Drafting Commercial Leases

Professional Skills Course

Drafting Leases Delegate Exercises Delegate Pack 1 © The University of Law Limited 2021

Drafting Commercial Leases

Delegate Pack

© The University of Law Limited 2021 2 Drafting Leases Delegate Exercises Delegate Pack



Drafting Commercial Leases Contents Subject

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Course Description

4

Course Objectives

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Course Programme

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Notes

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Delegate Exercises

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Drafting Commercial Leases

COURSE DESCRIPTION This session involves a tutor-led analysis of the key terms of a lease of commercial premises. The tutor will lead a comprehensive analysis of institutional-type provisions and, working individually or in groups, you will be asked to undertake various exercises of a practical nature. COURSE OBJECTIVES

• To understand the structure and content of a lease of commercial premises

• To employ good drafting techniques in the drafting of lease clauses

• To appreciate the inter-relationship of lease clauses



Drafting Commercial Leases COURSE PROGRAMME Session 1

Topic:

Heads of Terms

Timing:

9.35 am – 11.00 am

Break

Timing

11.00 am – 11.15 am

Session 2

Topic

Repairing Obligations

Timing:

11.15 am – 11.45 am

Session 3

Topic:

Service Charges

Timing:

11.45 am – 12.30 pm

Session 4

Topic

Break Clauses

Timing:

12.30 pm – 1.00 pm

Lunch Timing:

1.00 pm – 2.00 pm

Session 5

Topic:

User Covenants

Timing:

2.00 pm – 2.30 pm

Session 6

Topic:

Amending Rent Review Provisions

Timing:

2.30 pm – 3.30 pm

Break

Timing:

3.30 pm – 3.45 pm



Session 7

Topic:

Insurance Provisions

Timing:

3.45 pm – 4.15 pm

Session 8

Topic:

Alienation

Timing:

4.15 pm – 4.45 pm

Session 9

Topic:

Round-up and close

Timing:

4.45 pm – 5.00 pm



A. Principles of Good Drafting This section of the course material contains guidance on the skill of lease drafting. Further guidance can be found in:

• Ross: Commercial Leases (Butterworths)

• Lewison: Drafting Business Leases (Sweet & Maxwell)

• Skills for Lawyers (CLP Legal Practice Guides)

1. SEVEN PRINCIPLES OF GOOD DRAFTING • Sensible layout and order

• Clear clause construction

• Easy to read

• Client-friendly

• Economy of language but unambiguous

• Follows instructions

• Has legal effect

2. EXAMPLES OF DRAFTING TECHNIQUES TO AVOID

Consider the use of the following terms in many standard commercial lease precedents:

“hereby” - for example, “...the Tenant hereby covenants with the Landlord in the manner set out in...”

“hereof” - for example, “...in accordance with clause 3.1 hereof...”

“to hold the same unto”

“the Tenant shall be at liberty to”

“the Tenant shall be entitled to”

“power is reserved to the Tenant”

Is it not easier to say, for example, that “the Tenant may...”?

Avoid unnecessary couplets such as:

“observe and perform”

“agreed and declared”



“well and sufficiently”

“except and reserving” (there is a difference between these so this couplet may be permitted)

Avoid the misuse of the word “shall”:

“if the Tenant shall go into liquidation”

“the Tenant shall pay to the Landlord on demand”

“if the Premises shall have been destroyed or damaged by an Insured Risk”

3. EFFECTIVE USE OF DEFINITIONS AND INTERPRETATIONS

Definitions

The definitions section of a document contains word saving devices to avoid frequent repetition of commonly used concepts in the lease. By defining a word at the outset, its meaning is fixed for the purposes of the lease. This aids clarity and precision. Note:

• The use of the Capital Letter, to distinguish the use of the defined term from other uses of that word in different contexts (eg, “If the Tenant wishes to carry out Development upon the Premises” “for the benefit of the Landlord’s adjoining development”).

• Any term must be defined before it is used in the document.

• The defined terms should be placed in alphabetical order, and consideration should be given to whether all standard defined terms in a precedent are needed.

Interpretations

The interpretations clause in a document also contains word saving devices, but whereas a definition of a term fixes its meaning, an interpretation clause is designed to expand the meanings of words and phrases.

Generally speaking, “means” = a definition, whilst “includes” = an interpretation clause.

Common interpretation clauses include:

• Creating joint and several liability.

