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SGS 8 - contents of a lease: repair, insurance and landlord's remedies
Terms in this set (48)
what is an FRI lease?
Full repairing and insuring lease - this is where tenant both directly or indirectly covers the costs of repair and servicing of the property as of the lease.
what are the benefits of an FRI lease?
The main benefit is for the landlord whereby he/she wants to ensure there is clear income stream in form a rent and that these are not in reduction by the running costs.
What is covenant strength?
This is the ability of tenants and proposed tenants and assignees to pays sums due under the lease (principally rent but also service charge) to be able to perform other key covenant such as maintenance and repair so the landlord receives the property back at the end of the lease without its value being adversely affected.
Set out a list of options for a landlord who is concerned about covenant strength?
- Security/ rent deposit and guarantees
What is rent deposit and when can it be used?
A rent deposit is a set amount of money that is paid prior to the conclusion of a lease contract. This money is stored under the tenancy deposit scheme in a separate bank account by the landlord. It can only be withdrawn under specific circumstances. This should be documented in a rent deposit deed (this sets out the circumstances under which the money can be withdrawn)
Where rent deposit is not available, what is the alternative?
Guarantor who will sign to take responsibility for the tenants breaches under the lease.
- They can require a guarantor to be put in place. This is the person that will take responsibility for any requirements under the tenancy if the tenant has not complied with the lease.
What are the tenant's objectives when agreeing a lease?
1) To ensure that are no restrictions that prevent the tenant using the property for the required purposes
2) To ensure that rent does not rise too steeply
3) To ensure that the lease does not contain any unduly onerous provisions (onerous repair provisions)
4) To ensure the tenant can assign(sell) and underlet the lease if the premises are no longer required. The form of lease should be attractive enough to be marketable.
What is the name of the code on leasing business premises? What is the aim of the code?
Code for Leasing Business Premises published in 2007 (though there was a consultation for an updated code in 2019)
When looking at amending a lease for a tenant, this code sets out some useful suggestions. The code is voluntary but is expressed in strong terms to encourage landlords to adopts its recommendations
What is the general landlord's view of the adoption of the suggestions of the code?
Landlords are asked to adopt flexible terms depending on the type and length to achieve a fairer balance between the landlord's and tenant's rights under the lease. However, Landlord may not want to do this (rarely adopt the code in practice) because they are concerned with the freehold interest (governed by the lenders' requirements to grant FRI leases). Any leases that depart from the 'clear rent' income stream can have an adverse effect on the value of the freehold investment.
What is general tenant's view of the adoption of the code but approach of leases in general?
The tenant will want the most flexible terms available under the contract. They will only want to be responsible for the demised property under the tenancy.
- Tenants don't want to be tied down to a long-term contract and will be more attracted to leases with 'get-out' options. Similarly, tenants now have the protection of Landlord and tenant act 1954 which guarantees the ability to hold over.
- It is common for landlords to require that the act be excluded for the purposes of short term lease.
What is alienation of a lease?
This is where the main tenant undertakes to assign(sell) or underlet a property and in doing so devolves third party rights onto secondary letters under the lease
What should a tenant do before the granting of a lease?
Similar to the requirements and actions taken when purchasing a freehold, the tenant's solicitor should still investigate landlord's freehold title and carry out all the relevant pre-contract searches an enquiries.
What are the key points of difference between the grant of a lease and the sale of a freehold?
- The landlord must obtain consent (usually per the terms of the lending arrangement) to grant lease on the property
- The completion of a new documentation - the lease itself
When does the landlord need to obtain permission to grant a lease from a lender?
When the landlord's freehold interest is subject to a mortgage (as outlined on the proprietorship register), they will need to get written consent from a bank/lender should they wish to grant a lease. This will be registered on the property register?
Who drafts the lease?
The landlord's solicitor drafts the lease and then sends to the tenant's solicitor who will raise any concerns. This replaces the TR1 in a normal freehold sale.
