LANDLORD & TENANT

RESIDENTIAL LANDLORD AND TENANT

Our landlord and tenant advise includes

• Drafting Rent Act tenancies.
• Assured and assured shorthold tenancies
• Recovery of rent arrears
• Unlawful eviction
• Disrepair disputes
• Court proceedings for Housing Act tenancies
• Possession pre-action protocols
• Enforcement of possession order
• Short term tenancy agreements
• Rent reviews and renewals
• Residential service charge disputes
• Nuisance and statutory nuisance
• Houses in multiple occupation
• Advice on anti-social behaviour and applying for anti-social behaviour injunctions
• Affordable home ownership and right to buy or acquire Public sector residential tenancies.

COMMERCIAL LANDLORD AND TENANT

Commercial Leases

What is a commercial lease?

A commercial lease generally refers to a written agreement which not only creates a tenancy of business premises, but also sets out the often detailed and extensive provisions which will govern the relationship between the landlord and the tenant.

The difference between leases and licences

Leases

There are two essential characteristics which must be present for a lease to exist:

• it must grant exclusive possession of defined premises to a tenant, and
• it must be granted for a term which is definite or can be made definite by either party

The payment of rent is not essential for the creation of a lease.

Licences

A licence, by contrast, is a contractual agreement which permits the licensee to do something which would otherwise be unlawful—such as to park a car in the licensor’s car park.

If there is any dispute as to whether or not a property is occupied under a tenancy or a licence, a court will look at the substance of the agreement. Labelling an agreement which grants exclusive possession as a licence will not be enough to prevent it from being a tenancy.

Short-term and temporary lettings

A lease of business premises with extensive landlord and tenant covenants is not always the most suitable vehicle for what the parties wish to achieve.

A tenant may only want to occupy premises for a few months without taking on onerous repairing obligations, or a landlord may want to be able to recover possession at short notice. There may be time pressures which mean the parties want occupation to start at once while the details of a formal lease are resolved.

A landlord, particularly, may also want to avoid granting a lease which gives the tenant security of tenure under the Landlord and Tenant Act 1954 (LTA 1954).

In situations like these, the parties can consider other options

• a licence to occupy or a licence permitting access to premises for particular purposes.
• a tenancy at will. This kind of tenancy can be terminated by either party at any time and will not grant security of tenure.
• a tenancy within LTA 1954 s 43. These are short tenancy agreements (not more than six months) which cannot benefit from security of tenure, subject to certain provisos.

It must also be remembered that a tenancy of commercial premises does not have to be granted expressly in writing: it can be inferred from the behaviour of the parties (for example a periodic tenancy) or it can be created by statute (for example pursuant to LTA 1954).

Heads of terms

Very often, the parties to a lease will agree heads of terms setting out the key points of the lease. See Precedent:

Heads of terms are not contractually binding on the parties but agreeing key terms in advance can cut down the amount of time spent by solicitors in negotiating the lease.

In addition, should there be a mistake in the lease which comes to light after completion, heads of terms can serve as evidence of the parties’ agreement in any case for rectification.

Drafting the lease

Traditionally, it is the landlord’s solicitor who drafts the letting documents.

The draft lease will need to be checked against the heads of terms to be sure that it reflects the intentions of the parties as well as being checked for fairness and clarity.

If the lease will need to be registered at HM Land Registry, it must contain HM Land Registry prescribed clauses. These clauses require specific information about the lease to be laid out at the front of the lease.

If the lease is a renewal pursuant to LTA 1954, it should be on the same terms as the existing lease, subject to reasonable updating. A copy of the lease being renewed should be obtained to be checked against the draft.

Full repairing and insuring leases—the clear lease

Most landlords of commercial premises hold the premises as an investment and want a ‘clear lease’.

Lord Wilberforce in O’May v City of London Real Property Co Ltd defined clear leases as ‘leases in which the tenants bear all the costs and risks of repairing, maintaining and running the building of which their demised premises form part, so that the rent payable reaches the landlord clear of all expenses and overheads’.

A full repairing and insuring lease (often referred to as an ‘FRI lease’) is a clear lease. The tenant pays the landlord’s costs incurred in insuring the premises and the tenant either carries out all repairs at their own cost or the landlord carries out repairs and recovers the cost from the tenant via the service charge.

Parties to the lease

The correct names and addresses of all parties to the lease—landlord, tenant and guarantor (if applicable) should be entered into the draft lease. If there is to be a guarantor, consider any potential conflict of interest in acting for both the tenant and the guarantor.