• Ensuring that one gender is interpreted to include all others.

• Ensuring that a covenant “not to do or omit to do” is also breached by permitting or suffering the thing to be done.



4. EFFECTIVE USE OF SCHEDULES

Schedules help break up a lengthy document by removing the detail of the document out of its body and into separate schedules at the end.

Schedules will commonly be used to contain all or some of the following (and, perhaps, in the manner set out):

SCHEDULE I

• Part 1 - The description of the premises

• Part 2 - Easements to be granted

• Part 3 - Easements to be reserved

• Part 4 - Matters to which the premises are subject

SCHEDULE II

• Tenant covenants

SCHEDULE III

• Landlord covenants

SCHEDULE IV

• Guarantee covenants

SCHEDULE V

• The rent review clause

SCHEDULE VI

• The service charge provisions

Note: Excessive use of schedules can increase the risk of drafting errors because of the need for cross references to other parts of the lease.



B. Liability Of Parties – A Reminder

1. LANDLORD

First, consider who is to be named in the lease as landlord.

• Is it the owner of the freehold (or leasehold interest superior to the tenant’s)?

• Is it identified correctly?

• Will title be deduced and investigated?

• Is the landlord of sufficient substance as to enable it to perform its obligations (eg, service charge obligations)?

Second, consider liability on covenants.

Old Regime (leases granted before1 January 1996)

• Under traditional rules, by virtue of privity of contract, an original landlord is bound by the covenants it gives for the entire duration of the lease.

• A buyer of the reversion becomes bound by all of the covenants of the landlord which have reference to the subject matter of the premises (see s142 LPA 1925).

• Under s141 LPA 1925, the benefit of the tenant’s covenants having reference to the subject matter (and of the rent reserved) pass to an assignee of the reversion.

New Regime (leases granted on or after 1 January 1996)

• In relation to “new tenancies” (see s1 Landlord and Tenant (Covenants) Act 1995 (“LTCA”)), an outgoing landlord may apply to its tenants, by service of notice in the prescribed form, for a release from future liability (see ss6 - 8 LTCA).

• Following London Diocesan Fund v Avonridge Property Company Ltd [2005] UKHL 70 landlords are able to provide clauses within their leases for an automatic release of their obligations as landlord on the sale of their reversionary interest.

• A buyer of the reversion becomes bound by all of the landlord covenants of the tenancy (except those which were expressed to be personal to its predecessor).

• The buyer also takes the benefit of all of the tenant covenants of the tenancy (unless the benefit was expressed to be personal to its predecessor).



2. TENANT

First, consider who is named in the lease as the tenant.

• Is it the same person who was identified in instructions?

• Is the tenant of sufficient substance as to enable it to perform its obligations?

Second, consider liability on covenants.

Old Regime (leases granted before 1 January 1996)

• Traditionally, by virtue of privity of contract, the original tenant remained bound by its obligations for the entire duration of the term, notwithstanding an assignment of the lease.

• An assignee of the lease becomes bound by all of the covenants of the lease which “touch and concern” the premises.

In practice, the landlord usually insists that the assignee enters into a direct covenant with it to create contractual liability on all of the covenants for the residue of the term.

New Regime (leases granted on or after 1 January 1996)

• In relation to “new tenancies” (see s1 LTCA), a tenant will be automatically released from liability on lawful assignment (s5 LTCA).

• A landlord may require a tenant who obtains a release to enter into an Authorised Guarantee Agreement (s16 LTCA) to guarantee the obligations of the assignee.

• An assignee becomes liable in relation to all of the tenant covenants of the tenancy (except those expressed to be personal to the assignor) from the date of assignment until the assignee is itself released by s5 LTCA.



3. GUARANTOR

The need

Is one required? If the landlord considers that the tenant’s performance of covenants needs to be guaranteed, the guarantor will be a party to the lease.

There are three covenants typically found in a commercial lease:

• A covenant by the guarantor to pay the rent and perform the covenants in the lease in the event of default by the tenant.

• A covenant by the guarantor to take a new lease from the landlord if the tenant goes into liquidation (or bankruptcy) and the lease is disclaimed.

• A covenant by the tenant to provide a substitute/replacement guarantor if the current guarantor becomes unsuitable (eg, on the bankruptcy or liquidation of the guarantor).

