Leases and underleases - Options for the term of a lease

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Overview

A clear grasp of leases and underleases is vital for the SQE1 FLK2 exam. This article examines the complexities of lease terms, legal distinctions, statutory frameworks, and strategic elements relevant to both landlords and tenants. We will assess the relationship between common law principles and statutory requirements, review key case law, and consider practical applications. This exploration aims to equip candidates with the knowledge needed to excel in property law questions within the SQE1 FLK2 examination.

Lease Term Options and Legal Distinctions

Flexibility in Lease Duration

Leases offer a range of durations, each carrying distinct legal considerations:

  1. Short-term leases (less than three years): Offer flexibility but may lack certain protections.
  2. Medium-term leases (three to seven years): Balance flexibility with stability.
  3. Long-term leases (over seven years): Provide security but require more formal legal processes.

The choice of lease duration affects rights and obligations. For instance, the Landlord and Tenant Act 1954 offers security of tenure for business tenants, applicable to leases over six months. Similarly, the Leasehold Reform, Housing and Urban Development Act 1993 provides rights to long leaseholders of residential properties.

Legal vs. Equitable Leases

Differentiating between legal and equitable leases is essential:

  1. Legal leases:

    • Created by deed
    • Must be registered with HM Land Registry if exceeding seven years
    • Enforceable against all parties
    • Offer stronger legal protection

  2. Equitable leases:

    • Arise from agreements without formal deed execution
    • Created by estoppel or part performance
    • Require notice registration for protection
    • Vulnerable to claims by bona fide purchasers

The case of Walsh v Lonsdale (1882) 21 Ch D 9 established that equity treats certain lease agreements as legal leases. The Land Registration Act 2002 emphasizes the importance of registration to protect land interests.

Privity and Lease Assignments

The Doctrine of Privity

Privity in lease law involves:

  1. Privity of contract: The relationship between the original lease parties.
  2. Privity of estate: The relationship between the current landlord and tenant.

Impact of the Landlord and Tenant (Covenants) Act 1995

This Act brought notable changes to privity law in leases:

  1. Automatic release: Tenants are released from obligations upon lease assignment (for leases after 1 January 1996).
  2. Authorised Guarantee Agreements (AGAs): Landlords can require outgoing tenants to guarantee their immediate assignee's performance.
  3. Limitations on AGAs: The Act prohibits "sub-guarantees" for subsequent assignees beyond the immediate one.

The case of K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] clarified these provisions, highlighting that attempts to bypass the Act's restrictions are void.

Alterations and Improvements

Statutory Framework

Alterations or improvements are governed by common law and statute:

  1. Landlord and Tenant Act 1927, Section 19(2): Imposes qualifications on absolute prohibitions against improvements, requiring reasonable consent.
  2. Landlord and Tenant Act 1954, Section 38: Defines "improvement" and criteria for determining changes.

Types of Alteration Covenants

Leases generally include one of three types of covenants:

  1. Absolute prohibition: No alterations permitted.
  2. Qualified prohibition: Alterations allowed with landlord's consent, not unreasonably withheld.
  3. Fully qualified prohibition: Alterations allowed with landlord's consent, and consent not unreasonably delayed or withheld.

Reasonableness of Consent

The case of International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] established principles for assessing reasonableness of consent refusal:

  1. Decision based on proper grounds related to the landlord-tenant relationship
  2. Avoiding demand for unrelated collateral advantage
  3. Proper consideration of requests, avoiding arbitrary decisions

Example: Commercial Lease Alteration Dispute

A technology company, TechCo, leases office space in a multi-tenant building. The lease contains a qualified covenant against alterations. TechCo seeks to install a new air conditioning system for their server room. The landlord, PropCo, refuses due to concerns about electricity use and tenant disruption.

Analysis:

  1. The covenant is qualified; PropCo's consent should not be unreasonably withheld.
  2. TechCo can argue the alteration is essential and qualifies as an "improvement" under the Landlord and Tenant Act 1954.
  3. PropCo's concerns are potentially reasonable, but they should consider solutions rather than outright refusal.
  4. TechCo could seek a court declaration if refusal is deemed unreasonable, based on principles from International Drilling Fluids Ltd v Louisville Investments.

Case Study: Residential Lease Extension

Mrs. Smith holds a long residential lease of a flat with 65 years remaining. She wishes to extend it under the Leasehold Reform, Housing and Urban Development Act 1993.

Key considerations:

  1. Eligibility: Mrs. Smith must have owned the flat for at least two years.
  2. Process: A Section 42 notice must be served, proposing a premium and new terms.
  3. Valuation: The premium is based on property value, remaining term, and ground rent.
  4. Dispute resolution: If disputed, the issue can go to the First-tier Tribunal (Property Chamber).

Outcome: Mrs. Smith successfully extends her lease by 90 years at a peppercorn rent, increasing her property's value and securing long-term rights.

Conclusion

Understanding the complexities of leases and underleases is vital for the SQE1 FLK2 exam. Candidates should understand:

  1. Lease term options and their legal impacts
  2. Differences between legal and equitable leases
  3. The doctrine of privity and statutory evolution
  4. Frameworks governing alterations and improvements
  5. Reasonableness in landlord consent
  6. Practical lease law applications in commercial and residential settings

By understanding these concepts and their applications, candidates will be prepared to analyze complex scenarios and provide informed legal advice. Approach exam questions thoughtfully, integrating both theoretical aspects and practical impacts of lease law.