10.

2019 PLP REVISION VC A&O

Property Law & Practice

Consolidation Notes: Leaseholds
Security of Tenure (15 marks)

Security of tenure = If a tenant has built up his business, can stay in occupation after the
end of the lease and get a new lease.
Contractual expiry date (‘CED’) = the date specified in the lease as the date it comes to
an end.

CONTRACTING OUT

A landlord might grant a contracted out tenancy because they want to be able to get the
property back when the lease ends without the bother of notices.

The 1954 Act may be excluded by agreement between the parties (s.38A) prior to the
grant of the lease.
Agreement to contract out must be carried out in accordance with the procedure set out
in the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003.

Two procedures that may be followed to exclude 1954 Act protection from a new lease: 1.
The landlord must serve a warning notice on the tenant, giving at least 14 days’ notice
before the tenant becomes bound to enter into the lease, stating that the 1954 Act will
not apply.
The tenant must then make a simple declaration confirming its receipt and
understanding of the warning notice, and that it understands/accepts the
consequences of this notice.
2. Where time is short, the notice period can by waived. Less than 14 days’ notice may
be given by the landlord to the tenant in the warning notice, but then the tenant must
make a statutory declaration in front of an independent solicitor confirming that it has
received the warning notice and accepts the consequences.

In both cases, the lease must refer to the landlord’s warning notice and the tenant’s
declaration, and must contain a clause stating that security of tenure is excluded.

Contracted out leases entered into before June 2004 contain reference to a court order
permitting the parties to contract out of the 1954 Act. You should ensure that you see a
copy of the court order when dealing with the lease.

The warning notice must be served by the immediate landlord of the proposed under
tenant.
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10.2019 PLP REVISION VC A&O TERMINATION BY LANDLORD

A landlord may serve a notice under s.25 to terminate the 1954 Act protected lease.
• A s.25 notice may not be served if a s.26 request has already been served by the
tenant (s.26(4)).
• The s.25 notice must be in the prescribed form (s.25(1)) and served by the competent
landlord (s.44).

The s.25 notice must be served on the tenant not more than 12 nor less than six
months from the specified termination date (for the current lease) which is set out in the
s.25 notice (s.25(2)).
Specified termination date = the date you would specify in the notice, and which may
either be the CED or a date later than that, depending on when you have served the
notice.
The specified termination date can never precede the contractual expiry date of the lease
(s.25(4)).
1. Plot today’s date
2. Plot the CED
3. State the rules which govern the Specified Termination Date (STD)
4. State client’s objectives
5. State date for service of notice and recommended STD

The notice can be ‘hostile’ or ‘friendly’ (s.25(6)):

• ‘Hostile’ notice = Landlord is unwilling to grant a new lease. Will have to fight in court.
The s.25 notice must specify the s.30(1) grounds of opposition that the landlord is
relying on (s.25(7)).
• ‘Friendly’ notice = The landlord is willing to grant a renewal lease after termination of
the current lease. This may be to take advantage of an increase in market rent. The
s.25 notice must set out the landlord’s proposals for the terms of the renewal lease
(s.25(8)).

After receiving a s.25 notice, either the landlord or the tenant can apply to court. • The
tenant would apply for a court order for the grant of a renewal lease (s.29(1)). • If the
landlord served a ‘hostile’ s.25 notice, the landlord would apply for a court order
for the termination of the protected lease without the grant of a renewal lease (s.29(2))
and must establish its s.30(1) grounds to the court’s satisfaction (s.29(4)). Deadline for
the court application is the specified termination date (s.29A(2)(a)). It is possible for the
parties to extend this deadline with a view to agreeing matters themselves (s.29B). If the
parties subsequently reach agreement on the terms of the renewal lease, the
application may be withdrawn.
If no court application is made by the deadline, the tenant loses the right to a new lease.
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10.2019 PLP REVISION VC A&O TERMINATION BY TENANT

A tenant may terminate its tenancy without renewal by serving a s.27 notice at least 3
months before its intended leaving date (s.27(1)).
Alternatively, the tenant may simply vacate by the contractual expiry date, in which case
no notice is strictly necessary.

A notice may not be served under this section to end the lease before the contractual
expiry date.
If a tenant considers it may need to leave part way through the term of its lease, when
negotiating the lease it should ask for a break clause to give x months notice, or sublet to
minimise their liability, or underlet the premises.

REQUEST FOR NEW LEASE BY TENANT

Protection given by the LTA 1954 is in the form of tenant’s rights under
s.24. s.24(1) gives the tenant two layers of protection:
1. A protected lease will not end on its contractual expiry date (‘CED’). The tenant has
the right to hold over / stay in occupation of the leased premises after the contractual
expiry date of the lease has passed and the lease will continue until it is ended by
service of a s.26 notice under the LTA 1954.
2. The tenant also has the right to hold over and apply for a new lease → The tenant has
the right to apply to court for an order for the grant of a new lease of the leased
premises.

Step 1: Does the LTA 1954 apply?

3 requirements under s.23(1) must be satisfied for the 1954 Act protection to apply: There
must be a tenancy in occupation for the purposes of a business.

Step 2: Is the tenancy excluded?

s.43 excludes certain types of tenancies.

Step 3: Is the lease contracted out?

A lease may be contracted out of the protection of the LTA 1954 under s.38A. Check the
lease document to verify this → Must have a clause stating that ss.24-28 LTA 1954 have
been excluded, and reference to the serving of the landlord’s warning notice + the
making of the tenant’s declaration in relation to this exclusion.

Step 4: Have any notices already been served?

A s.26 request by the tenant for a new lease can only be served if a s.25 notice has not
already been served → Check that the landlord has not already served a s.25 notice.

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10.2019 PLP REVISION VC A&O Requirements for service of the relevant notice:

- s.26(3): The s.26 request must be in a prescribed form.

- s.44: Must be served on the competent landlord.
- s.26(3): Must set out the tenant’s proposals for the terms of the new lease + the
proposed commencement date (‘PCD’) of the new tenancy.

Timing:

Identify today’s date, the CED and the best date for the PCD (depending on the client’s
objective).
Exam tip: Helpful to draw out a timeline to work out all the details.
s.26(2): The date on which the s.26 request was served must be not more than 12 or less
than 6 months before the proposed commencement date specified in the s.26 request. •
The time starts from when the notice is served.
• Whilst the renewal lease can (although does not have to) start on the day of the old
CED, the PCD must be on or after the CED (s.26(2)).

The risk to the tenant of serving the s.26 notice on the latest date for service possible for
their chosen PCD is that, in the meantime, the landlord may serve a s.25 notice with a
specified termination date (‘STD’) that is 12 months from the date of service (the latest
possible STD).
A s.26 request cannot be served if a s.25 notice has already been served

(s.26(4)). Counter-notice:

After receiving a s.26 request, the landlord may serve a counter-notice on the tenant
within 2 months of the date of service of the s.26 request → indicating whether or not he
will oppose a new lease.
If the landlord opposes the grant of a renewal lease, the landlord’s counter-notice must
set out the s.30(1) grounds of opposition which the landlord is relying on (s.26(6)).