Length and extent of liability

The covenant by the guarantor may be expressed as an obligation to pay and perform if the tenant does not. This type of covenant creates secondary liability, although many landlords will seek to impose a primary obligation on the guarantor.

As regards length of liability:

• Unless the lease says otherwise, a guarantor’s obligations are co-extensive with the tenant’s.

• If it is an old lease, the original tenant’s guarantor will (without contrary express provision) remain liable throughout the term.

• In relation to new tenancies, s24(2) LTCA gives the guarantor a release to the same extent as the Act gives the tenant a release.

• In either case, liability does not extend into a statutory continuation under s24 of the Landlord and Tenant Act 1954, unless express provision is made (Junction Estates Ltd v Cope (1974) 27 P & CR 482).

The obligation to take a new lease on disclaimer If the tenant becomes bankrupt or goes into liquidation, the lease may be disclaimed under ss178 or 315 Insolvency Act 1986. The implications are as follows:

• As far as tenants and guarantors are concerned, it is only the insolvent tenant who is released by the disclaimer (Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70). The lease is deemed to continue for the purpose of preserving the liability of other parties (eg, original tenants, guarantors, former tenants under AGAs – see Gabriella Shaw v Hazel Doleman [2009] EWCA Civ 283).

• However, best practice is to specify in the lease that the guarantor should continue to pay the rent for a period of time following disclaimer and, if requested by the landlord, should take a new lease upon terms similar to those in the disclaimed lease.



Authorised Guarantee Agreement (AGA)

An AGA is a creation of the LTCA and, as such, the terms an AGA are governed by the provisions of that Act (s16 LTCA).

S16(3)(c) LCTA requires that an AGA is entered into pursuant to a lawfully imposed condition of the landlord’s consent to the assignment. It has become common practice for leases to require that an AGA is provided without any qualification to that condition.

Note that the RICS professional statement Code for leasing business premises February 2020 (effective 1 September 2020) (Code for Leasing Business Premises) states that leases should provide that, if in each case the landlord reasonably requires, the assigning tenant is to provide an AGA, any existing guarantor is to guarantee that the assigning tenant complies with the AGA, and/or the assignee is to procure a new guarantor or rent deposit. It recommends that tenants should try to negotiate a provision under which they do not have to provide an AGA, where for example the new tenant is financially strong enough or pays an appropriate deposit or provides a suitable guarantor.

Length and extent of liability

The LTCA provides that an AGA must not impose:

• Any requirement to guarantee the performance of the relevant covenants by any person other than the assignee.

• Any liability, restriction, or other requirement in relation to any period after the assignee is released from liability under the LTCA.

An AGA may impose on the tenant:

• A principal debtor liability in respect of any obligation owed by the assignee.

• Guarantee liability which is no more onerous that the liabilities it would have had if it were principal debtor under the lease.

• A requirement to take a new lease in the event of disclaimer. In Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 300 (Ch) the High Court ruled that a guarantee of an assignee given by the outgoing tenant’s guarantor was void under s24 LTCA. This decision was upheld by the Court of Appeal in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904. The Good Harvest case had cast doubt on whether a sub-guarantee (where the tenant’s guarantor guarantees the liability of the tenant under an AGA) was valid. The Court of Appeal in K/S Victoria confirmed that a tenant’s guarantor can validly guarantee the tenant’s liability under an AGA. The decision in Co-operative Food Ltd v A & A Shah Properties Ltd and another company [2019] EWHC 941 (Ch) is a firm reminder to landlords of the need for clarity in drafting to ensure that a guarantee by a tenant’s guarantor is not a direct guarantee for the assignee. In this case, involving the interpretation of licence provisions, the landlord succeeded in establishing that one out of two guarantor obligations was a sub-guarantee which was enough.



C. The Key Terms 1. THE RENT

Apart from the initial level of rent to be paid, the parties should consider:

• From when rent is payable, and whether the tenant is to be given a rent-free period.

• Dates for payment - is it to be the usual quarter day or some other date?

• Is rent to be paid in advance or arrears? Unless express provision is made, rent is payable in arrears.

• Method of payment - rent is usually payable quarterly in advance and may be required to be paid by some form of direct credit.

• Is interest to be charged by the landlord on arrears? After what period of default? At what rate?

• Will other sums payable under the lease be defined as “Rent”?

• Will VAT be payable?

