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Leasehold Grant of land - giving possession of the land but not a grant of freehold estate. Lease – Estate in the land for a defined period of time. A lease is “the 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” (street v Mountford 1985). Key aspects:  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 Sublease must be of a term LESS than the head lease, not equal or greater to. If it is equal or greater to, the transaction will be treated as being an assignment of the tenants lease. RESIDENTIAL leases are usually long leases. Their characteristics include:  They are granted for a term of 99, 125 or 999 years  A large amount is paid up front for the grant of the lease  The ground rent is a small sum paid each year  They are deemed to be a ‘capital asset’  They have significant statutory protection. COMMERCIAL leases are often much shorter (e.g. 5-15 years) and historically favour the landlord. Their characteristics include:  A ‘Rack rent’, large amount of rent payable each year.  No capital value (because you pay a lot each year to stay in the property)  No premium up front  Typically owned by institutional or investor landlords  The Full Repairing and Insuring lease (FRI) is unique to the UK and provides the landlord with a clear income stream. The tenant either will either directly pay the running or repair costs of the property or the landlords will re-coup these costs by way of service charge. As a result the landlord does not have to spend any of his income on maintaining or insuring the property.  The concept of covenant strength is the ability of a commercial tenant to pay the rent. M&S historically has good covenant strength.  The value of a landlord’s reversion is calculated from the covenant strength of the tenant and the rental yield (as well as term left to run).  Security:

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Landlord’s may ask for a “rent deposit” or A guarantee either from a parent company or a personal guarantee from the directors.

Advantages of commercial leases for tenants:  Flexibility – if short term tenant can move easily at end of term  More flexibility – tenants can negotiate a break clause  No capital outlay – so capita of their business is not tied up in the premises  Management of the building may be undertaken by someone else Advantages of commercial leases to Landlords  Retains a capital interest in the freehold  Can retain control of the management of the building to ensure the capital value is preserved  If leases drafter properly, landlord will recover all expenditure via service charge  Gains a steady income. Assigns ‘Reversion’

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Subtenant Legal leases  A legal lease must be created by deed (LPA 1925, s 52(1) and Law of Property (Miscellaneous Provisions) Act 1989, s 1) unless it falls within s 54(2) of the LPA 1925.  S54(2) provides that a lease which takes effect in possession for a term of years not exceeding three years at the best rent reasonably obtainable without taking a fine may be made merely in writing, or even orally, and still be legal.  A deed is always necessary to effect a legal assignment of a lease, even if the lease itself has been created informally under s 54(2).  Legal leases are prima facie binding on all comers; however, this position is modified by the LRA 2002 and depends on the length of the original term of the lease as follows: o (a) Legal leases granted for a term of more than seven years. Such leases must be registered with their own separate title number. The position then depends on whether or not the reversionary title is registered. If the reversion is registered, the grant of the lease amounts to a ‘dealing’ with the registered title and the lease must be registered with its own title, and in addition it must be noted on the

reversionary title. If the reversionary title is unregistered, the grant triggers first registration of title to the lease but does not affect the title to the reversion, which will remain unregistered. o

(b)Legal leases for seven years or less. If such a lease is granted out of a reversion with a registered title, it takes effect as an overriding interest under Sch 3 to the LRA 2002 whether or not the tenant is in actual occupation. No form of registration is required. If the reversionary title is unregistered, the lease is automatically binding and requires no form of registration.

Equitable leases  A lease which has not been created by deed and is not within s 54(2) of the LPA 1925 may take effect as an equitable lease, provided that it is for value and satisfies the requirements of the Law of Property (Miscellaneous Provisions) Act 1989, s 2 (ie it is in writing, incorporating all terms expressly agreed and signed by or on behalf of each party).  If the reversionary title is unregistered, the lease must be registered as a Class C(iv) land charge against the name of the owner of the immediate reversion.  If don’t register the charge, it is void against a purchaser of the legal estate for money or money’s worth.  If the reversionary title is registered, the lease must be registered as a minor interest on the charges register of the reversionary title.  If, however, the tenant is in actual occupation, the lease is an overriding interest under Sch 3 to the LRA 2002 and binding without registration. OLD LEASES: In leases granted before 1 January 1996 landlord will be able to call upon the original tenant (and intervening previous tenants who have given direct covenants to the landlord) to meet the liability of the current defaulting tenant. This was due to the rule of privity of contract between the original parties. The new tenant is only liable for covenants that touched and concerned the land as their relationship with their landlord exists by virtue of privity of estate.  On the transfer of a registered lease, indemnity covenant is implied by Sch 12 para 20 LRA 2002 whether or not value was given for assignment.  Unregistered land, if not valuable consideration for assignment, express indemnity convenant required.  SC 4.6.4 AND SCPC 6.6.4 required the transfer deed to contain an express indemnity covenant if it is not implied.  If the lease contains a requirement to obtain the landlord’s consent before any assignment takes place, the landlord may, in appropriate circumstances, insist that any assignee enter into a direct contractual relationship with him to observe the tenant’s covenants under the lease for the remainder of the term.  This is usually contained in the same document in which the landlord gives hi  s consent to the assignment, known as a licence to assign.  This has the effect of imposing on any assignee the same liability under privity of contract as is faced by the original tenant.  Liability of landlords o The original landlord remains contractually bound to the original tenant throughout the term of the lease under the doctrine of privity of contract.

