Please enable JavaScript.
Coggle requires JavaScript to display documents.
LEASEHOLD TRANSACTION, LEASE STRUCTURE AND CONTENT - Coggle Diagram
LEASEHOLD TRANSACTION
ESSENTIALS OF A LEASE
Grant of a right to exclusive possession of land for a determinate term less than that which grantor has himself in the land
- Exclusive possession = tenant must be able to exclude strangers and even the landlord
- Fixed term or periodic tenancy = must be for a fixed term (6 months, 5 years,) OR periodic term (weekly, monthly) > may not be for an indeterminate time
- Formalities = must be created by deed if the term is over 3 years > if 3 years or under may be created in writing, or even orally
- Reversion = interest landlord holds subject to the lease = end of lease term, property reverts to the landlord
Landlord’s objectives
- Dominant negotiating position + will insist on a full repairing and insuring (FRI) lease = costs met by tenant, directly or indirectly
- Will want lease that ensures premises are: insured / kept in repair / only used for the permitted purpose
- Will want to: control whom may occupy of the premises / have a say over how the premises are altered by the tenant / increase the rent in line with market rent
Tenant’s objectives
- Will want lease that: allows tenant to use premises for intended purpose / has contractual term that is satisfactory / provides flexibility
- Will not want: onerous restrictions / steep rise in rent / unfair provisions
Lease termEither fixed term / periodic tenancy
- FRI leases are generally for a fixed term
- Commercial leases are 3, 5, 10 or 15 years
- Shorter = more flexible > Business plans are often drafted in 5 or 10 year cycles + less Stamp Duty Land Tax or Land Transaction Tax
Term commencement date = date on which lease term starts
- May be date of completion of lease or before or afterwards (after = revisionary lease)
Expiration
- If term of lease is “from and including” a day = term expires on day before that day (from and including 24 March 2019 expires on 23 March 2029)
- If term of lease is “from” a certain day of year = term starts day after that day, so expires on that day of the year (10 years from 24 March 2019 will start on 25 March 2019 and expire on 24 March 2019).
Break clausesIf tenant is unsure about commitment of a lease + landlord is unwilling to grant a shorter term, a break clause can offer a compromise BUT if no break clause > neither landlord nor tenant can bring lease to an end before end of fixed term without agreement of otherCan be:
- Landlord break = only landlord can exercise it
- Tenant break = only tenant can exercise it
- Mutual break = either party can exercise it
May specify a date (fifth anniversary of the term commencement date) or rolling break (any time after 5th anniversary of term commencement date)
- Anniversary = same day of the year
A surveyor valuing the landlord’s reversion is likely to consider a 10 year lease with a 5th anniversary tenant’s break more valuable than a 5 year lease.
RentResidential = long terms + low rent Commercial = short term + market rent payableRent in a commercial FRI lease
- Expressed as a yearly figure but payable quarterly = due in advance on the quarter day + lease needs to state if rent is payable in advance + how rent is to be paid + if VAT is payable
- Traditional quarters: 25 December to 24 March / 25 March to 23 June / 24 June to 28 September / 29 September to 24 December
- Modern quarters: 1 January, 1 April, 1 July and 1 October.
Rent reviewNO implied right for landlord to increase rent
- Stepped rent = yearly rent of £25,000 for the first two years, a yearly rent of £30,000 for the next 2 years, and so on…
- Turnover rent = rent may be calculated based on tenant’s turnover at the property > mostly with retail leases
- Index-linked rent = increased by reference to agreed measure of inflation, retail prices index.
- Open market rent review = rent review adopted by FRI leases + ascertaining rent based on comparable premises and certain principles
Open market rent review
- Commercial leases almost always have an “upwards only” rent review
- Give landlord and tenant opportunity to agree the rent between themselves - IF NOT lease will set out a mechanism for a specialist valuer to determine the new rent considering rent payable for comparable premises + terms of the hypothetical lease
Valuers instructed on assumptions + disregards
- Basic assumptions: premises are vacant and available + there is a willing landlord and a willing tenant
- Common disregards: operate to ignore what the tenant has done voluntarily, and not as an obligation of the lease
After rent review
- New rent is documented in a rent review memorandum signed by landlord and tenant + kept with lease
- If rent review is before 5th anniversary of term commencement date = tenant may have to pay further Stamp Duty Land Tax or Land Transaction Tax
- If rent review is on or after 5th anniversary of term commencement date = tenant will not have to pay further SDLT or LTT.
-
-
Different types of lease
A lease is the document that creates a leasehold interest: state contractual term and rent payable Residential = long terms (99 or 999 years) + low rent is usually payable > newer house = £150 a yearAssured shorthold tenancies = letting out houses and flats on 6 or 12 month basisCommercial = short term (up to 15 years) + market rent payableAdvantages of a lease – tenant’s point of view
- no need to spend capital which may be in short supply
- leasehold is not a permanent investment
- Some premises will only be available as a leasehold
Commercial landlordsPrivate investors = individuals or companies who make business out of letting premisesInstitutional investors = financial institutions, typically, pension funds and life assurance companies who invest in property > property is safe and valuable investment, offering income (through rent) + long term capital growth (through rise in property prices over time)
- favour a full repairing and insuring (FRI) lease + want covenant strength = tenant has means to comply with obligations + has assets landlord can recover breaches against
Asset management = acting for an institutional landlord + dealing with legal work generated by the property
-