As regards VAT, the grant of a lease is an exempt supply (i.e. not subject to VAT). However, the landlord can opt to tax by giving written notification to HM Revenue & Customs. If he does so, sums payable by the tenant become subject to VAT.

If the landlord opts to tax before the lease is granted the rent will be deemed to be inclusive of VAT unless the lease contains a provision to the contrary. The landlord may have made a blanket option so that every property acquired is covered by the election.

If the landlord makes an option to tax after the grant of the lease the landlord will be able to add VAT to the rent (s89 VATA 1994).

Most well drafted leases will include an obligation by the tenant to pay VAT in addition to the sums due under the lease. This makes the sums payable to the landlord VAT exclusive and allows VAT to be added on.

2. THE PARCELS CLAUSE

See “Parcels and Repairs” below.



3. THE TERM

3.1 Fixing the term

In fixing the term, there are certain practical issues to consider, including:

• The commercial requirements of landlord and tenant.

• Current market conditions.

• Security of tenure under the 1954 Act.

• The effect of length of term upon the value of the reversion.

3.2 Commencement

Some landlords backdate term commencement to tie in with a recently passed quarter day. This is usually for estate management reasons so that where the landlord has a number of leases their key dates will coincide eg, rent review dates, rent payment dates.

When specifying a commencement date, be careful over the words you use, for example:

“from 29th September” - this term commences on 30th September (unless there are contrary indications in the lease)

“from and including” - this term commences on 29th September

“commencing on” - this term commences on 29th September

3.3 Break clauses

A break clause exercisable by the tenant may be considered desirable if the tenant is unsure about its business viability, or wary of long term liability. Break rights are common features of commercial leases in the current market. A break clause can also be of value to a landlord that may want the premises back in order to re-develop or re-occupy.

If including a break clause, consider:

• Who is to be allowed to break? The tenant? Just the original tenant? The landlord? Both parties?

• When? At fixed dates or at moveable dates?

• Should any pre-conditions be set? Performance of covenants and payment of rent by the tenant? Desire to redevelop or occupy on the part of the landlord?

• What will be the effect of the break? End of lease liability and underleases? Beneficial or detrimental effect on rent review?

• Will time be of the essence?

• If it is a landlord break, the need for landlord to also serve s25 notice if the lease is protected under the Landlord and Tenant Act 1954.



From a tenant’s perspective, if the lease is to contain a tenant break, the tenant will want to be able to exercise that break with as few limitations or qualifications as possible and the tenant’s solicitor will need to take particular care in relation to any conditions that the landlord may seek to impose. A break clause is similar to an option in nature and conditions that are attached to the right to break must be strictly performed. For example, a condition requiring that the tenant has performed its covenants will prevent the tenant from exercising the break if there is any subsisting breach of covenant, no matter how minor.

4. ALIENATION PROVISIONS

4.1 What Factors Come Into Play When Drafting Alienation Provisions?

It is the landlord’s aim to keep a check on the identity of all occupants at the premises, with a view to excluding potentially undesirable or unreliable would-be occupants. A landlord is particularly concerned with maintaining covenant strength to ensure a steady flow of income and to protect the value of the reversionary interest.

A landlord may also prevent a division of the premises (for estate management reasons).

A tenant’s main concern is the possibility that its business needs may change during the term. Also, changing economic conditions may lead to a desire to re-think; either the tenant may wish to dispose of the premises completely by assignment or reduce it by underletting to make use of surplus space.

Tenants who are members of groups of companies frequently seek permission to share occupation with subsidiaries, sister, or parent companies. This is often permitted on the basis that the companies remain in the same group and provided that no landlord and tenant relationship is created.

In all cases, the provisions of any superior lease may have a bearing on the drafting of the covenant.

4.2 How Are These Factors Dealt With?

Absolute covenant These will prohibit absolutely those types of dealing considered to be undesirable (largely for estate management reasons).

Dealings with part “...not to assign, underlet, share or part with the possession or occupation of part only of the Premises.”

However, the right to underlet part may be allowed (eg, the underletting of an entire floor).



Qualified Covenant In relation to more desirable forms of alienation, a qualified covenant will be chosen:

“..not to assign, sublet or charge the whole of the Premises without the prior consent in writing of the Landlord...”

Fully Qualified Covenant Commonly the covenant will go on to provide that the landlord’s consent is not to be unreasonably withheld rather than relying on the statutory provisions. This is commonly referred to as a “fully” qualified covenant.

