Drafting Leases

Audio Lecture

Aims & Objectives

• To understand key drafting issues in rent, rent review, alienation, user and alterations provisions in a lease

• To understand the different methods of reviewing rent

• To understand the fundamentals of an open market rent review

Why use a lease?

• Problems of repair and maintenance

• Commercial considerations

Drafting leases

• Why are the precedents so long?

• Use of precedents

• Standard forms of commercial leases

• Land Registry prescribed clauses leases

Commencement

• ‘This lease’

• Date

• Name and addresses of the parties

• Land Registry heading

Premium

• Consideration and receipt clause

• Payment of rent

• Promise to perform covenants

Operative words

• Traditional - ‘hereby demises’

• Modern – ‘grants’ or ‘lets’

Title guarantee

• ‘with full title guarantee’

• ‘with limited title guarantee’

Term

• Length of the lease and start date must be set out

• It must be clear whether or not the date specified as the commencement date is to be included in the term

Parcels clause

• Certainty

• Top floor and ground floor units

• Garage and/or car parking space

Easements

• Access and services

• Access for repair

• New rights

• Use of communal facilities

• Rubbish

Rent and rent review

• Flat leases

• Commercial leases

• The need for rent review in a commercial lease

• Regularity of review

Types of rent review

• Fixed increases

• Index linked clauses

• Turnover and sub-lease rents

• Open market review

Open market review

• It is not possible to assess the rental value of the premises

• It is a leasehold interest which is capable of valuation

• A hypothetical interest in the premises is valued not the tenant’s own interest

Hypothetical letting

• Terms of the hypothetical letting must be set out in the lease

• The date of valuation must be the review date

• Valuer will be directed to ascertain the open market rent of a hypothetical letting of the premises at each review date

Circumstances of the letting (1)

• The premises

• The market

Circumstances of the letting (2)

• The consideration

• Possession

Circumstances of the letting (3)

• The terms:– The alienation covenant– The user covenant– Rent and rent review– The length of the term

Assumptions

• Premises fitted out and ready for occupation and use

• Covenants performed

• Recovery of VAT

Disregards

• Goodwill

• Occupation

• Improvements

The mechanics

There are two ways in which a review may be carried out:– By negotiation– By service of notices

Is time of the essence?

• Express stipulation

• Any other contrary indication

• The interrelation of the rent review clause with other lease clauses

Negotiated review

• Provides for rent to be agreed at any time

• But if no agreement by review date, then a referral may be made to an independent third party

• Either party should be able to refer

Trigger notices

• Formal timetable for service of notices

• Problems can arise:– Landlord does not have to be reasonable

in his proposals– Notice must be clear and unequivocal

The third party

• Usually a surveyor

• Appointment process

• Will act either as an arbitrator or as an expert

• There are considerable differences between the two

Ancillary provisions

• Late review

• Record of review

Alienation

• Flat leases

• Commercial leases

Types of covenant

• Absolute

• Qualified– Section 19(1)(a) LTA 1927– LTA 1988

Special rules for commercial leases

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

• Section 19(1A) LTA 1927– factual– discretionary

Alterations

• Landlord will want control over alterations

• Absolute bar on structural alterations

• Qualified covenant for other alterations

• Section 19(2) LTA 1927

Permitted user

• Flat leases – use for residential purposes only

• Commercial leases – use agreed between parties

• Reference to use classes?

• May be absolute or qualified

Other lease provisions

• Insurance

• Rent suspension

• Repair

• Service charge

• Forfeiture

Conclusion

• To understand key drafting issues in rent, rent review, alienation, user and alterations provisions in a lease

• To understand the different methods of reviewing rent

• To understand the fundamentals of an open market rent review