Application to court:

After notice is served on the landlord, either party can apply to court → Usually the
tenant, who has more to lose if no court application is made because it loses its right to
renew its lease.
• The tenant would be applying to the court for an order that a renewal lease be
granted. • If the landlord opposed the grant of the renewal lease, it could apply to court
for an order that no renewal lease be granted (proving the s.30(1) grounds of opposition
set out in its counter notice) or it could use the s.30(1) grounds of opposition set out in
its counter-notice to oppose a court application by the tenant.

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10.2019 PLP REVISION VC A&O

s.29A(3): Earliest date to apply to the court is the earlier date of:
• after the landlord responds (either with a counter-notice or a reply), or
• 2 months after the service of the s.26 request.
If the landlord does not serve a counter notice within 2 months of the tenant’s s.26
request, it cannot oppose the grant of a renewal lease to the tenant, but can still negotiate
on the terms of the renewal lease.

s.29A(2)(b): Deadline for the court application is the day immediately before the PCD set
out in the tenant’s s.26 request. This can be extended by agreement between the
parties.

Even if the landlord is willing to grant a renewal lease to the tenant, the tenant should still
apply to court to protect its right to a renewal lease → The court will determine the terms
of the renewal lease if the landlord and tenant cannot agree them between themselves
(ss.32-35 LTA 1954).

s.34: The rent of the renewal lease will be a market rent so if market rents have fallen the
rent of the renewal lease will be less than the rent under the tenant’s existing lease.

O’May v City of London Real Property Co Ltd [1983]

The terms of the current lease are the starting point for the terms of the renewal lease. It
is for the party who wishes to change the existing terms to justify the change by reference
to changes of circumstances.

• Landlord and tenant will meet and negotiate and hopefully come to an agreement on
the terms of the renewal lease.
• This court application will continue to be pending until the new lease is agreed and
signed, as a safety net for if a new lease cannot be agreed.
• The application will then be withdrawn after the new lease is confirmed.

The tenant should protect the court application with a unilateral notice lodged against
the landlord’s registered title at the Land Registry.
Then, any third party purchasing the landlord’s freehold will be bound by this court
application.
Entry will be placed in Charges Register of the Official Copies.
 5
10.2019 PLP REVISION VC A&O GROUNDS OF OPPOSITION

Identify and set out s.30(1) grounds in landlord’s s.25 notice.

• Apply facts to support ground(s) cited
• Identify and deal with any relevant issues, e.g. relevant timeframes in ground (g)
• What is the likelihood of success?

Discretionary ground = The court can grant a new lease even if the ground of opposition
is made out.
Mandatory ground = If proved, the court must allow the landlord’s
opposition. The compensation grounds are set out in s.37(1A).
s.30(1) ground landlord must satisfy if it wishes to oppose the tenant’s right to apply for
a new lease

(a) Breach by the tenant of a repairing obligation under Discretionar No

the lease. y compensation.
Must be a serious breach as at the date of the
court hearing.

(b) Persistent delay by the tenant in paying rent. Discretionar No

Must be serious and persistent → the court will look y compensation.
at length of delay + number of occasions of default.

(c) Other substantial breaches of obligations under Discretionar No

the lease. y compensation.
Must be serious and persistent → the court will look at
the number of occasions of default.

(d) Availability of suitable alternative accommodation. The Mandatory No

landlord must have made an offer of suitable alternative compensation.
accommodation.
Must be reasonable in all circumstances, having regard
to the tenant’s business, goodwill etc.

(e) In the case of an under lease of part, possession is Discretionar Compensation

required for letting or disposing of the property as a y is available.
whole.

(f) Landlord intents to demolish/reconstruct the premises Mandatory Compensation

(or a substantial part) OR intends to carry out substantial is available.
work of construction on the premises (or part), and it
could not reasonably do so without obtaining
possession. The landlord must prove a firm and settled
intention to redevelop, not just do minor works, and must
need full possession of the property to do so.
This could be evidenced by obtaining planning consent
in advance.

(g) Landlord intends to occupy the premises itself. Needs Mandatory Compensation
a firm and settled intention by the landlord. Restricted by is available.
the ‘five year rule’ = A landlord cannot rely on this
 ground if the landlord bought the reversionary interest
within five years of the specified termination date set out
in the s.25 notice or the PCD in the s.26 request.

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10.2019 PLP REVISION VC A&O

‘Firm and settled intention’ = have spoken to building contractors about the works

(d) Alternative accommodation available

• Alternative premises must be suitable for the tenant, having regard to the nature/class
of its business + taking account of goodwill.
• Consider whether the alternative premises are in a suitable location.
• The size of the premises is irrelevant if it is in an unsuitable location.

(f) L intends to demolish / reconstruct

• Firm and settled intention e.g. has obtained planning permission
• Possession of the whole required
• Substantial works of construction on the holding or part of it → ‘Substantial building
works' = Will take around 9 months

(g) L to occupy the holding

• s.30(2): Cannot rely on (g) if L purchased his interest less than 5 years before the
specified termination date.

Calculating compensation

s.37(2)(b) <14 years, 1 x multiplier (of 1) x rateable value

ss.37(2)(a) and 37(3) 14 years or more, 1 x multiplier (of 2) x rateable value Rateable
value figure will be provided in the exam, just need to work out if the lease is 14 years or
more/less.

s.38(2) prohibits the exclusion of statutory compensation under s.37. Exception: An

agreement to exclude or modify the right to statutory compensation will not be void if, at
the date of quitting, the tenant has been in occupation for the purpose of its business for
less than 5 years.
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10.2019 PLP REVISION VC A&O
Contents of the Lease

Break down advice to your client into the ‘Four Ls’:

• Lease
Demonstrate in your answer that you have read the clause.
Look at all the documents in the deed packet in addition to the lease
itself: - deeds of variation which have varied the original terms of the
lease - licences granted under the lease detailing any works carried out
- licences documenting transactions (assignment or underletting)
• Law (statute + case law)
• Landlord’s title
When advising on the terms of a lease, look at the freehold title as there may be
freehold covenants which affect the use and enjoyment of the property. Does the
landlord own the freehold? Are they the proprietor of the land? Can the landlord
lease the property under a mortgage charge? May need the lender’s consent.
A number of registered leases may be noted on the official copies under ‘Schedule
of Notices of Leases’. Ideally the whole property will be let out.
• Local Authority consents, e.g. planning permission for a change of use, building
regulations approval if alterations are being made.
Consider the effect that local authority controls and statute have on the lease

terms. Term and break clauses

Commercial leases are generally for a fixed term, depending on the business sector.
The term does not have to begin on the same day as the grant of the lease (completion
date) → could begin earlier than the date of the grant.
For ease of management, landlords often prefer the terms of al the leases in a
development to begin on the same date.
It is common for the term to start on the ‘quarter day’ preceding the date of the lease.

