SQE FLK2: Property Practice (Leasehold Transactions) for SQE2
Studied by 0 people
Learn
Practice Test
Spaced Repetition
Match
Flashcards1/547
There's no tags or description
Looks like no tags are added yet.
Name | Mastery | Learn | Test | Matching | Spaced |
|---|
No study sessions yet.
548 Terms
What is a lease?
grant of a right to exclusive possession for an agreed time
estate in land providing the holder with rights of possession and use
contractual relationship between landlord and tenant
What is an assured shorthold tenancy?
Standard for renting residential properties (6 or 12 months)
Tenants pay market rent
What is a commercial lease?
Grant of a business tenancy of commercial property
Typically shorter term (up to 15 years) granted within the LL&T Act, unless contracted out
What is a long-term residential lease?
Typically for long periods, involving paying a low ground rent, often symbolic.
Common in flats or older houses
What are the essential characteristics of a lease?
exclusive possession
fixed duration (fixed term or periodic tenancy)
formalities (deed?)
rent
reversion
How is a commercial lease usually structured?
Prescribed clauses
Commencement date and parties
Definitions and interpretation
Grant of the lease
Rent and rent review
Tenant’s covenants
Landlord’s covenants
Provisos
Schedules
Execution clause
What are prescribed clauses?
Appear at the beginning of the lease.
Compulsory if granted after 19 June 2006, where LL’s title is registered and lease is substantively registrable
When must a leasehold transaction include 'Prescribed Clauses'?
If longer than 7 years
What prescribed clauses set by HMLR must appear at the beginning of registrable leases?
LR1L: Date of lease
LR2: Title number
LR3: Parties
LR4: Property
LR5: Prescribed statements
LR6: Term for which property is leased
LR7: Premium
LR8: Prohibitions/restrictions on disposal of lease
LR9: Rights of acquisition
LR10: Restrictive covenants given by LL to other land
LR11: Easements
LR12: Estate rent charge burdening property
LR13: Application for standard form of restriction
LR14: Declaration of trust where there's +1 person comprising T
What is the purpose of the prescribed clauses?
HMLR relies on this when registering a lease and when making entries in registers in respect of rights created/reserved
What will HMLR do if the lease does not contain all the prescribed clauses?
Rejects application for registration if drawn up incorrectly or incomplete
What is the purpose of the prescribed clauses for LL and T?
Ensures their rights are properly noted in the title register if completed properly
What registrable leases must contain prescribed clauses dated on/after 19 June 2006?
Leases granted out of registered land and are compulsorily registrable
Leases required to be completed by registration following a triggering event for first reg of superior title
What is the commencement date for a lease?
Date of the grant of the lease
Doesn’t have to be the same date that the term commences
What are ancillary rights?
Rights granted to the tenant
What are excepted and reserved rights?
Rights reserved for the benefit of the landlord
right of access and parking
rights of entry for repair purposes
What is rent?
Rent for T’s occupation but can also include insurance rent or service charge
Annual rent is the basic rent - what you think of when paying the rent.
What is annual rent?
Basic rent - what you think of as rent
Exclusive of repairing, insurance rent, service charge etc.
What are the rent quarters for commercial rent?
March 25
June 24
September 29
December 25
What are the landlord’s covenants?
Quiet enjoyment
Insurance
Additional services (maintenance) usually through T paying a service charge
What are provisos?
Conditions or qualifications attached to the grant of the lease.
Usually for re-entry/forfeiture.
How can a schedule to a lease have effect?
If expressly referred to in the main body to be incorporated
What is an execution clause?
Leases usually need to be executed by deed unless they don’t exceed three years
What is a commencement date that starts after the lease is dated called?
Reversionary lease
If the term of a lease is “from and including” a certain day of the year, when does the term expire?
The day before that day of the year
If the lease is “from” a certain day of the year, when does the term expire?
