Leasehold transactions 1 (week 6)

Leasehold transaction

A property transaction involving the grant, assignment, or dealing with a leasehold interest rather than a freehold

Long residential lease

A lease commonly granted for 99 or 999 years, usually with a very low ground rent

Commercial lease

A lease of premises for business use such as offices, warehouses, or shops, typically for shorter terms

Typical commercial lease term

Often 3, 5, 10, or 15 years, depending on sector and market practice

Advantage of lease (tenant)

Allows occupation without large capital outlay

Non-permanent investment

A lease allows a tenant to avoid long-term ownership commitment

Business flexibility

Tenant can leave at lease end if business needs change

Market testing

Leasing allows businesses to experiment with locations

Lease-only premises

Some properties are only available on a leasehold basis

Commercial landlord

A person or entity that grants business leases

Private investor landlord

An individual or private company owning property for rental income

Institutional landlord

Financial institutions such as pension funds or insurance companies

Full repairing and insuring (FRI) lease

A lease where the tenant bears repair and insurance costs and landlord receives clear rent

Clear rent

Rent received by landlord without deduction for repairs or insurance

Covenant strength

Financial reliability of a tenant to meet lease obligations

Strong covenant

Long-established business with good financial standing

Weak covenant

New or shell company with limited financial history

Asset management

Ongoing legal work for a landlord relating to leased property

Grant of new lease

Part of asset management involving letting to a new tenant

Licence or alteration request

Tenant application during lease requiring landlord consent

Breach of lease

Failure to comply with lease obligations such as non-payment of rent or disrepair

End of lease issues

Matters arising on expiry including dilapidations or renewal

Lease (definition)

Grant of exclusive possession of land for a fixed or periodic term, usually in return for rent

Leasehold interest

A proprietary interest in land created by a lease

Freehold interest

Ownership of land in perpetuity

Lesser interest

A lease is always shorter than the landlord’s freehold interest

Carved out interest

A lease is an interest carved out of the freehold

Exclusive possession

Tenant’s right to exclude others, including the landlord except for limited rights of entry

Licence vs lease test

Exclusive possession distinguishes a lease from a licence

Fixed term

Lease granted for a definite period such as 5 or 10 years

Periodic tenancy

Lease continuing week to week, month to month, or year to year

Formalities (lease over 3 years)

Must be created by deed

Lease under 3 years

May be created orally or in writing

Reversion

The landlord’s interest that remains and resumes at lease expiry

Short lease (LRA 2002)

Residential lease under 7 years

Short commercial lease

Often 1

Tenant preference (short lease)

Greater flexibility

Tenant preference (long lease)

Greater security

Landlord preference (short lease)

Greater control

Landlord preference (medium lease)

Stable income

Landlord preference (long lease)

Higher capital value but less control

Landlord negotiating position

Often dominant, especially for institutional landlords

FRI requirement

Institutional landlords usually insist on FRI leases

Permitted use

Restriction on how tenant may use premises

Alienation control

Landlord control over assignment or subletting

Alteration control

Landlord control over physical changes

Rent review

Clause allowing rent adjustment during lease term

Tenant objectives

Use premises for intended purpose on fair and flexible terms

Tenant concerns

Avoid excessive restrictions, rent increases, and landlord-dominant clauses

Break clause

Clause allowing early termination of lease

Tenant break

Break exercisable only by tenant

Landlord break

Break exercisable only by landlord

Mutual break

Break exercisable by either party

Rolling break

Break exercisable at any time after a specified date

Anniversary

Same calendar date in a later year used for break or review

Lease vs licence

Distinction based on exclusive possession and legal interest

Bare licence

Permission to enter land without payment or contract, revocable at will

Licence to occupy

Contractual permission to use land without exclusive possession

Estate in land

Legal proprietary interest created by a lease

Code for Leasing Business Premises

RICS code promoting fairness in commercial lease negotiations

RICS

Royal Institution of Chartered Surveyors

Scope of Code

Applies to RICS members and regulated firms

Purpose of Code

Improve negotiations and promote clear heads of terms

Mandatory requirements (Code)

Provisions indicated by “must” that RICS members must follow

Good practice (Code)

Provisions indicated by “should” that must be followed unless exceptional circumstances

Heads of terms

Document setting out key commercial lease terms before drafting

Mandatory negotiation duty

Lease negotiations must be constructive and collaborative

Unrepresented party duty

Unrepresented party must be informed of the Code and advised to seek help

Written heads of terms

Must be prepared and marked subject to contract

Required heads of terms content

Premises, term, breaks, rent, rent review, repairs, alienation, use, alterations

Demise

The physical extent of property let to the tenant

Lease of whole

Tenant responsible for interior, exterior, and structure

Lease of part

Tenant responsible only for interior surfaces

Common parts

Shared areas such as lifts and staircases retained by landlord

Service charge

Tenant contribution to landlord’s costs for common parts

Counterpart lease

Tenant’s signed copy of the lease

Original lease

Landlord’s signed copy of the lease

No exchange for lease grant

Lease grants usually proceed straight to completion

Engrossment

Preparation of final clean copy for signature

Agreement for lease

Contract to grant a lease in the future subject to conditions

Use of agreement for lease

Common in developments or where conditions must be satisfied

Investigation of title (lease)

Tenant solicitor checks landlord’s title and right to grant lease

CPSE1

Standard commercial property enquiries

CPSE3

Enquiries specific to the grant of a lease

Searches (lease)

Similar to freehold searches such as local authority and environmental

Pre-completion apportionment

Adjustment of rent and charges so tenant pays only for period of occupation

Completion statement

Statement showing sums due on completion including apportioned rent

OS1 (lease)

Priority search for lease of whole

OS2 (lease)

Priority search for lease of part

OS3

Search where lease is not registrable, no priority protection

Lease term

Must be certain or periodic

Term commencement date

Date the lease term starts, which may differ from completion date

Revisionary lease

Lease whose term starts in the future after existing lease expiry

From and including rule

Term expires day before same calendar date

From rule

Term starts day after stated date and expires on same date

Market rent

Rent reflecting open market value

Ground rent

Low rent payable under long residential lease

Premium

Lump sum paid for grant of a long lease

Quarterly rent

Rent payable four times a year in commercial leases

Quarter days

Traditional or modern dates used for rent payment