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any transferee of the reversion for the time being will also be liable in respect of breaches of covenant which touch and concern the land which are committed whilst the reversion is vested in them. Again, this is under the doctrine of privity of estate.

NEW LEASES: Following the Landlord and Tenant (Covenants) Act 1995, the doctrine of original tenant liability was dismantled for new leases. Instead, on lawful assignment of the lease, tenants are automatically released from all covenants. The landlord’s redress is to require them to enter into an AGA (authorised guarantee agreement).  An AGA is an agreement entered into by the outgoing tenant with his landlord in which the outgoing tenant guarantees the performance of the lease covenants by his immediate successor in title.  Obliged to proved an AGA when: 1. Lease for commercial property, where the parties have agreed in the lease that an AGA is to be provided on assignment. (this cannot be agreed in a residential property). 2. If the landlord lawfully requires the provision of an AGA as a condition of giving consent to an assignment.  Guarantee extends to immediate successor only.  Assignee is bound by all covenants unless expressed to be ‘personal’ to the original tenant.  If outgoing tenant has AGA with landlord, should get an indemnity covenant from the new tenant. Landlord is not automatically released form his covenants when he sells, but can apply to the tenant for the time being to be released from future liability before or within 4 weeks of the date of assignment of the reversion. A lease of more than 7 years (or with more than 7 years to run) must be registered on assignment or grant. Default notices – liability of former tenants  In order to afford some protection to former tenants in respect of arrears of fixed sums such as rent, s 17 of the Landlord and Tenant (Covenants) Act 1995 provides that a landlord can pursue a former tenant only if he first serves what is known as a ‘default notice’ on the former tenant.  This must be served within 6 months of the sum falling due.  If the notice is not served, the landlord cannot pursue the former tenant.  This protection applies to leases whether created before or after the Landlord and Tenant (Covenants) Act 1995 came into force. Liability between head-landlord and sub-tenant  No privity of estate exists between a head-landlord and a sub-tenant, although a contractual relationship will exist between them if the subtenant has entered into direct covenants with the head-landlord.  The sub-tenant will in any event be directly liable to the headlandlord on restrictive covenants in the head-lease of which the former had notice when he took his sub-lease.  Irrespective of direct contractual liability, if the sub-tenant breaches a covenant in the head-lease, the head-landlord will have the right to forfeit the head-lease, and this will mean that the sub-lease which is derived out of the head-lease will also terminate. Determination of leases

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Effluxion of time o In the case of fixed-term leases, when the contractual terms ends, the lease automatically determines by what is known as ‘effluxion of time’. o No notice is needed to do this. Notice to quit o Periodic tenancies are determined by the appropriate period’s notice to quit given by the landlord or tenant. o ‘clear’ notice is not necessary. o If not in the terms of the tenancy, the common law implies the following length of notice:  (a) Yearly tenancies. - at least half a year’s notice expiring at the end of a completed year of the tenancy. Either the last day of the year of the tenancy or the next following day may be specified in the notice as the expiry day.  (b) Other periodic tenancies. - one full period’s notice (ie one quarter, month, etc) expiring at the end of a completed period of the tenancy and must expire at the end of a completed period. o Any notice to quit premises occupied as a dwelling house must be given at least four weeks before it is to take effect, must be in writing and must contain certain prescribed information (Protection from Eviction Act 1977, s 5). Surrender o Surrender occurs where the tenant yields up his lease to his immediate landlord who accepts the surrender. o The lease is said to merge in the landlord’s reversion and is extinguished. o To be legal, surrender must be by deed (LPA 1925, s 52). Merger o This occurs where the tenant acquires the immediate reversion on his lease (ie, acquires his landlord’s estate in land). o It can also occur where a third party acquires both the lease and the reversion. o the lease automatically merges with the reversion and is extinguished unless the contrary intention appears.

Remedies for breach of covenant  For non-payment of rent o (a) Debt action. Under the Limitation Act 1980, an action to recover a debt, such as rent, must be commenced within six years of the sum falling due. o (b) Forfeiture.  This is a right to retake possession of the premises and so prematurely determine the lease.