The day of that day of the year
e.g. - a term of 10 years from 1 April 2010, starts on 2 April 2010 and ends on 1 April 2020
Who are commercial landlords?
private investors
institutional investors (pension funds)
Make money from rent and capital appreciation
What is a full repairing and insuring lease (FRI)?
Lease requiring the tenant to be responsible for the costs of repairing and insuring the premises
Why is an FRI preferable for commercial landlords?
T’s assets and financial health help ensure lease compliance
Allows LL to receive a clean rent with minimum financial responsibilites
What is an institutionally acceptable lease?
One granted on acceptable FRI terms, such that it would be suitable as an investment for an institutional investor who will be keen to get a steady stream of income and a capital gain over time
What are signs that a lease is acceptable?
Market rent
T has sufficient control
What is peppercorn rent?
Token or nominal rent
What do rent provisions usually cover in a commercial lease?
amount of rent payable
date to pay rent
if rent is paid in advance or in arrears
date from which rent is payable
rent payment method
calculation of first rent payment (if apportionment applies)
payment of VAT on rent
if T can make any deductions, or withhold, where T has a claim against LL
provisions for rent review
If a lease is silent as to whether rent is payable in advance or arrears, which method is used?
Rent is payable in arrears unless the lease specifies otherwise
What will a FRI lease usually provide for rent?
Payable in advance, on a set day each month.
Payable by standing order and should include obligation to pay any VAT
Proportionate sum normally payable on completion, unless the grant fails on rent payment day, then the full amount is payable
What is open market rent reviw?
Rent is reviewed to the hypothetical open market rental value of the premises at the time of review, considering assumptions and disregards.
Must be hypothetical as T is not vacating. Usually reviewed on an upward-only basis.
What are common types of rent review?
Stepped rent
Turnover rent
Index-linked rent
Open market review
What is stepped rent as a type of rent review?
Rent increases at predefined stages
What is turnover rent as a type of rent review?
Based on a % of the tenant’s business turnover, usually used in retail leases
What is index-linked rent?
Rent tied to inflation indices like the Retail Price Index (RPI)
What are open market rent assumptions?
Willing LL and T
Property is let with vacant possession
T has complied with covenants
L has complied with covenants (contentious issue)
On same terms of actual lease other than rent payable
Same term as OG lease
if damaged/destroyted, premises have been repaired or rebuilt
Why is it unfair to have an assumption that LL has complied with obligations?
Contentious issue
Say lift in an office never works – affects rent.
From T’s perspective this is unfair
Why is it fair for there to be an assumption that T has complied with obligations?
Always included
If T lets the premises fall into disrepair, Tshould not be rewarded with a lower rent
What disregards are there on a hypothetical lease for open market rent review?
T’s occupation
T’s goodwill
Effect of voluntary improvements by T
What happens after the rent review is complete?
New rent is documented in a Rent Review Memorandum, signed by both parties and kept with the lease
If new rent is agreed after review date, backdated rent might need to be paid, typically with interest
What are the risks of a rent review before the first 5 year anniversary?
SDLT may be due as its calculated by the first five years of rent
What happens if T fails to pay rent?
LL may sue for rent and interest on unpaid sums OR damages OR forfeiture
What is the purpose of the Code for Leasing Business Premises?
Improve the quality and fairness of negotiations on lease terms
Promote the issue of comprehensive heads of terms that should make the legal drafting process more efficient
Who does the Code for Leasing Business Premises apply to?
RICS regulated individuals
What are the mandatory requirements of the Code for Leasing Business Premises?
Lease negotiations must be approached in a constructive and collaborative manner
An unrepresented party must be advised of the code’s existence
LL is responsible for ensuring the Heads of Terms are compliant with the code are agreed before the draft lease is circulated
What areas MUST be covered by the heads of terms under the Code for Leasing Business Premises?
extent of the premises
length of term and break rights
rent and rent review
repairing obligation
rights to assign or underlet the lease
permitted use of the property
rights to alter the property and obligation to put the property back in its original state.
A RICS regulated surveyor is preparing heads of terms for a landlord client letting out an office building.
What can the surveyor do in accordance with Code?
