LEASEHOLD (commercial)
Landlord/ Lessor
Tenant/ Lessee
-Reversion: end of the lease, the interest reverts to the landlord L owns reversion
Grant or assignment?
-When new lease is granted= new estate in land created
-Existing lease is assigned= remainder of the term of leasehold estate is transferred
- Assignor is the Seller of the existing lease
- Assignee is the Buyer of the existing lease
2 types of leases – old and new leases
-Old is where lease was granted before 01/01/1996
-New is where lease was granted after 01/01/1996
Landlord and Tenants (Covenants ) Act 1995 changed privity rules in relation to leases,
SIGNIFICANT CHANGE – abolished privity in relation to new leases
L Assignment
assignment e.g. new lease granted for 10years (T1) then T1 assigns
remaining 5years to T2 T1= assignor, T2= assignee
T1 T2
Grant= sub-tenancy (undertenant)
ST Grant sub-lease e.g. T1 grants sub-lease landlord= head landlord and tenant
(T1)= head tenant
Landlord’s benefits/concerns:
To generate income – ownership of freehold will not provide an income stream, but by contrast,
leasing out property will generate an income return in the form of rent
Capital asset is retained – e.g. owner does not use, leasing alternative to selling
Cost of insurance who is going to insure property
Enforcement of covenants
when reverts to owner, need in good condition impose positive covenants e.g. maintain/repair
leasehold positive covenant run with land, so bind future owners (freehold= positive covs do not
run with land)
Landlord can sue assignee (instead of Tenant) directly for breach of positive+ negative covenants
Tenants benefits
Flexibility: not tied to one place for a long period
Cost: no big one-off payment, rather regular payments, better for cashflow
Tax: rent is tax deductible from income profits + Capital Allowance (2%)
Lease
Ownership of an estate in the land
Usually requires formality + certain characteristics
Tenant cannot be easily removed - has ‘security of tenure’
Licence
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, Personal right only
No formality/ characteristics
No security of tenure - so fairly easy to end licence
Street v Mountford: grant of a right to the exclusive possession of land for a determinate (certain)
term less than that which the grantor has himself in the land
Exclusive possession – if not then will just be a right to occupy which is a licence.
o A licence does not create an interest in land and may be revoked at anytime.
o Whether a lease of a licence has been created depends on the intentions of the
parties in so far as it can be inferred from all the circumstances.
o The court will look at the substance of the agreement, not the form i.e. just because
it is called a licence is not conclusive of it being one.
Term of years absolute
Term must be less than that owned in the superior lease
Landlord & Tenant relationship
Lease= contract both parties have privity of contract
Unequal bargaining powers- unless anchor tenants (like Boots)bargain better terms
Landlord satisfied if:
• Ability of Tenant to pay rent? check bank statements/ business accounts
• Ability of T to look after property? check references from previous Landlords
• Keeping Control through Tenants covenants in lease
• Litigation if problems more than one party to sue?
CONVEYANCING PROCEDURE ON THE GRANT OF A LEASE
Broadly same procedure as for sale of freehold, but the main differences are noted below
Pre-contract
Draft lease
For leasehold, extra documents required draft lease + contract for grant of lease (L drafts)
The draft lease + contract sent to the solicitor for prospective Tenant for approval
Note: often no contract on grant of a lease straight to completion once draft lease agreed
Searches and Enquiries
- Official Copies of the leasehold title (if registered) + Landlord’s title (if available/ registered)
- Sellers Leasehold Information Form (‘SLIF’) or Commercial Leasehold Enquiries
Check capacity for landlord to grant the lease, any burdens on freehold title as will bind the
tenant, is there a mortgage on freehold title (lender usually puts a restriction on leasing)
Exchange to completion
Lease instead of TR1 (as no transfer)
Usual pre-completion searches BUT ALSO check against freehold title:
- that Landlord has capacity to grant the lease
- for incumbrances on freehold/ superior leasehold which will bind Tenant
- for any mortgage of freehold (consent of Landlord’s Lender to the grant of the lease required)
What if the Landlord’s title is not deduced before exchange? SC 8.2.4 / SCPC 11.2.4
completion is delayed until official copies are produced
Post-completion
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,SDLT: on grant of a new lease, SDLT is payable on both premium (purchase price) + ‘Net Present
Value’ (no need to calculate in exam, understand inflation over time) of rent payable by tenant
Rates (different to freehold commercial property)
£0-£150,000= 0%
£150,000 - £5M= 1%
£5M+ = 2%
Registration
Tenant’s solicitor must register the grant of any lease has a term exceeding a 7 years term
leasehold interest registered with separate title and title number
Legal leases for less than 7years do not require registration, will bind the land an overriding
interest (LRA 2002 Sch 3, Para 1)
If more than a 7 year term, tenant must register grant of the lease
If less than 7years, might be binding as a overriding interest
CONVEYANCING PROCEDURE ON THE ASSIGNMENT OF A LEASE
Remember an assignment is used in respect of a pre-existing lease –terms of that lease cannot be
varied by the Assignor without obtaining the consent of the Landlord. If the Landlord is willing to
agree to any variation effected by a ‘Deed of Variation’
Assignment is transferring the interest of an existing lease (not a new lease)
Pre-contract
Pre-contract searches and enquiries
Freehold= SPIF/GE30C – Lease= SLIF for residential & similar forms for commercial properties
Key Q’s need to be asked of Seller:
compliance with covenants?
relationship with landlord?
is landlords consent required for the assignment?
