - Tenant

• Investigate the title

• Raise CPSE1 enquiries (freehold) AND CPSE3 enquiries (grant of a lease)

  • Tenant may not agree for cost of full investigation for short lease with limited repair and other obligation

• pre-contract enquiries and searches

  • LLC1 search

  • CON29 search

  • Environmental search

  • Water and drainage search 

  • Chancel repair search

  • Usual questions asked as if buying the freehold

• get tenant signature and authority for exchange (if there is agreement for lease)

pre completion process for granting a lease or underlease - tenant

• Get tenant signature

• Get the fund from client to complete

• Raise pre completion searches

  • OS1 for lease of whole (confer priority working days)

  • OS2 for lease of part (confer priority 30 working days)

  • OS3 to check if landlord is free to grant a lease

completion and post-completion steps

• Tenant solicitor send the monies to the landlord solicitor

• Agreed over phone to complete and date the executed lease

• Send the completed original and counterpart lease to each other

• Landlord solicitor

  • Send confirmation and main provisions of lease to landlord

• Tenant solicitor

  • Submit SDLT return and pay SDLT if necessary

  • Register the lease if >7 year or more

Process to assign a lease

1. deduction and investigation of title

2. precontract enquiries and searches

3. landlord consent

   1. Usually it is an absolute covenant which means the tenant must not do it without landlord consent and the landlord can unreasoably withhold consent

4. prepare deed of assignment and covenants for title

   1. TR1 as deed of assignment

5. precompletion formalities

6. authorised guarantee agreement

7. completion and post-completion steps

Pre-completion formalities

• Get parties to execute the licence to assign

• Prepare and send completion statement 

  • Money required

  • Any rent apportioned 

• Get the funds from assignee ready to complete

• Raise / Respond to requisition on title

• Raise pre completion search

  • OS1 search for lease of whole

  • OS2 search for lease of part

  • OS3 search for unregistered land

• Draft / Approve the deed of assignment and signature

completion and post-completion steps

• Send the completion money to the tenant solicitor

• Landlord, tenant and assignee solicitor agree on phone to complete and date the licence to assign

• Tenant and assignee solicitor agree on phone to complete and date the deed of assignment

• Assignee solicitor

  • SDLT or SDLT return

  • Register assignment if more than 7 years

  • Send notice of assignment to landlord solicitor

Licence to assign and licence to underlet

Get landlord consent over assignment and underletting which are usually subject to an absolute covenant; Landlord solicitor will draft it

privity of contract and how the licence deals with this

• The ability of the original parties to a contract to enforce the obligation against each other, even after the contract has been assigned

• No privity of contract between the landlord and the assignee or undertenant

• The licence contains a direct covenant given by the assignee or the undertenant to the landlord

Key provisions in the licence

1. Consent for limited time

2. Tenant agrees to pay landlord cost 

3. Assignee or undertenant convenants directly with landlord to observe lease obligations

4. Tenant AGA (only applicable in assignment)

5. Tenant not released from outstanding obligations

6. Annexures

Remedies for breach of a leasehold covenant

1. Action in debt

2. Commercial Rent Arrears Recovery

3. Pursue guarantors and/or rent deposit

4. Specific performance

5. Injunction

6. Damages

7. Self-help/Jervis v Harris clause

action in debt

• Issue court proceedings to recover a debt

• Limited to rent due in 6 years before issuing proceedings

• Expensive and costly

Forfeiture (re-entry)

• Landlord right to reenter the premise and take the premise back from tenant

• Bring the lease to an end before contractual term

• must include an express clause of forfeiture in the lease

Grounds of forfeiture

• Failure to pay rent - can forfeit immediately without 146

• Insolvency 

• Breach of covenants

  • Serve s.146 notice 

    • What are the breach?

    • How long does the tenant have to remedy the breach?