4.3 Bear in mind relevant statutory controls

Section 144 LPA 1925 Under a qualified covenant, the landlord may not charge a fine for consent unless the lease says otherwise although it can ask for its fees to be paid.

Section 19(1)(a) LTA 1927 Notwithstanding express provisions to the contrary, the landlord’s consent cannot be unreasonably withheld. This converts a bare qualified covenant into a fully qualified covenant.

When considering the issue of the landlord's reasonableness, see:

International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 All ER 321:

• The purpose of the covenant is to prevent undesirable uses or occupants.

• Any grounds of refusal must relate to the landlord and tenant under the lease.

• The landlord’s conclusions must be those which would be reached by a reasonable landlord.

• An assignee's user may be unreasonable even though permitted by the lease.

• The benefit to the landlord (in refusing consent) must not disproportionately outweigh the detriment to the tenant.

Section 1 LTA 1988

Where the lease contains a fully qualified covenant (whether express or implied), once the tenant has made written application for consent, the landlord owes a duty, within a reasonable time:

• To give consent, unless it is reasonable not to do so. For this purpose the giving of consent subject to an unreasonable condition breaches the duty; and

• To serve on the tenant written notice (see Footwear Corporation Ltd v Amplight Properties Ltd [1998] 1 EGLR 38) of the decision whether or not to give consent, specifying:

- if the consent is given subject to conditions, the conditions; or



- if the consent is withheld, the reasons for withholding it.

Section 19(1A) LTA 1927 (inserted, with effect from 1 January 1996, by the LTCA). This allows the landlord and tenant to agree terms upon which a landlord may legitimately withhold consent to an assignment. It does not apply to underletting.

When drafting covenants against assignment, the landlord should consider taking advantage of s19(1A) LTA 1927 by specifying circumstances in which consent may be withheld or conditions subject to which consent may be given.

Circumstances/Conditions

The landlord and tenant can agree any number of specified:

• Circumstances in which the landlord may withhold its consent to an assignment.

• Conditions subject to which consent to an assignment may be granted.

If the landlord withholds consent because those circumstances exist or imposes those conditions on its consent, then the landlord will not be acting unreasonably.

Therefore, in relation to commercial leases under the “New Regime”, s19(1)(a) above continues to apply but is supplemented by s19(1A) to enable the landlord to set out cast iron reasonable grounds for the withholding of consent or imposition of conditions.

The conditions/circumstances could be drafted on an objective basis (so that, viewed objectively, it will be clear whether it has been satisfied) or on a subjective basis, giving the landlord a discretion as to whether the condition is satisfied. Provisions which specify conditions or circumstances calling for the exercise of a discretion by the landlord alone will be ineffective, unless:

• The discretion vested in the landlord is required to be exercised reasonably; or

• The tenant is given an unrestricted right to have the determination conclusively reviewed by an independent third party whose identity is ascertainable by reference to the agreement.

4.4 Drafting points

Consider the following types of circumstances and conditions.

Circumstances in which the landlord can withhold consent • Assignments which cause a diminution in the value of the reversion. Whilst

International Drilling Fluids suggested that this was a possible reason for withholding consent under s19(1)(a), the case also suggested that there had to be more than just a fall in book value to justify it.

• Assignees who are “less likely than the tenant to perform the tenant covenants”. This type of clause necessarily calls for a determination of an issue by the landlord, which must therefore either be reasonable or subject to third party review. But consider the position where the tenant is in financial difficulty at the date of the application for licence to assign.



In some situations this covenant might be considered onerous eg, where the tenant’s covenant strength is particularly strong.

• Subsisting breaches of covenant. A landlord may wish to withhold consent on account of breach of covenant or unpaid rent.

• Assignees who fail to meet financial tests (eg, net assets/net profits equating to a multiple of the annual rent).

Conditions which the landlord may wish to impose

• That the outgoing tenant enters into an Authorised Guarantee Agreement.

• That the assignee provides additional guarantors or a rent deposit.

5. UNDERLETTING

Section 19(1A) LTA 1927 (above) does not apply in relation to underlettings. Any withholding of consent, or conditions imposed on the giving of consent, must satisfy the requirement of reasonableness under section 19(1)(a). However, most covenants against underletting without consent contain a list of conditions regulating the permitted content of a permitted underlease which generally operate alongside the question of reasonableness.

