Grant of a Lease - RE Workshop 10 PDF

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RE Workshop 10...

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Grant of a Lease – Context

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Reading Property Law and Practice  Chapters 34.1 - 34.6  Chapter 35  

Chapters 31.7 - 37.3.8 Chapters 40.1 - 40.2

Lecture Notes - Leasehold Covenants Disadvantages of Owning a Lease  From Tenant’s Perspective o Depreciating asset o No viable return o Lack of control o Repair expense 

From Landlord’s Perspective (eg. as opposed to selling property as freehold) o Unreliable tenant o Disrepair (depreciate value of premises) o Ongoing responsibilities o Not guarantee of £££ (in terms of income and capital growth)

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Advantages of Owning a Lease  From Tenant’s Perspective o Flexible (in terms of length / break clause) o Not large capital outlay o Building management undertaken by someone else usually  From Landlord’s Perspective o Returning capital asset (monetary value) o Retain control of management to ensure value preserved o Possible recover all expenditure o Steady income Advantages tend to outweigh disadvantages. Enforceability of Leasehold Covenants  Grant of a Lease = (headlease)  Assignment of a Lease = selling a lease (terms of lease cannot be negotiated, buying of 

unexpired residue of the lease) Subletting a Lease = (sublease / underlease)

Types of Covenants With regards to actions that the tenant will want to take/make in the leasehold property.

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Absolute - tenant not allowed to carry out an action Qualified - tenant can carry out action only with landlord’s permission Full-qualified - tenant must obtain consent from landlord, but consent cannot be

unreasonably withheld Landlord will prefer absolute, but good landlords know that this is not commercial possible always. Most covenants are fully-qualified. Landlords want to protect the capital growth of premises. Who wants to buy such properties? Institutional Leases (eg. pension funds, insurance companies, etc.) - they see property as a long-term capital investment and a way of securing income in the form of rent in the shortterm  Leases are an investment product  Acts to preserve capital value (eg. repair)  Tenant’s strength of covenant  Subsequent tenants (lease must be acceptance to future tenants) Historically, leases of commercial property were FRI - full repairing and insuring leases, meaning that landlord gets a clear rental stream and that the rent is all profit (does not have to dip into rent to pay for repairs, maintenance and insurance contributions). Regardless of who actually repairs/insures the property, tenant actually pays for all of it. Leases which do not make tenants pay are referred to as not being investment quality or institutional; landlords must choose the tenants carefully based upon the tenant’s strength of covenant (eg. ability to pay rent and perform all the covenants of the lease). Landlord will want control over whoever occupies the property.  Tenants may want to sublet/assign, will not be acceptable to them if landlord places

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absolute covenants against these but landlord will want to control who stays/ensure they pay rent Landlord wants rental stream to continue so must know of any incoming

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tenant/subtenant and whether they can continue to pay the rent This is why landlord will want as many people on the hook as possible (prolong obligations of outgoing tenants so they remain liable for any breaches by incoming tenant)

Where property has changed hands, the alienation covenants must be reassessed (landlord want control over this).

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Will the burden of the tenants covenants pass to the new tenant? Will the benefit of the tenants covenant pass to the new landlord? Who is liable and who can sue?

Dependent upon when the lease was granted (not any subsequent assignments).

Old Lease Rules (before 1 January 1996)  relates to photo above  S.141 LPA 2915: benefit of all covenants which are not personal will pass to Purdey when 

they acquired reversionary interest in 2014 If King’s fail to pay rent, Purdey could only sue Gale as the original tenant (Gale will

remain liable throughout the duration of the lease through privity of contract) ; Purdey can also sue King’s as the current tenant Essentially, King’s will have taken on the burden of all those covenants which are not personal when it acquired the lease in 2006. Total would not be liable because there is no privity of contract or privity of estate. In practice, landlord would insist on a direct covenant in the license to assign by the outgoing tenant to remain liable for any breaches of the tenant’s covenants by the incoming tenant.

New Lease Rules (on/after 1 January 1996)  relates to photo above  New rules apply because sublease is after 01/01/96  If HG breaches a tenant’s covenant, King would sue as the current landlord of the lease o S.3 Landlord and Tenant (Covenants) Act 1995 - landlord will have taken benefit of tenant’s covenants when it acquired the headlease in 2006 / each tenant also takes on the burden of the tenant’s covenants which are not personal o S.5 Landlord and Tenant (Covenants) Act 1995 - outgoing tenants automatically released from burden of the tenant covenants upon lawful assignment of lease (eg. Avengers and Forbes) Landlords unhappy about s.5 as they relied on suing the original tenant (losing ability to sue former tenants would make them more reluctant to allow assignments, making life difficult for tenants and have repercussions on commercial property sector). Two things done to mitigate provisions for landlords, applying to commercial premises only: 1. Landlords allowed to insert into leases more rigor conditions for giving their consent to an assignment (s.19(1)(a) Landlord and Tenant (Covenants) Act 1927)  applicable only to qualified or fully-qualified covenants relating to assignment a. If these pre-agreed circumstances are not met then landlord will not be acting unreasonably if it withholds consent to assignment 2. Landlord is allowed to required outgoing tenant to guarantee that his immediate successor will observe and perform the tenant’s covenants under the lease, known as authorized guarantee agreement (AGA) ( s.16 Landlord and Tenant (Covenants) Act 1995)