Read the definition of ‘Term’ in the lease to calculate the contractual expiry date. •
‘From and including [x date]’ / ‘Commencing on [x date]’ = The lease will expire on the
day before that date in the relevant year/month.
• ‘From [x date]’ = Where a lease is stated to be 10 years ‘from 25 March 2018’, it will
actually commence on 26 March 2018 and expire on 25 March 2028.

Break clause = An option to end the lease before its contractual expiry date, agreed in the
negotiations prior to the grant of the lease.
Often specifies conditions for the operation of the break, e.g. the tenant must have paid
all rent/payments due under the lease + performed all its covenants.
• A commercial lease may be protected by the 1954 Act.
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10.2019 PLP REVISION VC A&O
Repairs and Insurance

In the exam, no need to investigate title. We examine the lease clauses and the steps in the
procedure (what we do to get to the completion and in the post-completion).

Service charge

Tenant pays proportion of the repair + maintenance liability of the entire

building/ development, depending on the floor area they take up.
The maintenance of all elements/parts of the building should be covered by either the
tenant’s repairing obligation or the landlord’s repairing obligation.
To ascertain the full picture, cross-check the exact definition of the ‘Premises’, the
tenant’s repairing obligation + the landlord’s repairing obligations in the lease.

Lease of a whole: Tenant likely to assume responsibility for repair fo the whole building.
Contributions to shared facilities are recovered by way of a service charge.

Lease of part: Tenant only directly responsible for the upkeep of its ‘internal envelope’.
Landlord responsible for maintaining the structure and common parts of the building,
recovered via a service charge levied on all tenants in the development.

INSURANCE

Not a long-form question, just 5-6 marks. Will be presented with this clause and asked
questions about the clause.

Tenant’s obligations

Insurance Rent = The premium paid by the landlord for insuring the Premises against
damage caused by Insured Risks and also for insuring against [3] years’ loss of rent.
The tenant pays the Insurance Rent to the landlord on 25 March, 24 June, 29 September
and 25 December (the ‘usual quarter days’).

Landlord’s obligations

Under the relevant lease clause, the landlord is obliged to insure the whole of the
Premises against damage caused by the Insured Risks.
The definition of ‘Insured Risks’ include damage caused by “fire, lightning, explosion,
aircraft, riot, civil commotion, strikes, lock-outs, workers, persons taking part in a labour
disturbance, malicious persons, earthquakes, storm, tempest, flood, bursting,
discharging, leaking + overflowing of water pipes, tanks & other apparatus, impact by
road vehicles or animals and such other risks as the Landlord considers it prudent to
insure against.”
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10.2019 PLP REVISION VC A&O

If there is damage by an Insured Risk, the relevant lease clause specifies that the
Landlord must apply all insurance monies received from the insurers to reinstate the
Premises as soon as any relevant planning permissions and consents have been
obtained.

The Landlord is not obliged to reinstate the Premises if, despite using reasonable
endeavours, he is unable to obtain Permissions (defined in the lease as planning
permissions and consents).
Inability to get permission to rebuild a property is very rare.

Damage to the Premises

Rent suspension clause = If the tenant’s Premises are damaged by an Insured Risk so
that they cannot be used or occupied, then the tenant does not have to pay the annual
rent, insurance rent or service charge (i.e. any ‘Rent’ payments) until the earlier
of: - the date the Premises are again fit for occupation, or
- three years from the date of the damage.

A further clause provides that if the Premises are damaged or destroyed by an Insured
Risk and cannot be occupied or used within three years, then either party can serve a
notice on the other to terminate the lease.

Note: Even though the property is damaged, it must be unfit for occupation/use for rent to
be suspended.

DRAFTING: THE REPAIR CLAUSE

Going on what you know from the facts, draft the clause in favour of your client.

Drafting issues in relation to repair that solicitors should look out for: Chapter 7 para

8.2

• Check for typos (spelling + grammatical errors) and correct

numbering. • Check back to the defined terms and see if they match up.
 Are all current defined terms used correctly?
Any new defined terms needed? Feel free to invent new definition, as long as it
makes sense.
• Does the clause reflect what L and T agreed/negotiated about repairs? The Heads of
Terms and instructions are clear about what has been agreed about the standard
of repair (doesn’t require a gold standard of repair)
• Can the clause be amended to favour your client more?
Good amendments → reasonable, properly incurred

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Landlord’s Remedies

Landlord and Tenant Act 1927 s.18(1): Action for damages for breach of a repair
covenant shall not exceed the amount of any reduction in the value of the landlord’s
freehold interest. Damages are not recoverable where the premises are going to be pulled
down or structurally altered after the end of the lease.

Forfeiture = Landlord’s remedy for breach of a tenant’s covenant.

• Bring the lease to an end before its expiry date, and
• Remove the tenant from the premises.

The right of a landlord to forfeit a least is not automatic. It is only available as a remedy if
the lease expressly reserves such a right in an express clause, giving the landlord right of
re-entry following a defined triggering event.

s.146 Notice

LPA 1925 s.146(1): Before exercising the right to forfeiture for breach of covenant or
bankruptcy, a landlord must serve a s.146 notice on the tenant, which must • set
out the breach
• require it to be remedied within a reasonable time (if it is capable of remedy, e.g. breach
of a repair covenant), and
• claim any compensation (damages) required.
s.146(2): The tenant can apply to the court for relief against forfeiture, i.e. to have the
lease reinstated.

Leasehold Property (Repairs) Act 1938

• Only applies to breach of repair covenants
• Only applies to leases that were originally granted for a term of 7 years or more, with at
least 3 years left to run at the date of notice.
Special s.146 notice must served on these leases even if the landlord chooses just to
claim damages for breach of a repair covenant rather than to forfeit the lease. s.1(4): The
s.146 special notice has to contain a statement that T has the right to serve a counter-
notice.
s.1(3): The tenant has 28 days to serve a counter-notice. If the tenant serves a counter
notice on the landlord, then the landlord has to get leave of the court (i.e. a court order)
before he can forfeit the lease, re-enter or sue for damages.

Landlord and Tenant Act 1954 s.51(1): Extended the LP(R)A to apply to all leases of at
least seven years with at least three years left to run at the date of the notice.

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10.2019 PLP REVISION VC A&O Self-help for breach of repair covenant

Jervis v Harris [1996]

If the landlord reserves the right to enter the premises, makes good the damage and
recovers the cost from a tenant and describes the sum due from the tenant as a debt, this
money would be recoverable by the landlord as a debt.

Advantage for the landlord: Any sum claimed is not subject to the same limitations or
requirements as a claim for damages under s.18 LTA or under the LP(R)A.

Note: The landlord can only do this if the lease expressly reserves the right to do so using
a “Jervis v Harris” clause = allows the landlord to enter the premises to repair if the tenant
has defaulted + sue the tenant as a debt to recover the cost of repairs.

Rainbow Estates Ltd v Tokenhold Ltd

An order for specific performance to force the tenant to comply with its repairing
obligation is available in principle. However, this is a discretionary remedy and is more
likely to be obtained in exceptional circumstances.