What is an agreement for a lease? When does it take place? What are its benefits?
This separate document which may be presented by a tenant which includes terms upon which the tenant requires the property to be actioned before they will agree the lease. This includes i.e. fixing a gate or putting the property into specific repair etc. The addition of this document will require exchange of contracts to be exercised and it will usually be presented with the lease terms (which will not be signed until the terms in the agreement for a lease have been actioned).
The benefit for the landlord is that if they have to incur additional expenses, they have a guarantee from the tenant that the lease will be signed upon completion of these items.
What does it mean if the tenant and landlord decide go 'straight to lease'?
That there is no presence of an agreement for a lease and all the terms of the lease have been agreed. (no additions have been made).
Set out the process prior to the completion of a lease?
1) Agree the terms of the lease, that it is ready to complete
2) The lease is produced in duplicate on thick paper and bound (producing engrossements)
3) One part(original) signed by the landlord
4) Second part (counter-part) signed by the tenant
Completion will take place over the phone where each part dates the lease. Each party will send its signed copy to the other by way of acknowledgement
The tenant provides the 1st quarter's rent payment at completion.
What are the pre-completion steps for the purposes of a lease?
OS 1 (official search of the register) where the lease is for the whole of the property
OS 2 - if the lease for a part (i.e. 1 floor)
SDLT (stamp duty land tax)
What are the two benefits of an Official Search of the Register (OS 1/OS 2)?
- You are given a priority of 30 days from the date of search. No other interest can be registered against title in this time.
- The search lets the recipient know if there have been any changes to the title since the first search at the beginning of the transaction.
Within the lease anatomy, what can I find information on the forfeiture and clauses dealing with the exclusion of security of tenure under Landlord and tenant act 1954?
Provisos, agreements and declarations
What are the key provisions of a lease?
What is the definition of demise?
This is the extent of the premises or the property. This helps to define to the tenant the parts of the property they are allowed to occupy. This is particularly relevant where the lease for a part of the property. Where the lease for a whole it will refer to the property by address and the title number.
Whether the lease is a whole or part will be in words and normally by reference to a plan attached to the lease
what is the internal envelope?
This is the name given to the part of the property/the demise outlined in a lease of part.
This is relevant where there are common parts.
What are the common parts?
These are the parts of the property that are available for use to all the various tenants
What is the importance of defining 'premises' correctly in the view of the tenant?
The tenant will not want to be responsible for repairing areas of the property that are outside of its demise. The solicitor should make sure to check that the repair obligations/covenants match the demise. Similarly, check that landlord covenants to maintain any common parts (which he can recover via service charge)
What other rights might the tenant's solicitor want to include apart from the right to occupy (in a lease for a part)
- Rights to use common parts/ conducting media for utilities
- Rights over other parts of the building, rights of way etc
What are three elements of repair in a commercial lease?
1) Obligation on the tenant to repair the premises during the terms
2) Obligation on the tenant to replace items within the premises
3) Obligation on the tenant to decorate the premises during the term at the intervals agreed by the parties
What factors should be taken into consideration when considering the repairing obligations?
1) Definition of the Premises
2) Landlord's repair obligations and service charge
3) Insurance provisions (are insured risks excluded from the repairing covenant?)
4) The alterations provisions (does the tenants's repairing obligation extend to any alterations made by the tenant to the premises?)
What does repair mean?
Restoration by renewal or replacement of subsidiary parts of a whole. It involves no more than renewal or replacement of defective parts and not of substantial whole.
To keep premises in repair entails and obligation to put them into repair, if the tenant wants to maintain the premises as they were he should replace 'keep/put and keep' with maintain.
What is a schedule of condition?
This is a set of photographs and verbal description of a property produced by a surveyor. This can be annexed to a lease and the wording added to the lease that the tenant is under 'no obligation to put the premises in any better state of repair than as evidence in the schedule of the condition annexed to the lease'
What should be borne in mind regarding the damage by insured risks?
