#4821 - The Contents Of A Lease - Property Law and Practice

For ANY TYPE OF RESTRICTION IN A LEASE, distinguish between absolute, qualified and fully qualified covenants:

• Absolute – “the Tenant shall not [X]”

• Qualified – “the Tenant shall not [X] without Landlord’s consent”

• Fully Qualified – “the Tenant shall not [X] without Landlord’s consent, such consent not to be unreasonably withheld”

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.

1) Alienation

Alienation means subletting or assigning the property. It refers to all forms of disposal.

In the absence of any restrictions in the lease, the tenant is free to do as it pleases. However, a LL of a commercial lease will normally want to control who is in occupation of the property, and will require the tenant to give covenants relating to assignments and subletting.

• S19(1)(a) Landlord and Tenant Act 1927 – applies to all types of leases on all forms of alienation:

  • Has no effect on absolute covenants prohibiting alienation.

  • It converts a qualified covenants into a fully qualified covenant.

  • Note, that a LL may incur fees of a surveyor instructed to gather financial information about a proposed assignee or sub-tenant and could reasonably withhold consent if payment of such fees isn't made.

  • LL’s reasonableness in withholding consent:

    • International Drilling – a LL cannot refuse consent on grounds which have nothing to do with the LL/T relationship.

    • Moss Bros – LL’s of (e.g.) shopping centres will usually have a prescribed ‘tenant mix’ policy so it can control certain types of retail tenant – e.g. clothing shops/food outlets. A LL can refuse a proposed assignee’s business if it doesn't fit with the tenant-mix policy.

• S.1 Landlord and Tenant Act 1988 – applies to all types of leases on all forms of alienation:

  • This provides a further layer of protection for tenants when a tenant applies to a LL in writing for consent to assign/sublet and the LL must not unreasonably withhold his consent.

  • The LL must respond within a reasonable time (either to give consent or a written notice of refusal).

  • If the LL doesn't comply, he may be liable for tortious damages for breach of statutory duty.

  • Dong Bang Minerva – 28 days from the receipt of the notice to alienate was considered reasonable time.

• It is very IMPORTANT that LL’s ensure the terms of their consent are incorporated into a legal document (a licence) so that the conditions on which the consent is given can be outlined.

• It is also IMPORTANT to obtain the assignee/sub-tenant’s direct covenant with the LL that it will comply with the tenant’s covenants in the lease to be sold/granted to it. This creates privity of contract between the LL and the assignee/sub-tenant should the covenant every be breached.

  • Aubergine – consent in principle not enough, it needs to be via a formal licence.

• In addition to a T obtained the LL’s consent, it may need to ensure (where applicable) that the lender’s consent is obtained. Often, this is required under the lease terms.

• Even if it isn't required, the dealing may require an application to the Land Registry to amend the freehold/existing leasehold titles or create a new leasehold title. These application DEFINITELY cannot be made without the lender’s consent.

  • In unregistered land the lender will also require consent as it will have custody of the title documents needed for any relevant applications.

1a) Assignment

• Old Leases – pre-1996 – maintained the concept of original tenant liability.

  • This meant that if T assigned/sub-leased the property and the assignee/sub-tenant breached a covenant, the original tenant would remain liable to the LL as only they have privity of contract.

• New Leases – post-1996 – changes under the Landlord and Tenant (Covenants) Act 1995 (LT(C)A 1995):

  • S.5 LT(C)A 1995 abolished original tenant liability so for new leases, a tenant is automatically realised from covenants when it lawfully assigns the lease (i.e. only liable when the lease vested in it).

  • NOTE: original tenant liability still exists for leases created pre-1996.

• S.19(1A) LTA 1927 – only applies to new leases (unlike 19(1)(a) which applies all leases) and to assignment only.

  • It allows the lease to specify circumstances where a LL may withhold consent to an assignment without being subject to the reasonableness test.

  • NOTE: this doesn't apply to sub-letting.

• S.16 LT(C)A 1995 – authorised guarantee agreements (AGAs) – applies to assignment provisions in new leases.

