Granting a lease or underlease - Pre-completion formalities

Learning Outcomes

This article outlines pre-completion formalities for granting a lease or underlease, including:

• Essential pre-completion formalities for leases and underleases
• Title investigation steps for registered and unregistered land
• Pre-completion priority searches and the OS1/OS2 distinction
• Priority protection and operation of priority periods
• Lender and superior landlord consents, including licence to underlet provisions
• Lease engrossment and execution as a deed
• Rent apportionment on completion
• Common practical scenarios and SQE1-tested pitfalls
• Consequences of missed priority periods or consent conditions

SQE1 Syllabus

For SQE1, you are required to understand the pre-completion steps and legal requirements when granting a lease or underlease, with a focus on the following syllabus points:

• The process and purpose of investigating title before granting a lease or underlease
• The range and function of pre-completion searches and enquiries
• The formalities for engrossment and execution of leases and underleases
• The importance of obtaining necessary consents (e.g. lender, superior landlord)
• The practical consequences of missing or defective pre-completion steps
• The effect of caveat emptor on the parties’ responsibilities before completion
• The distinction between OS1 (whole) and OS2 (part) searches, and correct use of the “search from” date
• Priority protection: how OS1/OS2 protects registration and how K15 protects completion in unregistered land
• Bankruptcy (K16) and company searches: when and why they are used
• The short-lease exception to deed requirements and its limits (s54(2) LPA 1925)
• Lease engrossments and counterparts, and logistics for circulation and signing before completion
• Typical content of a licence to underlet, including direct covenants creating privity of contract

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the purpose of a pre-completion OS1 or OS2 search before granting a lease or underlease of registered land?
2. Why must a solicitor check the headlease before granting an underlease?
3. What are the key formalities for valid execution of a lease as a deed?
4. What is the risk if a lender’s consent is not obtained before granting a lease of mortgaged property?
5. Name two types of pre-completion searches that should be carried out before completion of a lease or underlease.

Introduction

Before a lease or underlease is completed, several formalities must be satisfied to ensure the transaction is legally effective and risk-free for all parties. These steps protect the interests of the landlord, tenant, and any lender, and are essential for compliance with the SQE1 syllabus. This article explains the main pre-completion requirements, including title investigation, pre-completion searches, obtaining consents, and lease execution. These activities take place after agreement of terms and, in practice, often after any contract to grant the lease has been exchanged. They sit within the broader conveyancing principle of caveat emptor: the tenant’s solicitor must carry out appropriate checks to ensure the lease can be granted and will be registrable or otherwise effective against third parties.

Key Term: caveat emptor
The principle that the onus is on the buyer (or incoming tenant) to investigate title and property-related matters; the seller/landlord has limited duties of disclosure.

Key Term: investigation of title
The process of examining the legal ownership and interests affecting a property to ensure the landlord is entitled to grant the lease and to identify any issues that may affect the transaction.

Investigating Title Before Grant

Before granting a lease or underlease, the landlord’s solicitor must investigate title to confirm the landlord’s right to grant the lease and to identify any restrictions or encumbrances that may affect the property or the proposed lease. The nature of the investigation will vary depending on whether the landlord’s interest is registered or unregistered, and whether the lease to be granted will itself be substantively registrable.

If the landlord’s title is registered, official copies of the register and title plan should be obtained and checked. The official copies should be scrutinised for:

• Restrictions on dispositions, including restrictions requiring third-party consent (e.g. lender’s consent, trustee consents, or superior landlord consent)
• Any existing leases, notices, or cautions noted on the charges register
• Registered easements burdening or benefiting the land
• Class of title (absolute, good leasehold, possessory, or qualified), which may affect the quality of the reversionary title from which the lease is granted
• Registered charges and whether terms or restrictions prevent the grant of a lease without consent

If the title is unregistered, the landlord must deduce title by an epitome demonstrating a good root (traditionally at least 15 years old), showing the chain of ownership and all material documents, including any mortgages and discharges. Where the proposed lease is for a term of more than seven years, and the reversionary title is unregistered, deducing title is essential to enable the new lease to be registered with absolute title. In practice, even for leases of seven years or less, obtaining sufficient evidence of title is best practice to confirm the landlord’s capacity to grant and to identify burdens to be reflected in the lease covenants.

Key Term: headlease
The superior lease out of which an underlease is granted. The terms of the headlease may restrict or regulate the grant of underleases.