State a rent that is significantly above open market value
An RICS regulated surveyor is preparing heads of terms for a landlord client letting out an office building.
In doing so, what can the surveyor not do in order to be compliant with the Code?
State “see draft lease to follow” instead of giving term length
State “see draft lease to follow” instead of giving the basis for rent review
Not refer to the permitted use, because it is obvious from the nature of the premises
Tell the tenant that the surveyor will talk through the heads of terms over the phone instead of providing them in writing
What does the Code say about break clauses?
Any break clause should be clearly specified
Unless parties agree on stricter terms, a tenant’s break should be conditional only on paying basic rent on any date before the break, giving up occupation and leaving no occupiers or sublets
Examples of an onerous break clause (not compliant with Code)
T cannot break if they have breached any of their covenants
LL shall not be required to repay to the Tenant any overpaid Annual Rent, Insurance Rent or Service Charge until the service charge accounts for that period have been finalised
What does the Code for Leasing Business Premises apply to?
Commercial lettings except short tenancies of six months or less
What areas are GOOD PRACTICE to cover in the Heads of terms under the Code for Leasing Business Premises?
T’s rights needed for use of premises
Term, renewal and break rights
Rent and rent reviews
Advise of limits to repairing obligations
Suspend rent if premises is damaged unless T caused
LL should obtain consent before granting lease from superior LL or mortgagee
When can a RICS member depart from the GOOD PRACTICE elements of the Code for Leasing Business Premises?
A strong reason to do so
What is an underlease?
Lease granted by a leaseholder to an undertenant.
Must be granted for a term at least one day less than the lease otherwise it takes effect as assignment
What does covenant strength mean?
Whether T can pay rent and observe and perform their covenants undet the lease
LL may ask for references or a personal guarantee or rent deposit
What is the purpose of a rent deposit?
3-6 months’ rent held by LL in case of T’s rent arrears or other defaults
What is the purpose of a guarantor?
A third party (often T’s parent company or director) guarantees T’s obligations if their covenant strenght is weak.
Safeguarding measure for LL
Is exchange needed for granting a lease?
Not typical
What are the procedural steps for the grant of a lease/underlease?
draft
purpose of an agreement
deduction and investigation of title
pre-contract enquiries and searches
pre-completion formalities
completion
post-completion
Who drafts the lease?
LL’s solicitor
T’s solicitor makes proposed amendments until agreement
Who executes the original lease?
Landlord
Who executes the counterpart of the lease?
Tenant
What does engross mean?
Print a copy for signature
Who engrosses the agreement for lease?
Landlord’s solicitor by obtaining LL’s signature and sending the counterpart to T’s solicitor
What is the purpose of an agreement for lease?
Contract between parties to enter a lease
Places a contractual obligation to enter a lease, on a fixed date in the future or following conditions being satisfied
When is a lender’s consent required for granting a lease?
If they have a charge over the property
Registered - restriction on proprietorship register in favour of lender, prohibiting disposition or dealing without consent
When is lender’s consent sought?
Earliest possible opportunity and usually need to approve final form of lease before completion
What happens if a lender’s consent is not sought?
LL of proposed lease will likely be in breach of the terms of the charge, and T will be unable to register the lease
What should a tenant do if the landlord’s title is registered but not deduced?
Tenant should obtain official copies and filed/title plan from HMLR
What should be deduced in the grant of an underlease?
Title to the headlease
If registered - official copies provided
What happens if the landlord’s title is unregistered?
Landlord must deduce title if lease is granted for +7yrs
Cannot register the lease with absolute freehold title if title title is not deduced
What does deduced mean?
Ownership is provided
When is it not strictly necessary to deduce title?
If the headlease is registered with abolute leasehold title
However, in practice, it is done to identify the current head landlord.
What things should be considered when entering into a commercial leasehold transaction?
An offer in writing should be made including clear terms on:
- rent and length of term
- rights to break the lease
- rent review
- rights to assign
- obligations
What is the purpose of Investigation of Title for granting leases?