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The right must generally be reserved expressly by the lessor. The right is enforced in one of two ways: by court order, or by peaceable re-entry. Where premises are let as a dwelling, it is unlawful to enforce forfeiture otherwise than by court proceedings while any person is lawfully residing on any part of the premises (Protection from Eviction Act 1977, s 2). it is on offence to use or threaten violence (Criminal Law Act 1977, s 6) to achieve re-entry where the landlord knew that there was someone on the premises opposed to the re-entry. The landlord is required to make a formal demand for the rent, but this requirement is usually waived in the lease. tenant may be able to claim relief against forfeiture if he pays all arrears of rent and costs before the hearing, or if he pays them after the hearing and the court considers it just and equitable to grant relief.

(c) Distress. - entry to the demised premises and seizing chattels to the value of the debt. (d) Collecting the rent from a sub-tenant. s 6 of the Law of Distress Amendment Act 1908, the sub-tenant being required to pay his rent direct to the headlandlord. (e) Bankruptcy and winding up. If the debt exceeds £750, a statutory demand can be served with a view to commencing bankruptcy or windingup proceedings. (f ) Pursue former tenant(s). If former tenant(s) remain liable then the landlord can pursue them (but for limitations in respect of recovery of rent from such former tenants. (g) Pursue any guarantors of the tenant.

For breach of other covenants o (a) Forfeiture.  The landlord must first serve a notice on the tenant under s 146 of the LPA 1925, which:  (a) specifies the breach;  (b) requires it to be remedied if capable of remedy; and  (c) requires compensation if desired.  The tenant must be allowed a reasonable time within which to remedy the breach, and if he does so there can be no forfeiture and the landlord’s costs are not recoverable unless the lease provides otherwise.  If the tenant does not remedy the breach, the landlord may forfeit the lease by applying to the court for a possession order.

The tenant may apply to the court for relief against forfeiture and the court may grant such relief as it thinks fit (LPA 1925, s 146). (b) Injunction. This is most appropriate for breach of a negative covenant. (c) Damages. These are recoverable under normal contractual rules as laid down by Hadley v Baxendale (1854). (d) Pursue former tenant(s). If former tenant(s) remain liable then the landlord can pursue them. (e) Pursue any guarantors of the tenant. 

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Additional rules for breach of a tenant’s repairing covenant o Forfeiture  If a lease was originally granted for a term of seven years or more and has at least three years unexpired, the provisions of the Leasehold Property (Repairs) Act 1938 (LP(R)A 1938) apply.  These provide that when a landlord serves a notic e under s 146 of the LPA 1925 prior to forfeiture, it must include a statement of the tenant’s right to serve a counter-notice within 28 days.  If the tenant does so, the landlord may proceed with his claim only if he gets the leave of the court. o Damages  s 18 LTA 1927, damages for the breach of a tenant’s repairing covenant are capped at the reduction in the value of the landlord’s reversion caused by the breach.  If the term lease has a significant time to run, the reduction in the value of the landlord’s interest may be slight and may be considerably lower than the cost of doing the repairs.  The LP(R)A 1938 also provides that before a landlord can enforce a claim for damages in respect of failure to repair against a tenant under a lease to which that Act applies, the landlord must serve a s 146 notice on the tenant (even though the landlord is not seeking to forfeit), and the notice must again include a statement of the tenant’s right to serve a counter-notice within 28 days.  If the tenant serves such notice, as with forfeiture, the landlord can proceed with his claim only with the leave of the court. o Self-help  The limitations considered above can be circumvented if the lease contains a properly drafted ‘self-help’ clause.  Such a clause allows the landlord to enter the premises and carry out repairs if the tenant has failed to comply with its obligations.

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The lease clause will then provide that the tenant should pay to the landlord the landlord’s costs incurred in effecting the repairs. Jervis v Harris [1996] Ch 195 confirmed that these costs are recoverable as a debt, not damages. The breach by the tenant that the landlord will be pursuing will be the tenant’s failure to pay a debt due under the lease, not the tenant’s failure to repair. Accordingly, the limitations and procedures imposed under LP(R)A 1938 and s 18 of the LTA 1927 can be avoided.

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

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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.

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Except where lease’s term doesn’t exceed 3 years, takes effect in possession and no premium payable for its grant, contract for lease must satisfy s 2 Law of Property (Miscellaneous Provisions) Act 1989.

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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.  Note that enquiries about service charge here are raised:  How much, how often, what included (insurance, heat, water) 3. The seller (landlord) must deduce title.

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Ideally, a tenant will want the landlord to deduce title to its freehold interest.

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important where 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.

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Absence freehold title usually prevent tenant and successors from obtaining an absolute leasehold title on subsequent registration of lease unless the freehold is already registered.

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At common law, the tenant is not entitled to call for deduction of the freehold title on the grant of a lease (LPA 1925, s 44(2)) - disapplied to grants of leases for more than seven years by Sch 11 to the LRA 2002.

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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.  Consent from the landlord (and any superior landlord) and mortgagees may be needed to grant a lease 5. Pre-contract package

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landlord’s solicitor should provide the ten...