If the property is leasehold, the headlease must be reviewed thoroughly to ensure underletting is permitted and to identify conditions or consents required. Typical headlease provisions include:

• An alienation covenant regulating underletting, often requiring the superior landlord’s written consent by way of a licence to underlet
• Conditions that any underlease be on similar terms to the headlease (e.g. similar user restrictions, repair obligations, insurance provisions, and service charge machinery), typically with the undertenant to give a direct covenant to the superior landlord
• Specific requirements to contract out of 1954 Act security of tenure (business leases), requiring service of the landlord’s warning notice and a compliant tenant declaration before completion
• Rent review and service charge provisions that may dictate how apportionments or caps are addressed in underleases
• Requirements to include certain rights or reservations to ensure estate management (e.g. rights of way, rights to enter for repair, compliance with estate regulations)

Where the lease to be granted is of part only, it is imperative to have a Land Registry compliant plan (following HM Land Registry Practice Guide 40), accurately identifying the demise, the common parts, and the location of any easements granted or reserved. Plans should be checked against any estate layout plans pre-approved by HM Land Registry, especially in new developments.

The solicitor should also verify whether there are third-party rights (e.g. easements of support or rights of light) or restrictive covenants that must be observed by the tenant. These burdens should be reflected in covenants within the new lease or underlease and, where necessary, in indemnity covenants to protect the landlord’s continuing liability under superior covenants.

Key Term: pre-completion search
A search carried out immediately before completion to confirm the state of the title and to provide a priority period for registration.

Worked Example 1.1

A solicitor is instructed to grant a 10-year underlease of a shop. The headlease contains a clause requiring the superior landlord’s written consent to any underletting. What must the solicitor do before completion?

Answer:
The solicitor must obtain the superior landlord’s written consent to the underlease, as required by the headlease. Failure to do so may result in the underlease being in breach of the headlease and at risk of forfeiture.

Pre-completion Searches and Enquiries

Before completion, the tenant’s solicitor must carry out pre-completion searches to ensure there have been no adverse changes to the title or other risks since the initial investigation. These searches update title information and, critically, provide a priority period to protect registration of the lease (or of an assignment of an existing lease). The precise search regime depends on whether the relevant title is registered or unregistered.

For registered land, an OS1 (official search with priority of the whole) or OS2 (official search with priority of part) should be made against the title number from the “search from” date shown on the official copies (not the edition date). This search provides a 30-working-day priority period and reveals any new entries since the official copies were issued. If the lease is of part, the OS2 will ordinarily require submission of a clear plan of the part affected.

Where the tenant is financing the premium or fit-out with a mortgage, the OS1/OS2 should be made in the name of the lender (the mortgagee). Searching in the lender’s name ensures the lender’s application to register the mortgage will benefit from the same priority as the tenant’s application to register the lease. A search in the tenant’s name will not protect the lender’s registration.

For unregistered land, a Land Charges Department search (form K15) must be made against the landlord’s name (and, if appropriate, the buyer where a lender requires a bankruptcy-only search to be combined), providing a 15-working-day priority period to complete the transaction free of new entries. This priority protects the completion date rather than the registration date. If completion takes place within the priority window, the tenant takes free of land charges registered against the landlord after the K15 search date.

It is common and prudent to diarise priority deadlines and the intended completion date. The OS1/OS2 priority protects the registration application if lodged by 12 noon on the last day of the priority period. Failure to lodge in time risks loss of priority, potentially allowing third-party registrations (such as a later lease or charge) to take precedence.

Other essential pre-completion searches and checks include:

• Bankruptcy search (K16) against the tenant where borrowing is involved, ensuring no bankruptcy proceedings are pending
• Company search against a corporate tenant or landlord to check solvency status and confirm corporate capacity and authority to enter into the lease
• Final requisitions or completion information and undertakings between the parties’ solicitors to settle practical completion arrangements (bank details, keys, apportionments, undertakings to redeem charges where relevant)
• If an underlease is being granted, enquiries of the superior landlord (if required) and verification of licence documentation and any conditions (e.g. fees, required direct covenants)

Note that local authority, water/drainage, and environmental searches are typically pre-contract searches and not part of pre-completion formalities. Pre-completion searches are the “priority” searches (OS1/OS2 or K15/K16) and insolvency/company checks immediately prior to completion.

Key Term: priority period
The period during which the applicant’s registration (for registered land) or completion (for unregistered land) is protected from adverse entries made after the search date.