T ensures that LL is permitted to grant the lease
If there's a mortgage over the interest from which leasehold is granted, lender's consent needed
If granted as an underlease, alienation covenant must be reviewed to allow for underleasing
If granted for +7yrs, T requires LL to deduce freehold to let T obtain registration with an absolute leasehold title at HMLR
If granting sublease of +7rs, T needs LL to deduce headlease and freehold title so T can register with absolute leasehold title. If head-lease is registered with absolute title, no need to see freehold title
What happens if the headlease is registered with good leasehold title only?
Freehold title should be deduced
If underlease is substantively registerable, HT should ask to apply to upgrade headlease to absolute leasehold title so underlease can be registered with absolute leasehold title
What happens if it is not possible to upgrade the headlease to absolute leasehold title?
Indemnity insurance may be required, particularly if a lender is involved
What happens if the headlease is unregistered?
LL is only obliged to deduce freehold title if proposed lease is substantively registrable
Undertenant can ask to see deduction of leasehold title going back up to 15 years (including headlease and assignment)
What are the standard conditions with a lease?
Where a new lease is substantively registrable, title should be deduced so it may be registered with absolute freehold title
Only applies if incorporated
What documents will the LL’s solicitor send to T’s solicitor as part of pre-contract searches and enquiries?
Evidence of title
Draft agreement for lease
Draft lease/underlease
Copies of any relevant documents held by LL (planning permission)
Replies to standard pre-contract enquiries
May provide lender’s consent but can follow later
What does the tenant’s solicitor do during pre-contract searches and enquiries?
Investigates title
Raises detailed standard enquiries
Undetake usual pre-contract searches
Underlease - request draft licence to underlet from LL’s solicitor
Are the pre-contract searches and enquiries the same for freehold and leaseholds?
Yes
Which enquiries will the tenant's solicitor raise?
CPSE1 (as a buyer would in a commercial transaction)
CPSE3 (which are specific to a new lease)
CPSE4 (assignment of a lease)
What are the pre-completion formalities for granting commercial lease/underlease?
(1) Must be signed as a deed complying with s.52 LPA
(2) Lease prepared in 2 identical parts
Part 1: Lease signed by LL and given to T
Part 2: Counterpart signed by T and given to LL
What is a licence to underlet?
Provides the superior landlord’s approval to the proposed underlease and provides privity of contract between head LL and undertenant which wouldn’t otherwise exist
Who usually prepares the licence to underlet?
head landlord’s solicitor
Who is party to a licence to underlet?
Head Landlord
Head Tenant
Undertenant
What does a licence to underlet usually provide?
Consent to the grant within a specified period
Specifies formal notice is to be given to T or UT
Obligation to pay head LL’s costs, supported by an undertaking by HT or UT’s solicitor
When might an agreement for lease be useful?
Delays in completion but parties want to formally commit to the transaction
New developments (don’t exist yet)
One/both parties need to carry out works before grant
TP consent is needed (lender)
Property already in occupation
How is an underlease executed?
Head LL produces engrossments of licence to underlet, typically executed in +1 part
If a contract is used, what is the process for exchange and what does the contract normally cover (leasehold)?
LL's Sols and T's Sols exchange as for a freehold property (usually using Law Societ B)
No deposit is usually payable
The agreement will likely set out conditions to be met for the lease to start (e.g. property being built)
Agreement will normally have a draft of the lease annexed.
What will the tenant’s solicitor do on pre-completion?
Arrange for T to sign counterpart
Obtain necessary funds from T based on completion report
Conduct pre-completion searches
What will the landlord’s solicitor do pre-completion?
Prepare both original and counterpart lease
Obtain LL’s signature on OG lease and send counterpart to T’s solicitor
Prepare and send completion statement
What is a completion statement?
Statement prepared by LLS detailing sums due on completion - apportioned rent, insurance rent and service charge
What is apportionment?
Counting the number of days T is going to occupy in the current quarter, and calculating an appropriate proportion of yearly rent