Leases and underleases - Code for Leasing Business Premises

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Overview

Understanding leases and underleases is vital for excelling in the SQE1 FLK2 exam, especially in commercial property transactions. This guide covers legal distinctions, statutory frameworks, and industry standards governing these agreements. We examine the interaction between landlords and tenants, the effects of various lease conditions, and guidance from the Code for Leasing Business Premises. A solid understanding of these concepts is necessary for managing intricate property law situations relevant to the SQE1 FLK2 exam.

Key Distinctions and Legal Framework

Lease vs. License

A basic distinction in property law is between a lease and a license:

  • Lease: Provides the tenant with exclusive possession of the property for a set term, creating a legal interest in land.
  • License: Permits use of the property for a specific purpose without granting exclusive possession or a legal interest.

The case of Street v Mountford [1985] AC 809 determined that granting exclusive possession for a term at a rent creates a tenancy, regardless of the agreement's label.

Legal Requirements for a Valid Lease

For a lease to be valid, it must meet certain criteria:

  1. Clearly identified parties (landlord and tenant)
  2. Accurate property description
  3. Defined duration (term)
  4. Consideration (usually rent)
  5. Exclusive possession

The Law of Property Act 1925, s.54(2), requires leases over three years to be executed by deed. However, Walsh v Lonsdale (1882) 21 Ch D 9 allows the enforcement of a lease agreement as if it were valid, provided specific performance is possible.

Leasehold Obligations and Covenants

Tenant's Covenants

Common tenant obligations include:

  1. Timely rent payment
  2. Maintenance and repair of property
  3. Compliance with user clauses
  4. Obtaining consent for alterations
  5. Insurance of contents and third-party liability

Landlord's Covenants

Typical landlord obligations include:

  1. Ensuring quiet enjoyment
  2. Non-derogation from grant
  3. Maintenance of common areas
  4. Building insurance against specified risks

Underleases and Their Legal Impact

An underlease arises when a tenant grants a lease to a third party, creating a chain of interests:

  1. Head Landlord (original lessor)
  2. Mesne Tenant (original lessee, now landlord to the subtenant)
  3. Subtenant (holder of the underlease)

Key considerations for underleases:

  • The underlease term must not exceed the head lease term.
  • The mesne tenant remains liable to the head landlord for all head lease covenants.
  • Direct covenant enforcement between head landlord and subtenant is limited.

The Code for Leasing Business Premises

The Code, developed by RICS, offers best practice guidance for commercial lease negotiations. While not legally binding, it heavily influences industry standards and may affect court interpretations.

Key principles include:

  1. Transparency in negotiations
  2. Fair and equitable drafting of lease terms
  3. Flexibility in lease structures
  4. Clear explanation of liabilities and obligations

The Code advises on lease terms such as:

  • Rent reviews not being automatically upward-only
  • Break clauses being mutual and clearly defined
  • Repair obligations matching the lease term and property condition
  • Reasonable consent for internal non-structural alterations

Statutory Protections for Business Tenants

The Landlord and Tenant Act 1954 Part II offers security of tenure for business tenants, including:

  • Automatic continuation of tenancies past the contractual term (s.24)
  • Reasons for landlords to oppose renewal (s.30)
  • Compensation if renewal is refused on certain grounds (s.37)

Contracting out of these provisions under s.38A requires strict procedural compliance.

Example: The Retail Shop Lease

Scenario: A retail shop owner signs a five-year lease with a rent review clause. After two years, the owner wants to install a new coffee machine. The lease requires landlord's consent for alterations, which cannot be unreasonably withheld.

Legal Considerations:

  • The landlord must consider the alteration request fairly.
  • The rent review clause allows for rent adjustment based on preset criteria.
  • The tenant must maintain the property and comply with lease terms.

Case Study: The Tech Startup's Expansion

Scenario: A tech company leases office space for 10 years. After three years, they sublease half the space to a startup for five years. The tech company wants to expand by taking over the vacant unit next door, but the lease prohibits alterations without consent and subletting.

Analysis Required:

  1. Assess the tenant's rights under the lease and the Landlord and Tenant Act 1954.
  2. Evaluate the landlord's refusal concerning the Code for Leasing Business Premises.
  3. Advise on potential negotiation or legal action strategies.
  4. Consider the impact of the existing underlease on the proposed expansion.

Conclusion

A firm grasp of lease and underlease principles, particularly in relation to the Code for Leasing Business Premises, is key for success in the SQE1 FLK2 exam. Key points to remember include:

  1. The difference between leases and licenses, focusing on exclusive possession
  2. Essential elements for creating a valid lease
  3. Common tenant and landlord covenants and their legal impact
  4. The structure and legal complexities of underleases
  5. The influence of the Code on industry standards
  6. Statutory protections for business tenants under the Landlord and Tenant Act 1954

By understanding these concepts and their practical applications, candidates will be well-prepared to analyze complex scenarios and demonstrate the necessary level of expertise for the SQE1 FLK2 exam.