Authorized Guarantee Agreement (AGA)  relates to same picture above  HG liable to Kings as current tenants  If Forbes gave AGA on assignment to HG, it will also be liable (not under legislation, but 

contractually through the AGA) If Avenger had given AGA on assignment to Forbes, it would be released on subsequent assigned by Forbes to HG (only ever one AGA in place at any one time)

Limited protection for former tenants under Old and New Lease Rules who find themselves in position of having to pay out for defaults of a successor. Sometimes possible to claim money back from defaulting tenant under assignment documents (must check contract and transfer deed to see if there is an indemnity clause).  If no express indemnity clause: former tenant can claim against defaulting tenant under implied indemnity (Moule v Garrett) o If landlord wants fixed sum of money, landlord must notify former tenant within 6 months of money becoming due and must serve a s.17 notice on former tenant (after the 6 months, landlord has 6 years to issue proceedings if former tenant does not pay) o S.17 ensures former tenants are notified of any possible liability for ongoing breaches

Grant of a Lease – Preparatory Task

All heads of terms were correctly done  does not usually happen!!

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Grant of a Lease – Workshop Tasks

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Task 1 Usual Quarter Days  days on which you pay rent in advance  March 25  June 24  

September 29 December 25

Task on paper. Task 2 [Textbook Chapter 40] Arcadian is worried that after the 13 months, the tenant may not leave. So, they want to avoid security of tenure (they do not want Land and Tenant Act 1954 to apply). If the provision applied, the lease will not come to an end upon the contractually agreed date, but when one of the methods in the legislation take place. The aim of this act was to protect tenants. In order for the landlord to regain possess, they must serve a notice under s.17 LTCA 1995. Methods in which they can regain possession:  No fault grounds, landlord wants to take occupation  Fault grounds, tenant is in breach of covenants Section 23(1) Landlord and Tenant Act 1954 Part !!:  Must be a tenancy o Not a license  Must be a business  

Must be in occupation None of the exclusions must applied

Initial Insurance Limited Features: want flexibility of contract and willing to pay more Options for Avoiding LTA

Procedure

Pros/Cons

One of the following must not

Pro: no security of tenure + rent

be applicable: exclusive

for 13 months not guaranteed

Protection License, not tenancy

possession, no fixed term and rent payable (eg. best to reserve right to enter property to ensure they do not have exclusive possession)

Con: they can leave whenever

Fixed term tenancy not

With option to renew for a

Pro: no security of tenure +

exceeding six months

further 5 months (so not in

security of rent for 6 months,

occupation for 12 months, as

then 5 months

security of tenure would apply OR SOMETHING WITH BREAK

then)

Con: may not extend as will hit the 12 month requirement + 2

CLAUSE

months’ worth of rent not receive Contracted-out tenancies

Provide fixed term of 13

Pro: no security of tenure +

(s.38A LTA 1954)

months, court order no longer

secured rent for fill period

required but a notice procedure Tenancy at will

must be dealt with

Con: less likely to be accepted

Tenancy which can be

Pro: no security of tenure

terminated by either party at

applicable

any time / no exclusive possessive, fixed term and rent

Con: no guarantee for full

payable

period of 13 months of rent

Premier Limited Features:  Options for Avoiding

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Procedure

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Pros/Cons

LTA Protection  Tenancy at will

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Agree to tenancy that

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Pros: flexible for both

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Fixed term tenancy not exceeding 6 months

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Grant a licence

can be terminated by either

party, no formalities,

party at any time, express or

Arcadian can terminate

implied

when CDS ready to move in   Cons: insecurity for

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S.43 LTA 1954, no security under the Act if agree the tenancy up to 6 months with no provision for renewal in the agreement

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Agreement entered

into must not grant exclusive possession to Premier, and in effect there must not be exclusive possession

both parties  Pros: easy to enter into, secured lease after 6 months   Cons: cannot exceed 12 months otherwise will be secured, Arcadian only 6 month guaranteed rent, no exclusive possession for Premier  Pros: flexible for Arcadian, can terminate whenever   Cons: risk of exclusive possession being given, lack of security may deter

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Contract out

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Only applies to fixed term leases, notice

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procedure must be abided

guaranteed income, security

with (s.38A)

for Premier for that period

Pro: can be applied to full 13 month lease,

only + Premier may be happy to contract given that reduce rent seeking   Cons: Premier cannot renew even if they want to, Arcadian to commit to 13 months (what if CDS ready earlier?) Better tenant: probably Premier  but dependent upon what the rent difference is....