If any party to the lease is a company, it should be identified in the lease by its company number as well as its name and its details should be checked at Companies House. As well as confirming the correct name and registered office address, this will confirm that the company is still active and not in administration or receivership.

If any party to the lease is a foreign company, an opinion letter confirming that the company can enter into a legally binding agreement must be obtained.

Different entities will have different requirements when it comes to executing the lease and these should be addressed at the start of the transaction.

Property details

The extent of the premises being let governs not just the physical space which the tenant will be entitled to occupy but also the extent of the landlord’s and the tenant’s respective covenants regarding repair, reinstatement, statutory compliance and other lease obligations.

The lease must make clear the precise boundaries of the premises and exactly what forms part of the premises.

A plan showing the proposed premises and any land over which the tenant is to be granted rights should be obtained and approved by the tenant as soon as possible. An accurate plan will also be needed in order to carry out the property searches.

If the lease will have more than seven years to run at the date of grant, it will need to be registered at HM Land Registry and the plan will need to comply with HM Land Registry’s strict requirements.

Term

All leases must have a certain (or potentially certain) end date. To avoid ambiguity, the exact start and end dates of the term should be entered into the lease.

A lease may be granted for a term which is expressed to run from the date of completion of the lease (broadly, the day the signed lease is dated) or from a date which has already passed.

A lease which is granted for a term to run from a future date is a reversionary lease.

Only a lease for a term certain of more than six months can be excluded (or ‘contracted out’) of the security of tenure provisions of LTA 1954, Pt II. A lease which defines the term as a fixed period together with ‘any period of holding over or extension…whether by statute or at common law or by agreement’ has been held not to be a term certain.

Break Clause

The parties may agree that the lease can be brought to an end before the contractual expiry of the term by the operation of a break clause.

Break clauses are notoriously tricky and must be negotiated with care. A tenant should push back on conditional break clauses and ideally the heads of terms should state that the break is to be unconditional.

For more details on the negotiating considerations of the landlord and the tenant in relation to break options, contact Westbury Solicitors on 0115 837 6570 at 4 East Street, Nottingham NG1 3AY.

Security of tenure

The application or otherwise of LTA 1954, Pt II to a lease of business premises is fundamental to all commercial leases.

Option to renew

An option to renew the lease gives the tenant a contractual right to a new lease. This contractual right may be granted in addition to, or instead of, the statutory right under LTA 1954, Pt II.

An option to renew can give the tenant the security of a long term with the flexibility of a short lease.

Rent

The lease will set out the amount of rent payable and the dates on which it is to be paid. If the landlord has opted to tax, the rent will be subject to VAT.

Most commercial leases provide for the rent to be paid in advance on the usual quarter days (being 25 March, 24 June, 29 September and 25 December) although some use the modern quarter days (1 January, 1 April, 1 July and 1 October).

If the lease does not expressly require the rent to be paid in advance, it will be payable in arrears (though this is unusual in commercial leases).

A landlord will require the rent to be payable expressly ‘without set-off’ in order to ensure that the tenant cannot set off rent against any claim they have against the landlord.

Rent review

A lease for a reasonable length of time (often five years or more) is likely to contain provisions for the rent to be reviewed. This balances the tenant’s need for long-term occupation and the landlord’s need to maximise their rental income over a period of time.

There are several different methods of reviewing the rent during the term of the lease but the most common by far is the open market rent review.

The basis of an open market review is the rent which would be paid for a hypothetical lease of the premises.

However, as the starting point for the hypothetical lease is the lease itself, other clauses in the lease can have an impact on an open market rent review and can provide a tenant with a useful bargaining chip.

Rent free period

On the grant of a new lease, the parties may agree that the tenant is to have a rent-free period at the start of the lease.

This is usually to cover the period of time required by the tenant to fit out the premises for their own use. The rent commencement date may well therefore not be the same as the term commencement date.

An abnormally long rent-free period may count as an inducement to the tenant to enter into the lease. Inducements like this can be problematic on an open market rent review.

Service Charge

A service charge allows the landlord of a multi-occupied property to maintain communal facilities and the fabric of the building and recover the cost of doing so from their tenants.

Depending on the nature of the property, the landlord will undertake to provide services either as and when required (such as repairs) or on an ongoing basis (such as cleaning common parts) or a mixture of both.

The tenant will agree to pay a share of the cost of providing the services, either as and when the costs are incurred or on an ongoing (often quarterly) basis.

The tenant’s share of the landlord’s costs incurred in providing the services is usually expressed as a fixed percentage or defined as a ‘fair and reasonable proportion’. A tenant may be able to negotiate a cap on the total amount of service charge they are due to pay in any one year.