Failure to pay rent

Commercial landlords will seek to reserve as many payments under the lease as possible
as ‘Rent’.
This broadened definition means a default on any such payment allows the landlord to
forfeit the lease for non-payment of Rent without serving a s.146 LPA 1925 notice. •
s.146(11): No requirement for the landlord to serve notice if it is a breach of covenant to
pay rent. Forfeiture is an easier remedy to pursue for this breach.

Payments from the tenant for service charges and the reimbursement of insurance
premiums are often expressed in the lease to be payable as “rent” to enable the landlord
to take advantage of remedies for non-payment of rent:
- Forfeiture
- Action for damages → issue proceedings in debt
- Seize goods to the value of the sum owed under Commercial Rent Arrears Recovery
- Draw upon rent deposit
- Pursue a guarantor or former tenant for arrears
- Security

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Alterations and Use (long form question)

ALTERATIONS

Unless the lease stipulates otherwise, the tenant is free to carry out any alterations to the
premises, subject to the legal doctrine of ‘waste’ = prevents alterations which would
devalue the premises.

Landlord’s controls:
• Limiting the type of alterations permitted, e.g. only allowing non-structural alterations
without consent → Usually the lease specifies you can’t do any structural works.
Internal demountable partitioning (removable + no damage) can usually be done
without bothering the landlord.
• Requiring the landlord’s approval or consent in order to do the alteration
works. • Requiring reinstatement/removal of alterations at the end of the lease
term.

Licence for Alterations

Before giving its consent to the alterations, the landlord will normally take various steps to
ensure that its investment is not adversely affected by the proposal, e.g. require
submission by the tenant of detailed plans and specifications.

Consent of the landlord to the tenant’s works is documented by a ‘Licence for

Alterations’.

The draft licence deed is to be prepared by the landlord’s solicitor, which will then be
approved or amended by the solicitor acting for the tenant.
• Attach the plan/drawings, annex to the licence.
• Contain tenant covenants → get right consents, do the works properly + carefully,
complete the works within a timeframe (because works are disruptive).

A tenant will have to consider whether any planning permission and building regulations
consent approval is required in respect of the proposed alterations (TCPA 1990). A tenant
will also have to check the landlord’s title for any restrictions. Where an undertenant
wishes to make alterations to its premises, it will usually require the consent of both its
immediate landlord (the tenant) and as well as any superior landlord.

The Code for Leasing Business Premises recommends that the landlord’s control over
alterations and changes of use should not be more restrictive than is necessary to protect
the value, at the time of the application, of the premises and any adjoining or
neighbouring premises of the landlord.

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10.2019 PLP REVISION VC A&O Types of covenants

Absolute covenant = “The Tenant shall not do [ ].”

Qualified covenant = “The Tenant shall not do [ ] without the Landlord’s consent.”
Fully qualified covenant = “The Tenant shall not do [ ] without the Landlord’s consent,
such consent not to be unreasonably withheld or delayed.”

Where the lease contains a qualified covenant against alteration, if a proposed alteration
could be considered as an “improvement”, then s.19(2) Landlord and Tenant Act 1927
implies that the landlord’s consent is not to be unreasonably withheld. It converts a
qualified covenant against alterations that amount to improvements into a fully qualified
one by implying in the words ‘such consent not to be unreasonably withheld’ to the end
of the clause.
NB: s.19(2) does not upgrade absolute prohibitions and does not apply to
covenants which are already fully qualified.

The landlord is allowed to require as a condition of giving consent:

1. The payment of a reasonable sum in compensation for loss in value to the reversion
caused by the alterations (damage to or diminution in the value of the premises). 2.
Payment of any of the landlord’s legal or other expenses in giving consent, e.g. costs for
landlord’s surveyor, can be passed on to the tenant.
3. Reasonable reinstatement of the premises at the end of the lease term. These
conditions are usually be set out in the Licence for Alterations but, even if they are not,
the landlord is still permitted to ask for them.
Covenant about nuisance in the landlord’s title might have impact on you carrying out
works, because somebody might be able to claim under that covenant if you are being
very loud and obstructive.

Lambert v Woolworth
‘Improvements’ are to be construed widely as works which improve the premises from
the tenant’s perspective.
An alteration will be looked at from the point of view of the tenant when deciding if it is an
improvement. Therefore, all alterations are assumed to be improvements → It is difficult
to imagine a situation where a tenant would wish to carry out works which it did not
consider to better its premises.

A reasonable refusal must be referable to the landlord and tenant relationship.

Iqbal v Thakrar
The landlord was entitled to withhold consent to the tenant’s proposed alterations
because he had serious and justified concerns as to the potential consequences which
the works would have to the structure of the building.
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A tenant would ideally want the lease to provide expressly that the consent to alterations
is ‘not to be unreasonably withheld or delayed’, because there is no statutory duty on a
landlord to give its decision to a tenant’s requisition to make alterations within a
reasonable time. (cf alienation)

Absolute covenants against alterations

Even though there may be an absolute covenant in the lease against e.g. structural
alterations, this does not preclude the landlord from granting a one-off consent to a
particular structural alteration.
This one-off consent would be documented in a Licence for Alterations. The landlord
would be free to stipulate any conditions to such consent he wanted and these would not
be subject to any test of reasonableness.

Deed of Variation

Any permanent changes in the terms of the lease after the lease is granted are
documented in a Deed of Variation:
- deletion of clauses in a lease
- amendment of clauses in a lease
- additional clauses to be inserted into the lease
A deed of variation which alters the extent of the premises demised or changes the length
of the term will usually operate as a surrender of the existing lease and a grant of a new
lease → called an ‘implied surrender and re-grant’.

This will have a number of undesirable consequences:

(a) A further payment of SDLT may be due on the new lease.
(b) If the original lease was registered at the Land Registry, a formal application would
need to be made to close the title and open a new one for the new lease. (c) If the original
lease was contracted out of the security of tenure provisions of the Landlord and
Tenant Act 1954, the contracting out procedure will not apply to the re granted lease,
resulting in the tenant benefitting from security of tenure unless the statutory procedure
was followed for the re-grant also.

If the extent of the premises is to be increased, it is better to deal with the extra premises
by way of a separate lease.
That lease will of course be a “new lease” but at least the landlord retains the benefit of
the “old” lease in relation to the original property.

If the current lease was granted before 1 January 1996, for the purposes of the Landlord
and Tenant (Covenants) Act 1995, an “old” lease ends and a “new” lease is granted. 15
10.2019 PLP REVISION VC A&O Former tenants are released from obligations under the
lease and the current tenant will only be liable until the next lawful assignment. Releasing
a former tenant can have a significant effect on the value of the landlord’s reversion.

If the term needs to be extended, it is usually better to grant a “reversionary” lease = a

lease which only takes effect at the end of the term of the current lease, provided the term
of the reversionary lease commences no later than 21 years from the date it was granted.

USE

An express restrictive covenant in the lease is needed from the tenant to restrict the use
of the premises = user clause. Otherwise, the tenant is free to do whatever it pleases.

The lease may have already defined ‘Permitted Use’, need to look that up first. This
section is about a qualified use covenant, but doesn’t upgrade it to a fully qualified
covenant. Doesn’t help the tenant if the landlord says no to the change of use. Only
helps the tenant if the landlord says yes to the change of use → binds the landlord.

