#4828 - Leasehold Transactions - Property Law and Practice

• Landlord’s Objectives – to ensure the property is insured, repaired and used only for the permitted purpose.

• Tenant’s Objectives – to ensure the are no restrictions on desired purpose, ensure the rent doesn't rise too quickly and that the lease doesn't have onerous provisions. Ensure that it can sell/assign the lease.

Requirements for and structure of a lease:

• Exclusive possession of the property by the tenant

• s.1 LPA – must have a “term of years” absolute

• The rough guide is as follows:

  • Parties, date, definitions, interpretation provisions (e.g. “Insured Risks”, “Common parts”)

  • Demise and rents (operative provisions of the lease where L grants the lease for a specified term in consideration of rents paid and covenants entered into)

    • ***When the lease of part be sure to CAREFULLY DESCRIBE the property and INCLUDE A PLAN

  • Tenant’s covenants (issues such as the obligation to pay rent and to repair, the use of the property, alterations, assignment and sub-letting provisions)

  • Landlord’s covenants (covenant for quiet enjoyment, services and insurance)

  • Guarantor’s covenants (guarantee payments and perform other obligations – e.g. repair)

  • Provisos, agreements and declarations (e.g. forfeiture, damage and destruction by insured risks)

  • Rights granted (e.g. right of way, right of access)

  • Rights excepted and reserved (L may reserve right to access property e.g. to carry out repairs)

  • Other provisions (rent review, service charge, form of future documents such as AGAs and rent deposits)

1) Landlord’s Clauses

SERVICE CHARGE: Covenant to provide services

• T will covenant to pay the service charge.

  • Include a proviso that suspends covenant in the event of insured damage (if premises/access is destroyed).

• Service charge will be calculated as a proportion of the premises (i.e. square footage). However, T may argue things the T wont use should be taken into account (e.g. lift if on ground floor).

  • GENERALLY, L will estimate the annual cost of maintaining/provides services and charge T. At the end of the year if there is a shortfall then T will pay difference. If there is a surplus it will be carried forward into the next year.

• L may try to resist an obligation to provide services, preferring an obligation to provide “such of the Services as it deems necessary”. It may also try to dilute it to “best/reasonable endeavours”. Basically to put the obligation on its own terms

  • This is unacceptable for T. T should resist efforts to make the provision of the services condition on the T paying the service charge. This is a separate obligation and must remain so.

  • T also doesn't want the include of wording such as “and other services”. He wants CERTAINTY via a restrictive list of specified services.

• It is reasonable for L to limit its liability to provide services where factors beyond their control prevent them from doing so (e.g. industrial action). In this situation, L should still use “best/reasonable endeavours to restore services as soon as possible”.

• L must disclose irregular events that would have a significant impact on the amount of future service charges.

• L must during negotiations provide the best estimate of the service charges.

Insurance – it is common in an FRI lease (where lease part of building/estate) for L to insure the whole development and recover a proportion of the cost from each T.

• Define “insured risks” in the definitions section.

  • L will want to include a proviso stating “and other such risks as the L may from time to time reasonably consider necessary”.

• The insurance policy should be fair and reasonable.

• L must during negotiations provide the best estimate of the insurance payments.

• The Tenant will then covenant to pay the insurance premium or a fair proportion.

Where damage occurs:

• Covenant by L to make a claim and reinstate premises: T must insist on this as no common law provision.

• Rent abatement: T must insist that a clause suspending the payment of rent is included in the lease if damage by an insured risk has caused the premises to be unfit for use.

• If reinstatement impossible: include a provision of time (e.g. “if the premises cannot be reinstated within the [3 years] during which rent is suspended”) and then the lease can come to an end.

2) Tenant’s Clauses

a) Positive Clauses

This is establish in the front of the lease.

• Legal action – issue proceedings in debt to recover rent that has fallen due

• Distress – ancient right of L to peaceably re-enter and seize chattels to the value of the debt (or by court order)

• Forfeiture – a commercial lease usually contains a lease enabling L to peaceably re-enter the demised premises and prematurely end the lease on breach by T of a covenant.

  • It is not automatic – L can only do it if the lease has a covenant to that effect.

  • No notice is required – s.146(1) LPA.

Example: Clause 4 Vento Teso lease

Generally, a T will be required to repair and decorate the premises during he term and hand premises back to L in repair at end of the term.

• BEWARE of the covenant to “keep/put the premises in repair”: courts have held this means to “put and keep” in repair, even if in disrepair at the start of the lease.

  • INSTEAD, the T wants to maintain the premises in the state it was at the start of the lease.

  • As a result, it should be kept to the standard of the schedule of condition ( a survey of the property at the outset of the lease identifying the state of the property):

    • The Tenant covenants to maintain the Premises in the state evidenced by the Schedule of Condition.

• Exclude: damage by “Insured Risks”, as well as latent defects (hidden problems) and fair wear and tear if you are representing T. Also try to avoid a responsibility to renew or to replace and rebuild.

• Define “Premises” in a clear way – this is vital to establish the Ts obligation.

• Forfeiture: Leasehold Property (Repairs) Act 1938 – this requires a special type of s.146 LPA notice to be given when the lease in question was granted for 7+yrs and has 3+yrs to run.

  • The notice must set out the right to serve a counter-notice on L within 28days which will require L to get the leave of court before proceeding with the remedy.

  • Any notice must also state the breach, the remedy and the compensation.

  • Remember: the lease must have a forfeiture clause.

• Damages: limited by s.18(1) LTA 1927 – to the reduction in value of L’s interest. May not be sufficient to cover full cost of works.

  • If term is 7+years and has 3+years to run then it requires the same s.146 notice as above.

• Self-help: to avoid statutory restrictions on damages, leases generally contain a Jervis v Harris clause.

  • This entitles L to enter the property, notify the T of any disrepair and then carry out the works himself.

  • He will then recover the full costs of the work as a debt.

• Specific Performance: court orders the T to carry out his obligation.

  • This is rarely ordered by the courts.

• Rent Deposit: L could simply retain the rent deposit he took at the outset of the lease.

b) Negative Clauses

The only way to permanently circumvent an absolute prohibition is for the parties to enter into a deed of variation altering the original covenant in the lease.

• Dong Bang Minerva – reasonable time is 28 days.

• International Drilling Fluids – L’s decision must be referable to relationship of L & T.

• Ashworth Frazer – if L anticipates breach of use covenant it is reasonable to refuse consent to assignment.

• Lambert v Woolworth – improvements are seen from Ts point of view = all T alterations are improvements.

• Moss Bros – L can refuse a certain type of institution if it doesn't fit with the tenant mix

• Old Lease – granted prior to 1 Jan 1996 = original tenant liability where the T is liable for the breaches of any assignee or sub-assignee.

• New Lease – granted on or after 1 Jan 1996 = no original tenant liability. Here, T is only liable for breaches by the assignee, and only when the assignee is still a tenant. Once the lease is assigned to a sub-assignee, T will not be liable for any breaches.

  • NOTE: T can be required to give an AGA by the lease.

  • An AGA is when an outgoing T promises to perform the incoming assignee’s obligations under the lease if the assignee defaults. This only guarantees the immediate assignee under the lease – s.16 LT(C)A.

NB: in relation to new or old leases, T is only liable for rent or other fixed sums due from an assignee if L has served notice on T within 6 months of money becoming due – s.17 LTCA.

• s.19 - former T who has had to make a payment under s.17 can require the L to grant them an overriding lease by which the former T becomes immediate L of defaulting T. This gives to former T some control as he regains possession of the premises from the assignee.

  • To obtain an...