Leasehold Procedure

PLP Lecture 9

Aims & Objectives

• To consider the advantages and disadvantages of leasehold

• To understand the main procedural steps on the grant of a lease

• To consider the form and content of a commercial lease

• To consider the rules relating to liability for covenants

Disadvantages of Leases - Tenant

• A lease is a depreciating asset

• There is no visible return on the rent

• The tenant does not own the property so does not have control

• The tenant may be subject to repairing obligations

Disadvantages of Leases - Landlord

• A tenant may be unreliable

• The investment may depreciate

• A landlord may be liable for repair, maintenance and insurance

• Income and capital are not guaranteed

Advantages of Leases

• The landlord retains an interest in the property

• The landlord retains control

• A capital sum may be charged for a long lease

• Enforceability of covenants

Who is liable for breach of covenant?

• The freehold of a factory was sold in 1988. The buyer in the transfer covenanted with the seller to keep the premises in good repair and not to use the premises for the manufacture of fireworks. The transfer was registered at HM Land Registry. The buyer still owns the factory and has breached both covenants.

Who is liable for breach of covenant?

• The original buyer sold the factory in 2001.

• The new owner has breached the covenants?

Who is liable for breach of covenant?

• Rather than selling the freehold in 1988, the seller granted a 25 year lease. The tenant covenanted in the lease to keep the premises in good repair and not to use the premises for the manufacture of fireworks. The lease was assigned in 1994 and the assignee has breached the covenants.

Who is liable for breach of covenant?

• What if the lease had been granted in 2001 and assigned this year?

Landlord and Tenant (Covenants) Act 1995

• Applies to leases granted on or after 1/1/1996

• Automatic tenant release on assignment

• Exception - Authorised Guarantee Agreement

• Does not apply to leases granted before 1/1/1996

Commonhold

• Designed to overcome some of the disadvantages of leases

• You will find an overview of commonhold at www.landregistry.gov.uk/education/commonhold

Residential Leases

• Long leases of houses

• Short term leases of houses

• Long leases of flats

• Short term leases of flats

Commercial Leases

• Advantages for a tenant:

– Flexibility– No capital outlay– Building may be managed by someone

else

Commercial Leases

• Advantages for a landlord:– Has a capital interest– Can retain control of management– Can recover expenditure through a service

charge– Produces income

Basic Leasehold Terminology

• Grant

• Assignment

• Subletting

Leasehold conveyancing procedures

• The steps which should be taken are set out on the handout.

Drafting leases

• Drafted by landlord’s solicitor• Use of precedents• Code of Practice for Commercial Leases -

www.bpf.propertymall.com/publications/comleases

• Land Registry prescribed clauses leases• See handout for the contents of a typical

lease

Types of covenant

• Absolute

• Qualified

• Fully qualified

Drafting the contract

• Usually used for the grant of a long term residential lease

• Not generally used on short term lettings or commercial leases

Title

• Open contract – tenant not entitled to deduction of the freehold title (s. 44(2)) LPA 1925)

• SC 8.2.4

Acting for the tenant

• Contract and draft lease

• Searches

• Lender’s requirements

• Advising the client

Engrossment and execution of the lease

• Lease and counterpart

• SC 8.2.5

Apportionment of rent

• Unless completion takes place on a day when rent is due, an apportionment will need to be made where the rent is payable in advance

• SC are silent and an express condition will be required

Completion

• The landlord will receive:

– The counterpart lease– Any premium payable– An apportionment of any rent payable in

advance

Completion

• The tenant will receive:

– The lease– A marked or certified copy of the freehold

title deeds (unregistered land only)– A certified copy of the lender’s consent, if

relevant

Post completion

• Stamp duty land tax

• Registration of the lease

• Notice to the landlord

Stamp duty land tax

• Submit a land transaction return to HM Revenue & Customs and pay SDLT

• Within 30 days after the ‘effective date’ of the lease – usually the completion date

SDLT

SDLT is due on

• Any premium paid by the tenant at the current rates, and

• The rental element of the lease calculated according to the ‘net present value’

Registration of the lease

• If landlord’s freehold title is unregistered, an application for first registration of the lease must be made within 2 months of completion

• If landlord’s title is registered, the tenant’s application is for registration of a dealing and it must be made within the priority period.

Conclusion

• To consider the advantages and disadvantages of leasehold

• To understand the main procedural steps on the grant of a lease

• To consider the form and content of a commercial lease

• To consider the rules relating to liability for covenants