LTA 1927 s.19(3) does not imply a reasonableness proviso into qualified user covenants.
• If the change of use does not involve any structural alteration of the premises (works to
premises), the landlord cannot impose a fine or sum of money in the nature of a fine. • If
the change of use does involve a change to the structure, the landlord can increase the
rent or charge the tenant a lump sum (in the statute referred to as a ‘fine’ or ‘premium’) in
return for the consent.
• The landlord is entitled to:
- To require payment of a reasonable sum in respect of any damage or diminution in
the value of the premises (e.g. warehouse use is not as valuable as office use) - To
require payment of any legal or other expenses incurred in connection with the
licence/consent, e.g. surveyor’s fees and legal fees.

Licence to change use

Need a separate consent for each thing you do, e.g. licence for alterations, licence to
assign etc.
A change of use may be requested by an existing tenant but more commonly occurs in
conjunction with an assignment of the lease.

If the landlord wants to forfeit the lease because the tenant is in breach of the user
covenant in the lease, get an injunction if the tenant has changed the use of the premises
in breach of the tenant’s covenant as to use.

16
10.2019 PLP REVISION VC A&O
Completion

Pre-exchange/completion steps

Get Agreement for Lease contract exchanged → (no deposit if not paying a premium)
particular for this transaction because of the air conditioning installation.

Completion Information and Undertakings Form (e.g. TA13) sent to landlord’s solicitors
→ find out the practical details from the landlord, e.g. where are the keys, what are the
bank details
OS1/OS2 official search + other pre-completion searches
• OS2 is the official search when taking a lease of part of the landlord’s property. If whole
property it would be OS1.
The official search begins the 30 working-day priority period, freezing the
Register. • Companies House solvency search of the landlord on the morning of
completion (no priority period)
Money: Need to collect all the money, including completion monies.
• First payment of the Rents is usually paid to the solicitors, subsequent payments to the
landlord directly.
• Solicitor sends a financial statement to the client.
Lease signed by both sides
• Receive landlord’s signed copy so the tenant can keep it for their

records. The parties will then be ready to complete.

17
10.2019 PLP REVISION VC A&O POST-COMPLETION STEPS

What step needed Where / What form + Time limits +

to be carried out with enclosures need to consequences of failing
which be sent to meet the
organisati relevant time limit
on

Pay SDLT and file HMRC Form: SDLT1 pr SDLT e Within 14 days of the
SDLT1 / Land Submission Form “effective date”, i.e.
Transaction completion.
Return Enclosures: Would only be different from
Don’t need to know • Cheque for SDLT, if not completion date if you are
how much tax to sent by telegraphic told the tenant moved in for
pay for transfer or online. occupation earlier.
leaseholds, only
need to calculate - Penalty for late submission
for freeholds
- Possible interest liability for
late payment
- Can’t register
at Land
Registry until you provide
evidence you have paid
tax → SDLT5
acknowledgement
 Register the lease (if it Land Form: API Within priority period of the
is a registrable lease) Registry OS1/OS2 search, i.e. within
Enclosures: 30 working days from the
• Certified copy of the lease date of the OS1/OS2
• Bank’s consent (where search result.
the landlord had a
mortgage on its title) - Third party interests
• SDLT 5 = receipt for may obtain priority, even
paying tax if
• Land Registry fee created after completion,
if they are registered in
the meantime.
- Until registration of
the Lease, they are
only
beneficial owners. The
legal title does not
transfer until registration
is completed.
- As the Landlord’s title is
registered, the Lease will
be automatically noted
on the Landlord’s title if
there is an application to
register the Lease itself
→ s.38 LRA
2002
It will be for the Landlord
to notify its mortgagee of
the completion of the new
Lease.

No charge created at Companies House like there would be in a freehold

transaction. Certified copy = Confirm it is a true copy of the individual. Either:
- the law firm can stamp it, or
- just tick a box confirming it at the Land Registry.

18
10.2019 PLP REVISION VC A&O
Alienation

If there is no break clause to get out of the lease by serving notice, the best option is
alienation → assignment and underletting/subletting.
Useful to draw a transaction structure diagram.
Transaction Completion Document

Sale of freehold TR1

 Grant of a lease Lease

Assignment of lease TR1 or deed of assignment (if unregistered lease <7 years)

Grant of underlease Underlease

UNDERLETTING

Documents: Licence to underlet must be signed by all three parties because otherwise
there will be nothing between the landlord and the undertenant in their property. Key
covenant → The UT promises to L that they will perform the lease covenants, so that L
can directly enforce covenants against UT.

There may be a qualified covenant for underletting contained in the lease. • Pre-
conditions for underletting are considered mandatory, the tenant must meet them as a
gateway to get the landlord to give consent.
• If the pre-conditions are not satisfied, the landlord does not even need to consider the
application.

Crestfort Ltd v Tesco Stores Ltd

A covenant against underletting without obtaining the landlord’s consent which imposed
conditions that had to be satisfied is to be treated as imposing mandatory pre-conditions.
The purpose of these conditions was to limit the circumstances in which the tenant could
properly apply for consent to grant an underlease.

19
10.2019 PLP REVISION VC A&O

ASSIGNMENT

In the context of an assignment of a commercial lease, the surveyor’s role is to assess the
covenant strength of the proposed assignee. Their fees are normally paid by the tenant –
usually provision in the lease obliges the tenant to do so.
If there are concerns about the proposed assignee’s ‘covenant strength’ at the time, the
assignor might request a guarantee or a rent deposit from the assignee.
The tenant will want assignment to happen quickly because the assignee’s financial
standing might change in six months’ time.

• The tenant will contact the landlord and ask for consent to assign → get consent
document from the landlord consenting to the assignment by T to A. • If this consent is
granted, the landlord, tenant and assignee will enter into a licence to assign.
• If this is an assignment of a ‘new’ lease, the landlord and the tenant may enter into an
authorised guarantee agreement.
• The tenant and assignee will enter into an assignment deed. If this is the assignment
of a registered lease, this will take the form of a TR1.
• If additional security is requested by the landlord and set out as a condition of
assignment in the lease, the landlord could ask for a rent deposit deed or
guarantee (e.g. by a parent company).

s.144 LPA 1925: L cannot agree to the assignment and require a payment of a lump sum
from the tenant in return for consent.
However, the contract could have excluded s.144.

Authorised guarantee agreements (AGA)

New leases will always require an AGA.

Note: If the lease was a new lease and Cassie assigned it, she would probably be liable
under an AGA to Alice but would not have an “interest” in the property. She would just be
a potential liability to Alice

After T assigns the lease, they will have an ongoing liability to the L under the AGA even
though they are no longer the tenant and no longer have an ‘interest’ in the property. The
AGA makes T responsible for the incoming A’s performance under the lease. If the
assignee failed to comply with the terms of the lease, the original tenant could then ask
for an overriding lease and would then end up with an interest in the property.