Worked Example 1.2

A tenant is taking a lease of part of a registered title. What pre-completion search should be made, and why?

Answer:
An OS2 search (official search with priority of part) should be made against the registered title. This provides a 30-working-day priority period for registration of the lease and reveals any new entries since the official copies were issued.

Worked Example 1.3

A landlord company is granting a lease. The lease is signed by one director in the presence of a witness. Is this valid execution?

Answer:
Yes, provided the lease is expressed to be executed as a deed, signed by the director, and attested by an independent witness, this satisfies the Companies Act 2006 requirements for execution by a company.

Worked Example 1.4

The tenant’s solicitor carries out an OS1 search in the tenant’s name, despite the transaction being funded by a lender. What risk does this create?

Answer:
An OS1 in the tenant’s name protects only the tenant’s registration of the lease. It does not protect the lender’s registration of its charge. The lender’s application could lose priority to a third party if lodged after an intervening application. Best practice is to search in the lender’s name to protect both the lease and charge applications.

Worked Example 1.5

A solicitor fails to lodge the AP1 to register a registrable lease within the OS1/OS2 priority period. Another party lodges a competing application within their own priority period. What is the consequence?

Answer:
The failure to lodge within the priority window risks loss of priority. A competing application lodged within a later priority period may be registered ahead of the lease application, potentially prejudicing the tenant’s registration. This may constitute negligence where loss results.

Obtaining Consents

If the property is subject to a mortgage, the landlord must obtain the lender’s written consent to the grant of the lease or underlease. Many registered titles include a restriction requiring the mortgagee’s consent to dispositions. Failure to obtain consent may breach the mortgage conditions, risk an event of default, and expose the landlord to enforcement action (including demand for repayment, appointment of a receiver, or possession). Even if the lease is otherwise valid as between landlord and tenant, a mortgagee exercising power of sale may sell free of later interests and may not be bound by a lease granted in breach of mortgage terms.

Key Term: lender’s consent
The written approval required from a mortgagee before the owner can grant a lease or underlease of the mortgaged property.

If the property is leasehold, the headlease may require the superior landlord’s consent to the grant of an underlease. Consent is typically given by a formal, tripartite licence to underlet, signed by the superior landlord, headtenant, and undertenant. The licence usually includes conditions such as costs recovery and a direct covenant by the undertenant in favour of the superior landlord to perform relevant headlease and underlease covenants. This direct covenant creates privity of contract between the superior landlord and undertenant, enabling enforcement in case of breach.

Key Term: licence to underlet
A tripartite deed by which the superior landlord consents to the underletting and takes a direct covenant from the undertenant to perform relevant covenants.

If the landlord is a company, a company search should be made to check for insolvency or restrictions, and directors must have authority to execute. Board resolutions may be required internally; execution must comply with Companies Act 2006, s44. Where a power of attorney is used, ensure it is valid, unrevoked, properly executed, and authorises the disposition.

Some registered titles carry non-standard restrictions (e.g. trustee restrictions, Form LL restrictions, or restrictions requiring a certificate of compliance). If present, obtain the necessary consents or certificates before completion to avoid rejection of the registration application.

Where a business tenancy is intended to exclude statutory security of tenure (Landlord and Tenant Act 1954), ensure the contracting-out procedure is undertaken before completion: serve the landlord’s warning notice and obtain a tenant’s simple declaration (or statutory declaration if completion is imminent) confirming acceptance of exclusion, and include appropriate statements in the lease. Failure to comply renders the exclusion ineffective.

Exam Warning

If a lease is granted without obtaining the necessary lender’s or superior landlord’s consent, the lease may be voidable or at risk of forfeiture, or vulnerable to mortgagee enforcement. Always check for and obtain all required consents before completion. Failure to comply with contracting-out procedures under the 1954 Act will invalidate any intended exclusion of security of tenure.

Lease Engrossment and Execution

Once all title and search issues are resolved and consents obtained, the lease or underlease must be engrossed (prepared in final form) and executed as a deed. In practice, this means producing clean copies of the lease and the counterpart, circulating them for signature in good time before completion (commonly at least five working days). Plans referred to should be annexed and, as a matter of best practice, initialled by the signatories.

Key Term: lease engrossment
The preparation of the final, clean copy of the lease or underlease for signature by the parties.

Key Term: execution as a deed
The process of signing and witnessing a document in accordance with legal formalities so that it takes effect as a deed.