1) The tenant should always seek to ensure that it is 'not liable to repair damage caused by the 'Insured Risks'.
2) The landlord should always agree except where the insurance excludes cover were damage is caused by an act or omission of the tenant.
3) Where there is shortfall on the insurance payout, the lease should deal with who will be responsible for this shortfall in such an event.
What is a latent or inherent defect? How might a solicitor exclude liability for a tenant?
This where (particularly with new builds) there are defects that arise due to a design or construction of a property that may not be apparent upon completion. The solicitor can add within the lease the following drafting 'any obligations from an inherent defect with a requirement that the landlord is to assume responsibility'.
Are decoration clauses strictly speaking obligations?
No, but they are fairly standard and common. The lease may required the interior (5 years) and exterior (3 years) to be decorated at regular intervals.
The tenant solicitor should ensure that 'the landlord does not have an veto powers over colouyrs used.'
'the tenant will not be required to redecorate in the last year of the term if the tenant has redecorated within the previous twelve months'
How should a tenant solicitor amend any requirements added by the landlord?
That these obligations should be reasonable and proper.
What is a schedule of dilapidations and when is it created?
This is relevant at the point of 'yield up' or giving back the premises. If the property is not in good repair, the schedule of dilapidations is drawn up. This is a list of each item of disrepair at the property and may contain photographs.
The tenant can either fix the issues of pay a sum of money to the landlord to ensure good repair
Recommendation 7 of the Code on Leasing Business Premises states what in relation to repair? Why is this controversial?
Tenants repairing obligation should be appropriate to the length, term and conditions of the premises. And that tenants should only be expected to give back the property in the state in which it was granted.
This controversial because a any requirement to keep property in good repair imputes an obligation to put the property in good repair even if it was not at the start of the lease. Therefore landlords prefer 'keep' than 'maintain'.
What are considerations for both the tenant and landlord in relation to Insurance provisions of the property?
- FRI lease - the landlord will usually insure the whole building and recover proportions of the cost (esp. where leasing in part). The tenant should ask to a see a copy of this insurance policy and check that it is with a reputable insurer
- Covenant to pay - The tenant covenants to pay a proportion of a insurance costs. These sums are usually reserved as insurance rent - this allows the landlord to be able to take advantage of the remedies for non-payment of rent.
- Rent abatement/rent suspension - if the premises are unfit to use, there is common law requirement on the tenant to pay rent. Therefore the tenant will want to include a clause providing that 'if damage by an insured risk has caused the premises or access to them, to be unfit for use', rent is suspended - the tenant will prefer the clause to apply to all sums reserved as rent (so that this can include serve charge and insurance rent)
- Covenant to reinstate the premises - there is not requirement at common law for the landlord to use the insurance monies to reinstate the property - therefore a clause should be inserted to this effect and also to make up any shortfall out of the landlord's own monies.
- The tenant will wish to include a right to terminate a lease at expiry of a specified suspension period.
What are some examples to typical insured risks?
Fire, riot, storm, burst pipes and earthquakes
Where insurance is not available i.e. terrorism or flooding, the lease should deal with who is responsible. Similarly, there should be a comprehensive list of risk that will be insured against.
What does recommendation 9 deal within in relation to Insurance?
That insurance policy terms should be fair and reasonable and represent value for money.
What is forfeiture?
This a landlord's remedy for breach of a tenant's covenant which involves the lease to an end before its expiry date and removing the tenant from the premises.
This is not automatic and only available if the lease expressly reserves such a right.
Note that the forfeiture clause will sometimes be called 'landlord's right of re-entry'
Why might a landlord serve forfeiture? What considerations must be/she take into consideration?
1) Arrears of rent for a certain amount of time after becoming payable
2) Breach of any covenant, agreement or condition in the lease
3) The nakruptcy or liquidation of the tenant together with a series of detail insolvent events.
The landlord should take into consideration the current market before taking possession, is it in the landlord's interest? Is there an opportunity to develop?