20
10.2019 PLP REVISION VC A&O If T had a guarantor to its lease that T will perform the
covenants, L will ask for a GAGA (guarantee the performance of the outgoing tenants of
the covenants under the AGA).

T is released from this AGA when the new tenant assigns again.
LT(C)A 1995 s.16: Any AGA which the tenant enters into can only last / bind the guarantor
until the next lawful assignment of the lease.

LT(C)A 1995 s.17: L must serve a default notice to a former tenant within 6 months so the
T is aware of how much they would need to pay.
s.17 applies to both old and new leases.

Documents needed for an assignment

Licence to assign (giving permission to T to assign to A, also Landlord, tenant and assignee
creates direct link between L and A)

Assignment deed: (This is a sale document; T is selling the lease to A) Tenant and assignee
• Use TR1 transfer deed if it is a registered lease → >7 years
remaining on the term at the date of assignment
• Use deed of assignment if it is an unregistered lease

Assignee should apply to the Land Registry. The Proprietorship

Register would need to be updated to reflect the fact that the
assignee is now the tenant.
If the lease was not registered (because it was for less than/equal
to seven years) then no application would be needed.

To bind the parties prior to completion, the assignor and assignee

could enter into a contract for the assignment of the lease.

AGA (the lease clause may require this) Landlord and tenant

Also may require:

• Notice of assignment → Landlord and tenant
• Rent deposit deed → Landlord and assignee

21
10.2019 PLP REVISION VC A&O
Exam tip:
Step 1: State the lease clause(s) permitting/prohibiting assignment
Step 2: What type of covenant is it?
Step 3: Law → what are the relevant statute(s) and why?
Step 4: What effect does statute and case law have?
Step 5: Landlord’s title → Are there any freehold issues?
Step 6: Local authority → Are there any planning or other issues?
s.19(1)(a) LTA 1927

In certain circumstances, section 19(1)(a) Landlord and Tenant Act 1927 regulates a
landlord when it is considering giving consent to a tenant’s request to alienate its
lease.

• Applies to all types of leases

• Applies to qualified covenants against alienation
• Upgrades it to a fully qualified covenant (consent should not be unreasonably withheld).
• L may recover reasonable fees
International Drilling Fluids Limited v Louisville Investments (Uxbridge) Limited This case laid
down guidelines as to when a court would consider a landlord to be acting reasonably or
unreasonably in withholding consent.
A landlord is not entitled to refuse his consent on grounds which have nothing to do with the landlord
and tenant relationship.
e.g. It would not be reasonable for a landlord to refuse consent on the basis that he did not like
the proposed assignee. It must be something to do with the proposed assignee’s ability to pay
rent and protect the property, or bad references.

Moss Bros Group plc v CSC Properties Ltd

Landlords of shopping centres will usually have a prescribed tenant mix policy.
e.g. It will stipulate that certain kinds of retail tenant are to be situated in certain areas of the centre,
e.g. food court areas/clothing units.
This case held that a landlord was reasonable in refusing consent as the proposed assignee’s
business did not fit in with the landlord’s tenant-mix policy.
The policy must be known to tenants and must be a rational one.

Ashworth Frazer Ltd v Gloucester City Council

Where a landlord believed that the proposed assignee intended to use the premises for a purpose
which would give rise to a breach of covenant, it was reasonable for the landlord to refuse consent to
assign.

s.19(1A) LTA 1927

• Only relates to new commercial leases
Commercial lease = the user is to run a business in the property
New = the lease was granted after 1 January 1996
New leases normally list some ‘circumstances’ and ‘conditions’.
• Only relates to assignments
22
10.2019 PLP REVISION VC A&O • With a qualifying lease, L and T can agree which
circumstances or conditions are NOT subject to the reasonableness test

Identify the relevant circumstance or condition of the lease that is being

breached. Potential advice: Rectify the breach (e.g. repair the property) before
assignment. s.19(1C): Imposes a requirement on the landlord to act reasonably in
making its determination.

e.g. Condition = ‘sufficient financial standing’ → If the assignee is a newly formed

company, there is no trading history or accounts so L can’t tell if the assignee fulfils
this. L could ask for rent deposit or guarantor.

Change of use: The condition may only specify the tenant breaching the lease, and not
say anything about the assignee. However, from Ashworth Frazer the assignee would be
breaching a covenant, so L can reasonably refuse.

If this section does not apply and there are no circumstances listed, look at the case law.

s.1 LTA 1988

• Applies to fully qualified covenants against alienation (s.1(1)(b)).
• L must consent within reasonable time, unless reasonable to refuse
consent. • Burden is on L to show that the refusal is reasonable.
Dong Bang Minerva (UK) v Davina
If a landlord has been furnished with sufficient particulars of the transaction, perhaps such as would
usually comprise “Heads of Terms” agreed between parties to the transaction, then he would prima
facie know the substance of the true nature of the transaction so as to be able to make a sensible
decision on its merits.
Reasonable period within which to inform the tenant of the decision = 28 days from receipt of
the application and references by the landlord.

23
10.2019 PLP REVISION VC A&O
Rent Review (MCQ or 3 mark tag-on)

When a tenant tries to reduce the amount of rent to pay

Tenant may try to reduce the amount of rent it pays via:

• Deduction of costs: Where the landlord is in breach of its repairing obligation and the
tenant carries out the repairs itself, it may seek to reduce its payment of rent
accordingly.
• Set-off: Where a landlord’s breach of covenant causes loss to the tenant, the tenant
may reduce its rental payment to recover such loss.
The landlord may try to stipulate that the rent is to be paid ‘without deduction or set-off’
to counter the tenant’s rights to reduce the rent payable.

Payment dates

The lease should specify the amount payable, the manner of payment (e.g. standing
order) and whether the rent is payable in advance or in arrears.
In the absence of an express provision to pay the rent in advance, the presumption is that
the rent is payable by the tenant in arrears.

Commercial landlords often require that annual rent is paid in four equal payments, often
paid on the usual quarter days = 25 March, 24 June, 29 September, 25 December

The lease usually allows a grace period for payment of the rent.
If rent has not been paid by the expiry of the grace period or by the rent payment date (if
there is no grace period), the lease will usually allow the landlord to charge interest on the
unpaid rent from the date it was due until the date of eventual payment.

Possible SDLT consequences of having a rent review

Leases granted before 1 December 2003 have no SDLT consequences on rent review.

Leases which are subject to SDLT will have further SDLT payable in connection with any
rent review scheduled to take place within the first five years of the term. For any rent
review which takes place on or after the fifth anniversary, further SDLT will only be
payable if there is an abnormal increase in rent → Under the Finance Act 2006, this is
where the rent is increased by >20%.

24
10.2019 PLP REVISION VC A&O ‘Full Repairing and Insuring’ leases

i.e. ‘FRI’ or ‘Institutional’ leases.

A market rent lease (‘rack rent’ lease) usually reserves a substantial monthly or quarterly
rent.