A deed must:

• Be in writing and make clear on its face that it is intended to be a deed (e.g. “executed as a deed”)
• Be signed by the parties in the presence of an independent witness who attests the signature (for individuals)
• Be delivered as a deed (i.e. parties intend to be bound by it; delivery is presumed on execution unless a contrary intention is expressed)

Companies may execute by affixing a common seal (if permitted by the articles), by two authorised signatories (two directors or a director and the secretary), or by a single director in the presence of a witness who attests the signature (Companies Act 2006, s44). Execution clauses should be drafted in a form acceptable to HM Land Registry, and witnesses should be independent adults who print their details under the signature. Where a plan is annexed, signing or initialling the plan by the executing party is good practice.

If a power of attorney is used, the attorney must sign in a manner consistent with the power, and the power should be examined for scope, duration, and proper execution. Solicitors should verify capacity of signatories and ensure the document is correctly dated on completion.

Leases create a legal estate in land, so except for short leases within s54(2) Law of Property Act 1925 (taking effect in possession for three years or less, at the best rent, without a fine or premium), a deed is required. Even if a short lease is validly created without a deed, any subsequent assignment of that lease must be by deed. Short leases of seven years or less are generally overriding interests and are not substantively registrable, so protection by notice is typically unnecessary.

In addition to execution, practical pre-completion arrangements include agreeing apportionments. Most leases provide for rent to be payable in advance; unless completion takes place on a rent payment date, a proportionate amount of rent from completion to the next rent day should be paid by the tenant on completion. Any insurance premium or service charge paid in advance may also need apportioning. Completion statements should set out apportionments and supporting arithmetic, and evidence of payment demands or receipts should be supplied.

Worked Example 1.6

A tenant takes a two-year lease of a small office at market rent and on immediate possession, orally agreed in a hurry to secure occupation. Is a deed required to make the lease valid?

Answer:
No deed is required if the lease takes effect in possession, is for three years or less, and is at the best rent without a fine (s54(2) LPA 1925). However, best practice is to record the terms in writing, and any assignment of that lease would require a deed.

Final Pre-completion Checklist

Before completion, the solicitor should confirm:

• All title issues are resolved and the landlord is entitled to grant the lease or underlease
• The headlease permits underletting and any conditions are satisfied (including contracting-out steps where applicable)
• All necessary consents (lender, superior landlord) are obtained in writing, and any register restrictions have been catered for with appropriate certificates or consents
• All pre-completion searches are clear and within their priority period, with OS1/OS2 conducted in the lender’s name where funding is involved, and K15/K16 searches completed in unregistered land
• The lease or underlease, with counterpart, is engrossed and validly executed as a deed, with compliant execution clauses and annexed signed plans where relevant
• Apportionments (rent and other outgoings) are agreed and reflected in the completion statements, and undertakings on the Completion Information and Undertakings form are properly given
• Logistics for completion are agreed (bank details verified, key release arrangements made, licence to underlet executed and dated appropriately for an underlease)

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Pre-completion formalities for leases and underleases include title investigation, pre-completion searches, obtaining consents, and lease execution.
• Title investigation ensures the landlord is entitled to grant the lease and identifies any restrictions or required consents, including superior landlord licence and register restrictions.
• Pre-completion searches (OS1/OS2 on registered titles, K15 on unregistered titles, plus insolvency/company searches where appropriate) provide a priority period and check for adverse entries; searches should use the “search from” date and, where mortgaged, be carried out in the lender’s name.
• Lender’s and superior landlord’s consents must be obtained in writing before completion; for underleases, a licence to underlet typically includes a direct covenant by the undertenant to the superior landlord.
• The lease or underlease must be engrossed and executed as a deed, following all legal formalities; short leases (≤3 years) may be created without a deed under s54(2) LPA 1925, but assignment still requires a deed.
• Missing or defective pre-completion steps may result in loss of priority, inability to register the lease, breach of mortgage or headlease terms, or risk of forfeiture and enforcement.
• Rent and other advance payments are usually apportioned on completion; ensure figures and supporting documents are agreed in completion statements.
• Short leases of seven years or less generally operate as overriding interests; leases of more than seven years are substantively registrable and require timely lodging of applications within OS1/OS2 priority windows.

Key Terms and Concepts

• caveat emptor
• investigation of title
• headlease
• pre-completion search
• priority period
• lender’s consent
• licence to underlet
• lease engrossment
• execution as a deed