  • One of the conditions attached to the LL’s consent for an assignment under s.19(1A) is often that the outgoing tenant enters into an AGA promising the perform the incoming assignee’s obligations under the lease, if the assignee defaults.

  • This only guarantees the IMMEDIATE ASSIGNEE – in the event of future assigning, another AGA is required.

• Overriding leases: s.17 and s.19 LT(C)A 1995 (applies to all leases where tenants liable under original tenant liability or an AGA are facing attempts by the LL to recover payment following a breach by an assignee):

  • s.17 – a LL must serve 6 months notice on a former tenant of the payment becoming due.

  • **s.19 – a former tenant who has made a payment under s.17 may require the LL to grant it an ‘overriding lease’ by which the former tenant becomes the immediate LL of the defaulting tenant and the immediate tenant of the LL who is serving the notice.

    • This has the effect of providing the former T some control in that is regains possession of the premises from the assignee to prevent the default from continuing.

    • To obtain an overriding lease, a T must demand it in writing within 12 months of making a s.17 payment.

2) USE

An express restrictive covenant is needed from the T to restrict the use of the premises. Otherwise, the T is free to do whatever he pleases. Such covenants can be absolute, qualified or fully qualified.

NOTE: very restrictive provisions will have a depressing effect on the level of rent chargeable.

• s.19(3) LTA 1927 – applicable to all leases:

  • Unlike alienation, s.19(3) does not upgrade a covenant to fully qualified.

  • It does, however, prevent a LL from demanding payment for consent (so long as no structural alterations).

3) Alterations

Leases will normally allow the tenant to make some alterations to the property. However, the LL will wish to control this by limiting the alterations permitted, requiring the LL’s consent and/or requiring reinstatement or removal of the permitted alterations at the end of the lease. As with user clauses, an express covenant is needed from the T to prohibit alterations.

The LL will wish to record its consent by the parties entering into a licence for alterations.

• s.19(2) LTA 1927 – upgrades qualified covenants to fully qualified (i.e. reasonableness):

  • What constitutes an Improvement:

    • Lambert v Woolworth - to be construed widely as words which improve the property from a tenant’s perspective.

    • Legal doctrine of waste – you cant make an improvement that diminishes the value of the property.

  • What constitutes unreasonable:

    • S.1 LTA 1988 doesn't apply to covenants against alterations, so there is no statutory implied duty that the LL must respond within a reasonable time. Therefore, T should want the less to expressly provide that the consent to alterations is “not to be unreasonably withheld or delayed”.

Rent Review

It is usual in commercial leases of 10 years or more to contain a rent review clause. This is for the LL to ensure he is always receiving the maximum rent possible for the property and not bound by the rent at the start of the term. Long leases wont have RR clauses as only ‘nominal’ rent will be paid each year.

• The PURPOSE of RR is to keep the rent in line with the local market by adjusting it regularly.

There are various ways in which the rent can be reviewed:

1. Stepped Rent – LL and T agree to increase the rent in fixed amounts each year

2. Turnover Rent – rent assessed based on the T’s turnover at the property

3. Reference to annual inflation

4. Open Market Rent Review – the most common type.

This involves a periodic revaluation of the rent based on what it would be if the property was re-let at the date of review.

• Upwards only clauses – if the market rent has increased, at RR the lease rent will increase. However, if the market rent has reduced, the lease rent will not go down.

  • Unless the T is in a very strong position, it is unlikely a LL will include an upwards/downwards clause.

If the LL and T cannot agree the rent themselves, a valuer can be called in to assess the market rent. He will take into account factors such as size, location, quality of the property. However, the rental value is also affected by the terms of the lease itself.

When assessing the value of the property, the VALUER will have to take into account certain assumptions and disregards, so iron out issues of unfairness in valuing the property. This involves him looking at a hypothetical letting of the premises – so the solicitor’s job is to ensure that each of the A/D’s is designed to achieve a fair result.

• FAIR - “the premises is available to let with vacant possession”

• FAIR - “the Landlord and Tenant/Tenant have/has complied with all its obligations”

• FAIR – “the term of the lease is [10/15/20]...