• Commercial leases typically held by tenants for terms between 5-35 years. •
Drafted on full repairing and insuring (‘FRI’) terms, so there will be a ‘clear rent’ and
therefore a predictable rental income for the landlord.
• They give the tenant rights to occupy the premises for the purposes of its business,
and the tenant pays:
- a market rent for the privilege of doing so
- the cost of insuring and repairing the premises
- a proportion of the insuring + repairing costs for any building/commercial estate in
which it is located
• Leases with a term of 10 years or more usually contain a rent review clause → The
 landlord wants to ensure that it always receives the maximum possible rent for the
premises, which increases with the market, rather than be bound by the amount which
was set at the start of the term.

The purpose of rent review

Provision for rent to be periodically reviewed → adjusting the rent regularly in order to
keep it in line with the local rental market for similar premises + retain value in the
landlord’s investment.

• Stepped rent review: The landlord and tenant agree to increase the rent by fixed
amounts periodically.
• Turnover rent: The annual rent is calculated as a percentage of the tenant’s turnover at
the property for that year.
• Index-linked rent review: The annual rent is increased by reference to an agreed
measure of annual inflation, e.g. the retail prices index.
• Open market rent review (most common): The rent is reviewed by reference to the
market rent for leases of comparable properties in the same locality as the premises at
the time of review.

OPEN MARKET RENT REVIEW

Involves a periodic revaluation of the rent, based on what the rent would be if the
premises were re-let afresh at the date of review.
The new rental figure is based on rents in the local market for leases of ‘comparables’ at
the date of review.

25
10.2019 PLP REVISION VC A&O Usually ‘upwards only’ = The rent can go up or stay the
same. If rents in the local market have decreased, the rent paid by the tenant will not be
reduced.

Recommendation 4 of the Code for Leasing Business Premises recommends that

landlords offer alternatives such as an upwards/downwards rent review. However, this is
unlikely to be successfully negotiated. The tenant would also have to pay a higher initial
rent for having the benefit of this type of rent review.

Intervals

Precise dates of reviews are agreed between the landlord and tenant. Commonly they
occur on anniversaries of either the term commencement date, lease completion date, a
specified rent commencement date (if there has been a ‘rent-free period’), or any chosen
date.
Security of tenure = Business leases are normally allowed to continue beyond their
contractual term. The interim rent is usually set by the court at market rate, so a rent
review on the penultimate day of the term is not required.

Who is involved?

Landlord and tenant should first try to agree the new rent between themselves by the
relevant rent review date.

Otherwise, a valuer is called in to determine the new rent.

Usually drafted so that either party can call upon the valuer → a surveyor acting in his
capacity as a commercial property estate agent with knowledge of local market rents.
• The valuer is nominated either:
jointly by the landlord and tenant, or
by the President of the Royal Institution of Chartered Surveyors.
• The rent review clause states whether the valuer is to act as an arbitrator or an expert.
Expert’s decision = binding on both parties unless it can be shown that he failed to
perform the assigned task.
Unlike an arbitrator, an expert can be sued in negligence.

Pending the agreement of the reviewed rent…

If the rent review is not agreed/determined by the relevant review dates, the tenant must
carry on paying the rent at the old rate.
- If an increase is agreed, the tenant is obliged to pay immediately the difference
between the old rent and the new rent, plus interest at the rate set out in the lease. - If
the valuation shows a reduction in the market rent, the rent review will be agreed at nil
increase.
26
10.2019 PLP REVISION VC A&O

A tenant should not pay interest on any back-payment of underpaid rent at a rate
higher than the ‘base rate’ of interest prevailing at the time.
• The tenant is not paying interest because of a default on their part, but because neither
party knows what the reviewed rent should be until it has agreed or determined. • The
landlord should not lose out from not having the benefit of the revised rent from the
relevant review date, but he should not profit from it either.

Once the review is agreed/determined, the new rent is documented in a rent review
memorandum which is signed by all the parties, including any guarantors. It is
annexed to the lease.

DETERMINING THE ‘REVISED RENT’

Ideally, the ‘Revised Rent’ is the rent at which “the Demised Premises might reasonably
be expected to be let in the open market on the review date by a ‘willing landlord’ to a
‘willing tenant’.

The landlord may want to insert the word ‘best’ before the work
‘rent’. The tenant should resist this.
• It would allow the valuer to take into account bids by potential tenants with a special
interest in the premises who may be prepared to pay more, e.g. tenant of adjoining
property wishing to expand its business by taking over the lease under review.

Hypothetical lease

The rent review is carried out on the basis of a hypothetical lease = a fictitious lease used
solely for the purposes of the rent review, based on the actual lease but subject to
amendments that ‘iron out’ any inconsistencies and injustices created by the ‘actual’
position.
This is how the valuer determines the Revised Rent.

The rent review provisions in the lease contain instructions to the valuer of things to take
into account.
• The rental value is determined by the size, location and quality of the premises, as well
as the terms of the lease itself.
• The terms of the hypothetical lease are contained in a series of assumptions and
disregards set out in the actual lease.

The tenant’s solicitor should check that the hypothetical letting created by these A+D is
not too far removed from the actual position and achieves a fair result on review.

27
10.2019 PLP REVISION VC A&O Basic principle: The more restrictive the terms of the
lease, the lower the rent the landlord should be able to command.
• It would be unfair if the valuer were to disregard some particularly harsh terms of the
tenant’s lease and have them pay rent on the basis of much wider clauses which the
tenant does not have the actual benefit of.
• A landlord-friendly lease should have a depressing effect on the rent because it is not in
the tenant’s interest.

It would be unfair if the valuer takes into account voluntary improvements made to the
premises and paid for by the tenant or any under tenants.
The tenant would then in effect be paying twice - once for the improvements themselves
and again by way of an increased rent.
A disregard in the hypothetical lease would ensure that these improvements are not
rentalised.

An assumption that the Tenant has performed all of its obligations under the lease would
mean that the tenant would not benefit from a lower rent on review due to it breaching the
lease by not fulfilling its obligations.
However, the tenant would not want to assume that the Landlord has complied with all its
obligations because that would mean that the tenant pays rent on the basis of benefiting
from common parts in a state of repair which doesn’t actually exist.

Terms of the hypothetical lease: The review dates

The rent review dates should be drafted by reference to anniversaries as opposed to by

reference to particular dates. Otherwise, it may be inferred that there is only one rent
review, which would unfairly inflate the rent at review.

28
10.2019 PLP REVISION VC A&O
Agreements for Lease (MCQ)

VAT on inducements are a common issue in AfL.

Why might an AfL be necessary?

Any leasehold transactions where there will be a delay between the lease terms being
agreed and the lease actually being granted will also involve a contract called an
“agreement for lease” being exchanged, e.g. if the property hasn’t been built yet.

An AfL is useful if one party requires a “condition” to be satisfied before they will enter
into the lease of the premises.
• A lease may be conditional on planning permission being granted, either
to rebuild/refurbish the premises or
for a change of use that the new tenant needs.
• Third party consent may be needed:
- Consent of the PWB under a restrictive covenant to building works or use.
- Superior landlord may be involved, need their consent for underletting.