Advantage of forfeiture

• Damage to business reputation; block the access to the premise 

• Peaceable re-entry

  • Tenant may challenge

• Apply for court order to re-entry

  • Tenant is harder to challenge

Waiver of the right of forfeiture

• Landlord acts in a way that acknowledges the continuing breach of the lease

• Implied waiver

  • Landlord does an unequivocal act recognising the continuing existence of the lease

  • With knowledge of the breach in question and

  • Communicates the act to the tenant

Waiver - Types of breach

• One time breach

  • E.g. non payment of rent

  • Unlawful assignment or underletting

  • Insolvency

• Continuing breach - each day the breach continues

  • Failure to repair the premise

  • Breach of user covenant

  • Failure to comply with insurance obligations

Relief from forfeiture

• Tenant can apply to court for relief

• Discretionary - usually get relief from non payment of rent

• Court aims to put the parties back in the position in which they would have been had forfeiture not taken place

• Other paties having an interest in the lease

  • Mortgagee or undertenant can seek relief from forfeiture

Commercial Rent Arrears Recovery

• A self help remedy recovering rents from purely commercial property

• Cheaper and quicker than court proceedings

Requirements of CRAR

• The property must be purely commercial

• Minimum of 7 days of principal rent + VAT + interest (NOT service charge or insurance)

• Lease is not forfeited

Procedure of CRAR

1. Landlord appoint an enforcement agent approved by the court

2. Give 7 clear weekdays notice to enter tenant premise

3. Notice includes amount of debt and how to repay it, power used to enforce the debt and contract details of the enforcement agent

4. Notice expires - the agent enter the premise and control the goods belonging to the tenant up to the value the debt owed

5. Landlord gives another 7 clear days notice to sell the seized goods

Pursue guarantors and/or rent deposit

• Guarantee

  • Cover all tenant obligations, unpaid rent and any breach of tenant covenants

• Rent deposit

  • Usually for 6 months rent

  • Tenant will be required to top up the deposit after withdrawal

specific performance

• Order to the tenant to do something 

• Discretionary 

• Rare remedy - only if there is no other alternative

Injunction

• Order to the tenant not to do something

• E.g. unlawful assignment

Damages

• Contractual damage by court claim

• Measure of damage

  • Put landlord back in the position they would have been were it not for the breach of contract

• Landlord may not recover all costs

Self-help/Jervis v Harris clause

• Give landlord the right to enter the property, carry out any repair and recover the cost from the tenant

  • The cost is treated as a debt to the landlord and can berecovered in full

• No need to serve s.146 notice

Termination of a lease

• effluxion of time

  • Lease ends at the end of the contractual term

• Surrender

  • Tenant gives up the leasehold interest to the landlord

  • Need to agree with the landlord

• Merger

  • Tenant acquire landlord interest OR

  • Third party acquire tenant and landlord interest

Definition of Security of tenure

Any >6 months Fixed term or periodic tenancy occupied by the tenant for the purpose of a business

Details of Security of tenure

NOT agricultural, mining, service tenancies and fixed term tenancies under 6 months

usually lease of < 5 years and udnerleases

Contracting out process - Security of tenure

1. Landlord serves warning notice 

   1. Details and consequences of contracting out

   2. Serve before completing the lease

2. Tenant provides a declaration

   1. 14 days or more signed declaration

   2. 14 days or less statutory declaration

Implication of security of tenure

Holding over: Tenant has the right to occupy beyond the contractual term; cannot evict the tenant; can only end the occupation by certain methods

Tenant renewal lease

• Section 26 notice

  • Must have security of tenure

  • Has the lease more than 1 year

  • Minimum notice at least 6 months to 12 months before the proposed commencement date of the renewal lease

  • Landlord can serve counternotice in 2 months

termination by the landlord

• Section 25 hostile notice

• At least 6 - 12 months before the date of termination

Statutory grounds for counternotice or s.25 notice

• Breach of repair obligation

• Not paying rent

• Breach of other covenants

• Alternative accommodations

• Demolish or reconstruct the premises

• Landlord occupy the premise

friendly’ section 25 notice

landlord is willing to renew the lease to start the day after the date of termination

Mandatory grounds for objection

• Alternative accommodation

• Demolish or reconstruct the premise (compensatory)

• Landlord occupy the premise (compensatory)

Discretionary grounds for objection

• Breach of repair obligation

• Not paying rent 

• Breach of other covenant

Compensation calculation of the objection

• based on rateable value

  • X1 if the business has occupied <14 years

  • X2 if the business has occupied >=14 years

Rateable value

estimated annual rental value of premises, and is fixed by the local authority

may not be the market rent

Forfeiture of breach of repairing obligation

• more generous to tenants in this than other breaches

  • just fix it

procedure of forfeiture for breach of repairing obligation

1. serve s146 notice

2. tenant has 28 days to serve counter notice

3. landlord then must get leave from the court before proceeding

4. the measure of damage is the loss of value to landlord reversion, NOT the cost of repair