The service charge needs to strike a balance between the landlord’s need to maintain the property and the tenant’s need to contribute only to those services from which they benefit.

Unlike residential service charges, commercial service charges are not subject to statutory controls but are a contractual arrangement between the landlord and the tenant. However, members of the Royal Institution of Chartered Surveyors (RICS) and firms regulated by the RICS are subject to mandatory requirements.

Insurance

It is standard practice for the landlord to insure the premises and recover the cost of doing so, or a proportion of the cost of doing so, from the tenant. As with service charge, the tenant may be responsible for reimbursing a fixed percentage or a fair and reasonable proportion of the landlord’s costs.

The tenant must consider the extent of the property to be insured by the landlord and how much it will be insured for. The insurance should cover any property over which the tenant has rights as well as the premises and the level of cover should be sufficient to reinstate any insured damage.

It is in both parties’ interests that the premises are properly insured but insurance will not be available against all risks at all times (for example, terrorism or flooding). The lease should provide for situations where not all risks can be covered.

The lease must also contain a mechanism for insurance money to be applied towards making good any insured damage and for the suspension of rent while the premises are unusable. If the damage cannot be made good, there must be provision for the lease to be terminated.

Repair

Most landlords want the tenant to take on a full repairing obligation whether through the service charge or by taking responsibility for repairing the premises themselves.

The scope of the tenant’s obligation to repair can vary greatly according to the wording of the repairing covenant and the nature of the property.

The standard of repair is fixed at the time the lease is granted.

The tenant should have a survey carried out to identify any potential issues which may need to be resolved before the grant of the lease, for example by qualifying the tenant’s repairing covenant by reference to a schedule of condition (a record, ideally photographic, of the state and condition of the property at the start of the lease) or by agreeing that the landlord will carry out certain repairs before the start of the lease.

In the case of a lease of part, the tenant must make sure that their repairing obligations dovetail with the landlord’s obligations. The landlord’s repairing obligations should cover items excluded from the tenant’s repairing covenant. However, the tenant should not have to pay via the service charge for something the landlord has specifically agreed to be responsible for.

Alterations

A tenant often needs the ability to alter the premises to suit their changing business needs and a landlord needs to protect against works to the property which may be damaging to the landlord’s long-term interests.

Most modern leases permit the tenant to make some alterations with the landlord’s prior consent.

A tenant may, however, irrespective of what the lease says, carry out improvements to the premises and obtain compensation from the landlord for doing so. This is subject to following the strict procedure laid out in the Landlord and Tenant Act 1927.

Signs

The tenant may need the right to display their signage outside the property and in the common parts.

Use

A landlord may want to control the use of the premises for various reasons—to ensure a good tenant mix in a retail centre, for example.

Most leases contain a covenant that the premises must be used for a specific use unless the landlord has consented otherwise.

The tenant will need to make sure that their intended use of the premises is not restricted by the terms of the lease, any planning or other statutory restrictions (which are different from the use which may be permitted by the lease) or any restrictions on the landlord’s title or in any head lease.

Dealings

A landlord wants to be sure that the tenant in occupation of their premises will be able to pay the rent and comply with the tenant covenants in the lease.

For this reason, commercial leases usually contain covenants preventing the tenant from assigning the lease or granting an underlease of the whole or part of the premises without the landlord’s consent. A landlord’s ability to withhold consent to an assignment or underletting is governed not just by the terms of the lease but also by statute and case law.

An outright ban on dealings would be extremely unattractive to a tenant who needs to be able to deal with their premises in the most cost-effective way for their business. Most leases therefore allow tenants to assign or underlet the premises with the landlord’s consent.

Any other sharing or parting with possession or occupation of the premises is almost always prohibited with the exception of allowing corporate tenants to share occupation of the premises with a group company and subject to certain other conditions (such as not allowing a relationship of landlord and tenant to arise).

Legal requirements

The landlord will want the tenant to comply with all legal requirements relating to the premises. This could involve the tenant in significant expense if, for example, the premises do not comply with health and safety legislation and the tenant is required to carry out works to the premises in order to make them compliant.

The tenant’s survey may identify areas of non-compliance and enquiries should also be raised with the landlord in order to identify any areas of non-compliance as well as any existing statutory licences, certificates or consents.

Forfeiture

A forfeiture clause gives a landlord a right to determine the lease due to specified breaches of covenant.

Typically, these breaches are non-payment of rent, breach of tenant covenant and the insolvency or bankruptcy of the tenant.

Will there be an agreement for lease?

