Granting a lease

What interest does a lease grant?

Exclusive possession for a determinate term shorter than the landlord's interest.

What is exclusive possession?

The right to exclude others, subject to reserved landlord entry rights.

What two forms can a tenancy term take?

A fixed term or a periodic tenancy.

What formality is required for a legal lease exceeding three years?

It must be granted by deed.

What formalities may apply to a lease of three years or less?

It may be oral or written, subject to the relevant requirements.

What is the landlord's reversion?

The interest retained by the landlord, entitling them to possession when the lease ends.

What does FRI mean in a commercial lease?

Full repairing and insuring; the tenant bears the relevant repair and insurance costs.

Why do institutional landlords favour FRI leases?

They seek rental income without deductions for repair and insurance costs.

What controls does a commercial landlord typically seek?

Control over use, occupation, alterations, repair and rent increases.

What flexibility does a commercial tenant generally seek?

Suitable use, term, assignment rights and protection against onerous rent increases.

What are the two main forms of commercial lease term?

Fixed-term and periodic tenancy.

How is expiry calculated for a 10-year term 'from and including' 24 March 2019?

It expires on 23 March 2029.

How is expiry calculated for a 10-year term 'from' 24 March 2019?

It begins on 25 March 2019 and expires on 24 March 2029.

What is a break clause?

A contractual right to terminate the lease early on specified terms.

What types of break clause may be included?

Landlord-only, tenant-only or mutual.

What is a rolling break clause?

A right to terminate at any permitted point after a specified date.

How does rent usually operate under a short commercial lease?

Market rent is paid periodically, usually without a substantial premium.

How does rent usually operate under a long lease?

A premium is paid initially, with a relatively low annual ground rent.

What ground rent restriction applies to most new long residential leases from 30 June 2022?

Ground rent is generally restricted to a peppercorn.

How is commercial rent commonly expressed and paid?

Expressed annually but paid quarterly.

What are the traditional rent quarter days?

25 March, 24 June, 29 September and 25 December.

What are the modern quarter days?

1 January, 1 April, 1 July and 1 October.

When is rent payable if the lease expressly requires payment in advance?

At the beginning of the relevant rental period.

When is rent payable if the lease is silent?

In arrears.

How is rent dealt with where completion occurs part-way through a rental period?

It is apportioned between the parties for the relevant period.

What additional payments may be defined as rent in a commercial lease?

Insurance rent and service charges.

What is required for a landlord to increase rent during the contractual term?

An express rent review clause.

What is stepped rent?

Rent increases to predetermined amounts at specified stages.

What is index-linked rent?

Rent adjusted by reference to an agreed inflation index.

What is turnover rent?

Rent calculated by reference to the tenant's turnover at the premises.

What is an open market rent review?

Reassessment of rent by reference to the market rental value of comparable premises.

What is an upwards-only rent review?

A review under which rent cannot fall below the existing rent.

How is a rent review dispute usually resolved?

By determination by an independent specialist valuer under the lease.

What is a hypothetical lease in an open market rent review?

The assumed letting used by the valuer to calculate market rent.

What basic assumptions are commonly made in an open market rent review?

Vacant premises and a willing landlord and tenant.

How is tenant non-compliance with repairing covenants treated in a rent review?

The tenant is generally assumed to have complied with the covenants.

How is damage to the premises commonly treated in a rent review?

The premises are assumed to have been repaired or rebuilt.

How may a landlord's breach of covenant affect rent review?

It may be relevant and reduce the achievable rental value.

What tenant-related factors are commonly disregarded at rent review?

Occupation, business goodwill and voluntary improvements.

Why are voluntary tenant improvements disregarded in rent review?

To avoid increasing rent because of improvements funded voluntarily by the tenant.

What evidence is relevant when determining open market rent?

Rents for comparable premises of similar size and location.

How is an agreed reviewed rent normally recorded?

In a rent review memorandum signed by landlord and tenant.

From what date does a reviewed rent normally take effect?

The contractual rent review date, potentially with arrears and interest.

What does 'demised premises' mean?

The part of the property granted to the tenant under the lease.

Who normally repairs premises under a lease of a whole building?

The tenant, subject to the repairing covenant.

How are repairing obligations normally allocated under a lease of part?

Tenant repairs its demise; landlord repairs common parts and recovers costs.