What must a landlord do before exercising the right to forfeiture for breach of a covenant or bankruptcy?
They must issue a s146 LPA 1925 notice on the tenant (the exception being a breach of covenant to pay rent)
The notice must:
- Set out the breach
- Require it to be remedied within a reasonable time (if it is capable of remedy)
Claim any compensation required
What is the tenant's option if a s146 LPA 1925 notice is issued?
- Apply to the court under s146(2) LPA 1925 for a relief against forfeiture to have the lease reinstated
What are the remedies available to a landlord for the breach of a covenant to pay rent?
1) Forfeiture - the forfeiture clause must be checked and the specified time for the non-payment must have expired before attempting this remedy.
2) Action for damages - landlord can only recover rent arrears in the six year period prior to the issue of those proceedings (s19 Limitation act 1980)
3) CRAR - Commercial Rent Arrears Recovery - this allows the landlord to seize goods to the value of the outstanding debt be it rent, VAT. The landlord must serve 7 days notice and cannot take obtain items that are in use by the tenant. Again this is limited to 6 years' arrears of the actual rent only (not insurance rent or service charge).
4) Security - rent deposit that the landlord can draw upon to cover the arrears.
What are the remedies available to a landlord for the breach of repairing covenant?
1) Forfeiture - check the clause in the lease to see if a forfeiture clause applies. If it does a s146 LPA 1925 notice will need to be served on the tenant
Under s1 Leasehold Property (repairs) Act 1938, if the lease was originally granted for 7 years or more and there is at least 3 years left to run, then a particular type of s146 notice is served. This is where the tenant has the right to serve a counter notice on the landlord within 28 day. This requires the landlord to get leave of the court before moving forward with the forfeiture.
S51 of LTA 1954 extended the above application to all leases (where as previously this only applies to long leases of small houses.
2) Action for damages - s18 Landlord and Tenant act 1927
Damages should not exceed the amount of any reduction in value of the landlord's freehold interest. Damages are not available for the breach of repair where premises are going to be pulled down or structural alterations to be carried out.
1) Actions for damages - leasehold Property (repaires Act 1938)
2) Self help - Under Jervis and Harris, the landlord can, if they reserved the right to enter the premises, enter the premises for the purposes of making good the damage and they can recover this money from the tenant so long as it is described to the tenant as a debt. (not subject to the dame restrictions as s18 LTA 1927)
3) Specific performance - Rainbow Estates Ltd v Tokenhold Ltd (1988). This allows the landlord to apply to require the tenant to comply. This is discretionary and generally exceptional.
4) Security - the rent deposit withdrawal or pursue a guarantor under the terms of a guarantee (if given)
What are landlord's remedies for all other breaches (other than non-payment of rent or repair)?
1) Forfeiture - check the clause for right of forfeiture for the breach in question and then a s146 LPA 1925 notice must be served.
2) Damages - this is for the landlord to be put back into the position it would have been in should the tenant have complied with the obligations. This may be applied for in conjunction with specific performance (i.e. if the tenant has change the use of the premises in breach of a covenant as to use)
3) Specific performance - equitable remedy is rare
Co-operative Insurance society Ltd v Argyll Stores - where the tenant had ffailed to comply with a covenant to keep its shope open during normal business hours. SP was not awarded because the covenant to carry on business would require constant supervision by the courts.
4) Injunction - a discretionary remedy issued by the courts ordering the tenant not to breach the lease. This comes down to the facts of the case.
5) Security - the landlord can withdraw for any rent deposit or pursue a guarantor.
Is SDLT payable on a lease/underlease?
Yes, based on the term of the lease and the amount being paid. On an assignment of a lease on the premiums paid
SDLT 1 is sent to HMRC where you will receive SDLT 5
SDLT 5, fee AP 1 and a signed lease will be sent to the land registry
The land registry will produce a title document where the lease will have their own title number.
Other sets by this creator
SGS 4 - completion, pre completion and remedies
SGS 1 - set 2
SGS 7 - Security of tenure
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