An agreement for lease is often used where there are conditions to be complied with before a lease can be completed.

A landlord may need to obtain a superior landlord’s consent to the grant of the lease or carry out works to adapt the premises to the tenant’s needs. In such cases, the landlord will not want to incur the expense until the tenant is committed to taking the lease.

What other documents are required?

The heads of terms may specify other arrangements which need to be documented at the same time as the lease or it may become clear as negotiations progress that other documents are needed.

If the lease is to be an underlease, the landlord should apply to the head landlord for licence to underlet (if required by the terms of the superior lease) as soon as possible.

If the tenant proposes to carry out any works on completion of the lease, a licence to alter may be required. The tenant should produce plans for their fit-out works for the landlord’s approval sooner rather than later so that the licence can be completed at the same time as the lease and the tenant can start their fit-out straightaway.

A landlord may require a rent deposit deed or deed of guarantee to be provided where the tenant has a poor credit rating.

Where the landlord’s property is subject to a mortgage, the consent of the mortgagee to the grant of the lease is likely to be required.

Will the tenant have security of tenure?

As noted above, tenants of certain commercial leases have ‘security of tenure’ by virtue of LTA 1954, Pt II. In such cases, tenants have the right to remain in occupation of the premises after the contractual expiry of the term.

Landlords and tenants may agree to exclude security of tenure from a lease by following a strict statutory procedure. S

The security of tenure provisions do not apply to all commercial tenancies.

Carrying out due diligence

Prior to the grant of the lease and usually while the details of the letting documents are being negotiated, the tenant’s solicitor will carry out an appropriate investigation of the landlord’s title and the premises in the same way as for a freehold acquisition.

The extent of due diligence required will depend on the nature of the interest to be acquired by the tenant. A lease for 15 years, for example, in which the tenant will covenant to comply with all title covenants and statutory requirements, as well as covenant to keep the property in repair will require the same due diligence as if acquiring a freehold.

A tenancy at will to cover a short period of occupation, for example six weeks in the run-up to Christmas where the tenant can leave at any time and takes on no repairing or compliance obligations, will require very little in the way of due diligence.

Investigating the landlord’s title

The general rule is that a landlord is not obliged to deduce title to a tenant (LPA 1925, s 44); the exception is where the lease to be granted is for more than seven years and will be compulsorily registrable upon completion (LPA 1925, s 44(4A)).

In practice, this is rarely an issue and the tenant should ask for a copy of the landlord’s title and any superior title together with a copy of any documents referred to in the draft lease, the landlord’s title and any superior title.

These should be checked to make sure that the landlord has the power to grant the lease and all the necessary rights to go with it and that they do not contain any adverse rights and restrictive covenants which will impact on the tenant’s use of the premises.

Searches

Pre-contract searches provide additional information about the premises and are carried out in order to provide the tenant with as much information as possible about the premises.

The results of the searches will need to be checked carefully and their significance explained to the tenant.

Preliminary enquiries

The tenant’s solicitor should send preliminary enquiries to the landlord’s solicitor. These are intended to capture any information the landlord has about the premises which may not be disclosed by the landlord’s title documents or the results of the tenant’s searches.

The tenant’s solicitor may need to make additional preliminary enquiries about matters which relate specifically to the property or which pick up on information disclosed elsewhere.

Replies to enquiries are contractual representations and the tenant is entitled to rely upon them.

The landlord’s obligation to disclose information to the tenant is limited and they are under no obligation to reply to enquiries, but in practice a refusal to provide replies is not considered acceptable. Once replies are given, the landlord must ensure that they are complete and up to date and must notify the tenant of any changes.

Physical inspection

If a property is particularly complex in its layout, the tenant’s solicitor may find a site visit helpful.

More commonly, it is left to the tenant’s surveyor to carry out a physical inspection and survey which may identify issues with the layout and the physical state of the property that need to be addressed in the lease.

A schedule of condition may need to be produced in order to be annexed to the lease; the lease will (often) then need to be amended to provide that the premises do not have to be handed back to the landlord in any better state of repair than evidenced by the schedule.

Minimum energy efficiency standards

A landlord must provide a prospective tenant with an Energy Performance Certificate (EPC). An EPC gives a property an energy efficiency rating from ‘A’ (highest) to ‘G’ (lowest). It must be prepared by an accredited energy assessor and lodged on the EPC register.