The landlord can spend money resolving an issue in the knowledge that the tenant is
committed to completing the lease once the condition has been satisfied. Developer
want to make sure they have a new tenant lined up before they start works. • Want to
know there are enough suitable tenants out there who are going to be
interested in this new development before spending the construction costs. • It is
often a pre-condition of any bank funding that the landlord is getting for this re
development to prove that there are AfLs with tenants.

If the Heads of Terms say security of tenure is excluded:

• Procedure for contracting out of the LTA 1954 must be carried out before the AfL is
exchanged. Not valid if done at the time of the actual lease being exchanged. • Every
guarantor also needs to get a warning notice and give back a declaration (because they
are technically agreeing in the lease to take on a new lease if the tenant defaults).

Annexures attached to the draft agreement

• Agreed form lease

Attached to the back of the agreement for lease so that the parties are clear, at
exchange of the agreement for lease, precisely what lease terms they are agreeing
to be bound by once the lease is completed.
The agreement for lease and the lease both need to be negotiated together. 29

10.2019 PLP REVISION VC A&O The form of the lease cannot be amended after the
agreement has been exchanged.
• Warning notices + declarations for tenant/guarantors
• Licence for alterations
Required for the fitting out works.
Standard of T’s works: Should be carried out in a good and workmanlike manner. In
the licence for alterations, L may want the premises to be reinstated at the end of
the term, to take out all of T’s fitting out works.
Attach plans and specifications for what works you are doing, provisions for how
the works will be treated for rent review, and reinstatement.
• Collateral warranties for construction
The rent review provision only disregards works T did + paid for. T If L paid for an
improvement, it will be kept in the rent figure of the property.
’s fitting out works are not alterations.

If there is no completion date in the contract, the default position is SCPC 9.1.1, which
says it is 20 working days after the completion of the contract.

Pre-exchange formalities: SGS 12 Activity 3 solution

Registration following exchange

After exchanging the AfL, the tenant should register their interest in the property under the
AfL at the Land Registry either by way of Unilateral or Agreed Notice. It is likely that the
AfL or the heads of terms specify which one to use.
Registration puts third parties on notice that the tenant has an interest in the property. •
Agreed notice = more secure because landlord has agreed to the registration, but the
AfL must be submitted to the Land Registry.
• Unilateral notice = Less secure because it can be warned off by the landlord, but it is
more confidential as no documents have to be disclosed to the Land Registry.

An Agreed Notice is the safer notice because it is not open to an application for
cancellation from the registered proprietor.
If it is an Agreed Notice, may also register EX1 and EX1A to get round the confidentiality
issue.
• The Land Registry may give this confidentiality exemption on the grounds of
commercial sensitivity, but those grounds are very personal to the applicant. • If the
property was ever to change hands, the new owner would have to really to make the
agreement confidential again.

30
10.2019 PLP REVISION VC A&O MONEY PAYABLE ON COMPLETION OF THE LEASE

Many leases are drafted so the tenant pays rent four times a year, normally on the
“quarter days”. If completion is not on one of the exact quarter day dates, on completion
the landlord will collect an apportionment of the rent due from the commencement date of
the lease up to the next quarter date.

To find the rent payable on completion, calculate using the surveyor’s method: 1. Take
yearly rent
2. Divide by 365 to find the daily rate
3. How many days are left in the quarter, from the start of the lease up until the next
quarter date?
4. Multiply the number of days left in the quarter by the daily rate.

SDLT IN THE CONTEXT OF AGREEMENTS FOR LEASE

It is possible for SDLT to be triggered before the lease completes → SDLT is payable on
substantial performance. Triggers:
• On the exchange of the AfL, if a lot of money is paid over
• When the tenant takes occupation early and goes in to start its fitting out works • On
completion of the contract/lease

Watch out for any indication that the client is paying over an amount of money or taking
occupation / early access to do fitting-out works.
If any of these triggers happen, need to advise client that the SDLT liability has started
and they have 14 days (from the effective date) to pay it.

Advice to client when it goes into occupation to carry out its fitting-out works: This
occupation will probably be regarded by HMRC as the “effective date” of grant of the
lease for SDLT purposes, because the transaction is substantially performed once you go
into occupation.
Therefore, the SDLT payment will be triggered, and the SDLT will be due within 14 days of
the effective date.
Need to complete a Land Transaction Return and pay any SDLT due on the transaction.

31

10.2019 PLP REVISION VC A&O

 VAT Leasehold Transactions

The grant/assignment/surrender of a lease and the rent under the lease is exempt from
VAT, unless the person receiving the money has opted to tax.
Doesn’t matter whether the lease is for an old building or a new commercial property.

Payment of VAT depends on what the lease itself says about payment of rent and
VAT, so check the lease and don’t just rely on the option.
Even if L has opted to tax, it doesn’t automatically mean that T must pay VAT on its

rent. Basic principles:

The lease says that

the rent amount is
VAT inclusive.

T will pay a VAT

amount on top of
the rent.

INDUCEMENTS

If T is doing something more than just taking a lease, that could amount to a supply → it
could be a service rather than an interest in land.
Must determine when T is being given money simply as an inducement to take a lease vs
when T is given money in return for a supply or service.

Ex1: Cash incentive to take the lease because it is in an undesirable area = not a supply,
T has not done anything more than just taking a lease.
T can take the cash incentive, e.g. £5,000, with no VAT implications.

Ex2: Instead of giving cash as an incentive, L gives T a rent-free period of 3 months. This
allows T to get its business up and running without having to worry about paying rent. T
is not doing anything in return for this except for agreeing to take the lease = not a
supply.
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10.2019 PLP REVISION VC A&O Ex3: T asks L for a rent-free period of 4 months, and
promises to improve the property in that time.
• If the tenant agrees to do something extra in exchange for a payment/rent-free period
→ T agrees with the landlord to do works to the property that L really should be doing,
e.g. improvement works to the premises, repair to the structure = supply of services.
• This would be standard rated, and T would have to pay VAT on the money’s worth of
that rent-free period.
Note: Not a supply if the tenant is just doing just its own fitting-out works.

If there is a supply, then it will be standard rated.

Whoever receives the money = the person making the supply. This person making the
supply must account to HMRC for the VAT amount.

The same principles apply if T is acting as anchor tenant.

• Anchor tenant often gets a long rent-free period.
Anything >6 months should raise alarm bells.
• The anchor tenant provides PR or advertising services in return for this inducement of
the rent-free period → The fact the anchor tenant is there will entice other tenants and
customers.
Exam question will tell you if they are an anchor tenant at the property.
• The tenant is making a standard rated supply. Must account to HMRC for the VAT.

Should T pay the VAT amount out of its own pocket, or should L pay an amount equivalent
to the VAT on top of the inducement?

T will have to pay the VAT, so they will make sure in the agreement that the inducement is
exclusive of VAT, and make the landlord pay the tax on top of the inducement. If T wants
the landlord to pay VAT on top of the inducement, the documentation will need to
provide for it. The AfL expressly say that L will pay VAT on top of the inducement. e.g. L
may pay £10,000 inducement + 20% VAT amount on top.
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