5.1 Terms of the underletting

At common law, a landlord cannot insist on seeing a copy of the proposed form of underlease before consent to an underletting is given (Dong Bang Minerva (UK) Ltd v Davina Ltd [1995] 05 EG 162), although the landlord is entitled to know the true nature of the bargain. Hence, a landlord may (under the terms of the lease) require the form of underlease to be approved by the landlord in advance (such approval not to be unreasonably withheld).

Rent payable, provision for rent review and control of rent review The landlord may be worried about the possible future termination of the headlease and the consequent “stepping-up” of the undertenant on the terms of the underlease. The landlord will also be concerned about comparables that may be used for the headlease rent review.

A covenant not to underlet at below the greater of the rent payable under the headlease and the open market rent will have an adverse affect on the ability of the tenant to underlet in a falling market. Given the difficulties created for tenants by a requirement to reserve a rent higher than the market rent on underletting, some members of the British Property Federation issued a declaration in April 2005. This states the signatories’ intention not to include this type of requirement in new leases and to waive this requirement in existing leases.

The landlord usually wants to ensure that the underlease has the same rent review clause as the headlease and that a new rent is not agreed for the underlease except with the landlord’s prior approval.

Duration and security of tenure The landlord may try to impose restrictions on the length of the term of the underlease; and may require it to be contracted-out of the Landlord and Tenant Act 1954.



Preventing variations and enforcing breaches Having controlled the terms of the initial grant, the landlord should also try to control subsequent variations. In addition, the landlord would not want the tenant to give up any legal rights that exist against the undertenant. They may therefore require the tenant to enforce all breaches of covenant in the underlease (save, perhaps, by way of forfeiture).

Enforcing directly against the Undertenant

• Direct covenant in licence to underlet.

• Restrictive covenant under Tulk v Moxhay.

• Using the Contracts (Rights of Third Parties) Act 1999

- By a head landlord against an undertenant for a breach of the headlease covenants (or those in the underlease).

- By an undertenant against a head landlord who has, for example, agreed to provide services.

However, there is often an express provision negating the application of Act to lease.

6. ALTERATIONS

6.1 Alterations or Improvements?

There is a difference between alterations and improvements:

• Alterations are changes which affect the form and structure of the premises (Bickmore v Dimmer [1903] 1 Ch 158).

• Improvements are works which, viewed through the eyes of the tenant, increase the value or usefulness of the premises (Lambert v F W Woolworth & Co Ltd [1938] 2 All ER 664).

Many alterations also amount to improvements but the distinction can sometimes become important because, for example, if the works amount to improvements the tenant may be entitled to compensation at the end of the lease and s19(2) LTA 1927 (see below) only applies to improvements.

6.2 What Factors Come Into Play When Drafting Alterations Provisions?

• Preserving the physical state of the premises.

• Ensuring that at the end of the lease the tenant does not give back to the landlord premises differing substantially from those demised.

• Maintaining the character, appearance, and reputation of the building and, therefore, the value of the reversion.

• Whether the tenant will need to make immediate fitting out works to the premises for the purposes of its business.



• Allowing for future changes to reflect changing business needs.

• Whether the proposed restrictions will affect assignability.

• Whether the tenant will suffer at review if the covenant is too flexible. The prospect of being able to make improvements can be taken into account at review, even though any increase in rental value due to actual improvements made are usually disregarded.

6.3 The Ability To Make Alterations

Absolute restrictions The landlord may consider placing an absolute bar on alterations where the lease is for a short term only. Even where the lease is for a longer term, the landlord may wish to prohibit external or structural alterations.

However, an absolute prohibition does not necessarily mean that the tenant will be unable to carry out any alterations, since:

• The landlord may be prepared to give its consent despite the prohibition.

• The works may not amount to “alterations”.

• Some statutes, such as those relating to fire precautions and disability, permit the tenant to apply to court to vary the terms of an absolute prohibition to enable works required by a public body to be effected.

• If the works amount to “improvements”, part I of the Landlord and Tenant Act 1927 provides a mechanism whereby the tenant may obtain permission even in the face of an absolute prohibition.