Stamp duty land tax/Land transaction tax

Stamp duty land tax (SDLT) is payable on the grant of a lease in England and land transaction tax (LTT) is payable on the grant of a lease in Wales. The amount payable is calculated by reference to a figure known as the net present value (NPV). The calculation for the NPV is complicated. Both HM Revenue and Customs (HMRC) and the Welsh Revenue Authority (WRA) have produced an online calculator to calculate the amount of stamp SDLT/LTT due on leases.

A tenant under a new lease must complete a land transaction return notifying HMRC/WRA of the transaction. Any SDLT due must be paid within 14 days of the ‘effective date’ of the transaction and any LTT due must be paid within 30 days of the ‘effective date’ of the transaction. Failure to do so will trigger the payment of penalties.

 The effective date of the transaction is usually completion of the lease or, if earlier, the date on which it is substantially performed. If there is an agreement for lease and the tenant has enjoyed early access to the property, the effective date may be the date of occupation. Substantial performance for the purposes of SDLT/LTT will be a question of fact in each case and the tenant’s solicitor should make sure that the land transaction return is not filed late.

VAT

A sale or lease of UK property is generally exempt from VAT.

However, a landlord may opt to charge VAT in relation to a property to enable it to recover the VAT element of other costs relating to the property.

If a landlord has opted to charge VAT, then VAT will be payable on the rent and any premium. The VAT status of the property should be disclosed in replies to preliminary enquiries and the relevant questions are raised in  Commercial Property Standard Enquiries – CPSE1.

Where a tenant is unable to recover VAT, the practical effect of the landlord’s election is to increase the rent by 20%, making it a significant cost to the tenant.

Completion of the lease

In practice, completion of the lease usually takes place by phone between the landlord’s and the tenant’s solicitors once they are each holding their client’s signed part of the lease. Each party agrees to date the lease and undertakes to send their client’s signed part to the other.

Immediately before the lease is dated, any blanks in it should be filled in, for example the term commencement date, rent commencement date, any rent review dates or break dates.

If there is any money to be paid on completion, this is usually transferred to the landlord’s solicitor to be held to order and is released by the tenant’s solicitor on completion.

Registration

A lease with more than seven years to run at the date of grant (or a reversionary lease which takes effect more than three months from the date of grant) must be registered at HM Land Registry. If the lease is granted out of a registered title, it will not take effect in law until it is registered. The application to register is made using form AP1 and should be submitted to HM Land Registry within the priority period given by the official search certificate.

Contracting out of the Landlord and Tenant Act 1954—procedures, timing and pitfalls

Why contract out?

The Landlord and Tenant Act 1954 (LTA 1954) gave tenants of business premises security of tenure—in other words, the right to stay on in their premises after the expiry of the contractual term of the lease.

A landlord who grants a tenant a lease with security of tenure can only bring the lease to an end and regain possession of the premises by following the procedures set out in the LTA 1954. Even then, the landlord must be able to establish one of the limited statutory grounds for possession laid out in LTA 1954, s 30 and successfully obtaining possession is likely to involve the payment of compensation to the tenant.

A tenant who has security of tenure under the LTA 1954 is therefore in an extremely strong negotiating position if their landlord wishes to obtain vacant possession (eg to redevelop the premises) and the presence of a protected tenant can lead to delay, and add to the cost, of any project proposed by the landlord.

Fortunately for landlords, a mechanism exists for leases to be excluded from—or ‘contracted out’ of —the LTA 1954 and where a tenant has agreed to exclude their tenancy from the LTA 1954, it is essential for the landlord to ensure that the exclusion is valid.

The landlord’s notice

The first step in the contracting out process requires the landlord to serve a landlord’s warning notice on the tenant before the parties enter into a tenancy, or if sooner, before they become contractually obliged to do so.

On whom is the landlord’s notice served?

The warning notice must be served on the tenant. If the tenant comprises more than one person or entity—for example a lease granted to a partnership—a warning notice, setting out the name and address of all of the individuals who will together make up the tenant, is served on each individual and that each individual signs a separate simple declaration or swears a separate statutory declaration.

When should the landlord’s notice be served?

The landlord’s warning notice must be served before the parties enter into a tenancy or become contractually bound to do so.

The tenant’s declaration

Following receipt of the landlord’s warning notice, the tenant must either sign a Simple Declaration to exclude Part II Landlord and Tenant Act 1954 to confirm that they have understood and agree to the exclusion of their statutory rights or, if the lease or agreement for lease will be entered into less than 14 days after service of the landlord’s warning notice, the tenant must swear a Statutory Declaration to exclude Part II Landlord and Tenant Act 1954 to the same effect.

• Drafting Commercial Lease agreements
• Commercial rent arrears recovery
• Commercial service charge disputes
• Commercial lease negotiations