Investigation of title: investigate landlords Freehold title + Seller’s Title
If HMLR has given absolute title then may not need to look behind the freehold title
If only good leasehold title, then look behind leasehold and at the freehold
Exchange to completion
Similar to freehold – but:
Landlord’s consent (‘Licence to Assign’): Landlords consent to the assignment to the proposed
new Tenant is likely to be needed (SCPC 11.3.2 – 11.3.6 covers what happens if L is unwilling to
consent to proposed Assignee) so consent in a document called ‘licence to assign’
Pre-completion searches: if lease is registered with good leasehold title, additional searches
should be undertaken against the freehold title.
-Unlike the grant of a lease, for assignment need a TR1 prepared by buyer’s solicitor (assignee)
Post-completion
SDLT: assignment of a lease= SDLT is payable on premium only (purchase price)– paid by assignee
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,On assignment of a lease, SDLT is calculated on:
- Premium only (not the rent)
- Rates are the same as for freehold
so it is much easier than grant
Registration: Tenants solicitor must register the assignment of a lease if it is a lease that:
- is already registered; or
- still has more than 7 years of the term left to run
- if superior title (freehold/ head lease) is unregistered, and title docs are not provided, HMLR
will only award ‘good leasehold title’ (not ‘absolute’)
VAT= 20%
Both the grant of a lease + assignment of a lease= charged VAT for commercial
Residential are zero rated for VAT but can opt to tax
Commercial lease
- age of property is irrelevant (unlike for FH)
- exempt but L can waive exemption & ‘opt to tax’
- If L wishes to charge VAT - must include express provision in lease
DETAILED GRANTING LEASE AND ASSIGNMENT PROCEDURE (SUPPLEMENTS ABOVE)
GRANT OF A LEASE:
1. The seller (landlord) drafts both the contract and the lease itself
This is called ‘an agreement for lease’
Particulars of sale must state property is leasehold and give details of the term vested in
tenant.
Incumbrances affecting freehold title must be disclosed and contract should provide an
indemnity given in transfer in respect of future breaches of any covenants affecting the title.
Except where lease doesn’t exceed 3years, takes effect in possession + no premium payable
Standard Condition 8.2 (SCPC 10.2) provides for the lease to be in the form annexed to the
draft contract, and for the landlord to engross the lease and supply the tenant with the
engrossment at least five working days before the completion date.
2. The buyer (tenant) raises pre-contract enquiries in the same way as in a freehold purchase.
Enquiries about service charge: How much, how often, what included (insurance, heat,
water)
3. The seller (landlord) must deduce title.
Ideally, a tenant will want the landlord to deduce title to its freehold interest – as:
o a premium is to be paid for the grant of the lease;
o the property is being offered as security for a loan; or
o where a tenant is paying a significant rent for the premises.
Absent freehold title usually prevent tenant + successors from getting absolute leasehold title
Where lease exceeds 7 years, SC 8.2.4 (SCPC 10.2.4) requires landlord to deduce such title as
would enable the tenant to obtain registration with an absolute title at Land Registry.
The intending tenant will thus be able to insist on the deduction of the freehold title, and
so should obtain registration with absolute leasehold title.
4. Obtaining consents
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, Consent from landlord (and any superior landlord) + mortgagees may be needed to grant a lease
5. Pre-contract package
landlord’s solicitor should provide the tenant’s solicitor with at least the following documents:
(a) draft contract (if applicable);
(b) draft lease;
(c) evidence of the freehold title;
(d) copies of any relevant planning consents; and
(e) evidence of the lender’s consent to the grant of the lease (where relevant).
Energy Performance Certificates required whenever building is constructed, sold or
rented
6. The buyer (tenant) must carry out pre-exchange searches and investigate title if deduced.
Investigate title – ensure landlord owns property to be able to grant the lease.
o Check any restrictions on the landlords title that would also bind the tenant.
Chancel repair search / mining search.
Company search against Management Company. (Company search not have priority period)
7. Negotiate terms of the lease
The Code for Leasing Business Premises contains recommendations for landlord and tenant
when negotiating new leases of business premises.
8. Exchange of contracts (with engrossment)
The lease is normally prepared in two identical parts, the lease and counterpart.
The lease is executed by the landlord and the counterpart by the tenant.
SC 8.2.5/SCPC10.2.5 landlord solicitor to prepare engrossment.
The landlord will sign the lease itself in readiness for completion, and the counterpart should
be sent to the tenant’s solicitor at least five working days before contractual completion date
(SC 8.2.5 and SCPC 10.2.5) for execution by the tenant.
Law society formula will be used at exchange. (NB: imposes undertakings on the solicitor)
9. Requisitions on title and apportionments.
Requisitions, raised between exchange and completion, are enquiries dealing with the
practicalities regarding completion; the discharge of any mortgage, the amount required on
completion and the bank account details.
Apportionments of rent, service charge and insurance premiums are also necessary.
The apportionment should be shown on the completion statement supplied by the landlord.
Neither set of standard conditions provides for the apportionment of rent on completion of
the grant of a lease, therefore an express special condition required to deal with this matter,
unless, as is often the case, it is dealt with in the lease itself.
10. Pre-completion searches – Same principles as freehold sale
11. Completion.
The lease is the required ‘deed’ for the purpose of the grant.
the landlord will receive:
(a) the counterpart lease executed by the tenant;
(b) any premium payable for the grant (less any deposit paid on exchange of contracts);
(c) an apportioned sum representing rent payable in advance under the lease.
The landlord should give to the tenant:
1. (a) the lease executed by him;
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