Why must a lease of part define the demise carefully?

To establish responsibility for floors, ceilings and other building elements.

What is a full repairing covenant?

An obligation to keep the premises in good repair, potentially requiring initial repairs.

Why should a tenant obtain a survey before accepting a full repairing covenant?

To identify existing disrepair for which the tenant may become responsible.

What is a qualified repairing covenant?

An obligation limited by reference to the premises' condition at lease commencement.

What document supports a qualified repairing obligation?

A schedule of condition recording the premises' initial state.

How may a tenant seek to limit an obligation to replace defective items?

Require replacement only where the item is beyond economic repair.

Why is 'good repair and condition' more onerous than 'good repair'?

It can impose obligations extending beyond physical disrepair.

What protection should tenants seek for newly constructed premises?

Exclusion of inherent and structural defects from repair and service charge obligations.

Who normally arranges buildings insurance in a commercial lease?

The landlord.

How is the buildings insurance premium recovered under a lease of the whole?

The tenant reimburses the landlord for the full premium.

How is the buildings insurance premium recovered under a lease of part?

Tenants contribute proportionate shares.

What is insurance rent?

The amount payable by the tenant towards the landlord's insurance costs.

What normally happens if premises are damaged by an insured risk?

The landlord claims and reinstates; rent is generally suspended during reinstatement.

What may happen if insured premises cannot be reinstated within the specified period?

The lease may permit termination by notice.

What is the purpose of the RICS Code for Leasing Business Premises?

To promote fair negotiations and comprehensive heads of terms.

To whom does the RICS Code apply?

RICS members and RICS-regulated firms.

How should lease negotiations be conducted under the RICS Code?

Constructively and collaboratively.

What advice must be given to an unrepresented party under the RICS Code?

Inform them of the Code and recommend professional advice.

Who is responsible for ensuring compliant heads of terms are agreed?

The landlord or letting agent.

What status should written heads of terms have?

They should be expressly subject to contract.

What principal matters must written heads of terms cover?

Premises, term, breaks, rent, review, repair, assignment, underletting, use and alterations.

What should heads of terms specify about rent?

Initial rent, payment frequency, VAT, rent-free periods and review arrangements.

What should heads of terms specify about repairing obligations?

The extent of repair obligations, appropriate to the term and condition.

What protection does the RICS Code recommend for qualified repairing obligations?

A schedule of condition.

What protection does the RICS Code recommend for newly built premises?

Appropriate protection against inherent construction defects.

What does the RICS Code recommend concerning rent suspension?

Suspension following relevant insured or uninsured damage, subject to exceptions.

What is an agreement for lease?

A binding contract to grant a lease, often conditional on specified events.

When might parties use an agreement for lease?

When they wish to commit before completion conditions are satisfied.

Who normally prepares the initial draft lease?

The landlord's solicitor.

What title-related work does the landlord's solicitor undertake before exchange?

Deduce title, check necessary lender consent and answer title queries.

What title-related work does the tenant's solicitor undertake?

Investigate title and consider covenants affecting the tenant.

Which CPSE forms are identified for lease enquiries?

CPSE1 and CPSE3.

What should a tenant's solicitor do if the tenant wishes to limit searches?

Explain the risks before agreeing to omit searches.

What document is commonly annexed to an agreement for lease?

The agreed form of lease.

What deposit is usually paid on exchange of an agreement for lease?

Usually none.

What does the landlord's solicitor prepare before lease completion?

Executed lease documents, replies to requisitions and a completion statement.

What sums may require apportionment on lease completion?

Yearly rent, insurance rent and service charges.

Which priority search is identified for a registrable lease of whole?

OS1.

Which priority search is identified for a registrable lease of part?

OS2.

Which search is identified for a non-registrable lease?

OS3, which checks title but does not confer priority.

What company-related search may be needed before completion?

A company search against the landlord for insolvency issues.

How is completion of a commercial lease commonly effected?

Payment of completion monies and agreement to date the executed leases.

What tax steps follow completion of a lease?

Submit any required SDLT or LTT return and pay the tax due.

When is lease registration required according to the notes?

Where the lease is registrable; the notes identify leases of seven years or more as relevant.

How can the procedure be simplified when no agreement for lease is exchanged?

Combine pre-exchange work with pre-completion work.