Qualified restrictions

Where the covenant is qualified, to the extent that the works constitute “improvements”, section 19(2) Landlord and Tenant Act 1927 implies a proviso that the landlord's consent is not to be unreasonably withheld. Whilst a landlord will still be able to unreasonably withhold its consent to alterations which are not improvements, there will be very few occasions when the landlord will be able to show that it is being reasonable in withholding its consent. This is because reasons relating to the financial impact of the “improvements” upon the value of the landlord’s reversion do not constitute reasonable grounds for withholding consent. The correct approach for the landlord in such circumstances is to require payment of reasonable compensation to cover the fall in value (as is provided for in s19(2)) (see Lambert v F W Woolworth & Co Ltd [1938] 2 All ER 664).

The landlord may reserve the right to impose certain conditions on giving consent. Where the landlord’s conditions are unreasonable conditions and the alteration amounts to an improvement (within the meaning of s19(2)), the landlord will be unreasonably withholding its consent. However, if the intended alteration is not an “improvement”, it seems that the landlord's wishes will prevail.



Fully qualified restrictions

To avoid any argument that the tenant's works are not improvements (and thus outside s19(2)), most tenants normally insist upon a fully qualified covenant (at least to the extent of internal alterations).

There is no implied obligation by the landlord not to delay. Although delay might, in some circumstances, be such as to be tantamount to “unreasonably withholding consent”, it is prudent for a tenant to expressly provide that the consent is not to be unreasonably withheld or delayed. The tenant should further consider whether the landlord should have to give reasons for refusal of consent, since no requirement would be implied by law.

The landlord will usually impose an obligation to reinstate altered premises at the end of the term. The tenant will often try to resist this or at least qualify it so that they only have to reinstate where reasonably required and subject to at least three months prior written notice. Landlords should be advised that an obligation to reinstate may, in some circumstances, be viewed as an onerous obligation which has a detrimental effect on rental value at review.

7. USE

7.1 What Factors Come Into Play When Drafting User Covenants?

• A landlord’s desire to balance estate management with impact on rent review, (i.e. preventing the tenant from competing with other premises of the landlord in the vicinity and maintaining a good mix of retail uses).

• Avoiding damage to the reputation of the premises.

• Maintaining the value of the landlord's interest in the premises, or adjoining premises, and the rental value of the premises (both at the outset and at review).

• Observing restrictions in the headlease/freehold title.

• Being alert to the possible requirements of a future buyer of the reversion.

• Ensuring the proposed covenant is appropriate for the tenant's needs (present and foreseeable) and those of any assignee.

• If a change of use might be required, ensuring that such a change is easily achievable.

• The need for the tenant to strike a balance between a more open covenant (facilitates diversification of business and/or assignment but probably at the expense of a higher rent) and a more restricted one (converse effects, i.e. no scope for diversification but possible lower rent).

• Competition law in consequence of the Competition Act 1998 and, in relation to grocery retailing activities, The Groceries Market Investigation (Controlled Land) Order.



7.2 Defining The Permitted Use

Most leases will specify a particular permitted use (or range of uses) and, in some cases, will go on to prohibit certain undesirable uses which might otherwise fall within the permitted use.

Making use of the Use Classes Order 1987 (UCO) Before 1st September 2020, the UCO was often used to specify a range of permitted uses. For example, with retail,

"not without the Landlord's prior written consent to use the Premises [or permit or suffer the same to be used] for any purpose other than as [specify primary use] or such other retail shop use falling within Class A1 in the Schedule to the Town and Country Planning (Use Classes) Order 1987, as the Landlord shall first approve in writing (such approval not to be unreasonably withheld"

There were five main categories of use classes in England:

A: shops and other retail premises such as restaurants and banks

B: offices, workshops, factories, and warehouses

C: residential uses

D: non-residential institutions and assembly and leisure uses

Sui generis: a wide range of uses in a class of their own.

The Town and Country Planning (Use Classes) (Amendment) (England) Regulations 2020 (the 2020 Regulations)

The 2020 Regulations came into force on 1 September 2020, overhauling the use classes regime in England and revoking Use Classes A and D. These have been replaced with wider use class E, F.1 and F.2 and some of the elements of the old use classes now fall into sui generis uses.

From 1 September 2020, there are six main categories:

B: general industrial (excluding offices)

C: residential uses

E: commercial, business and service uses

F.1: learning and non-residential institutions

F.2: local and community uses

Sui generis uses

Due to the wider nature of some of the new classes, some leases are now being drafted by reference to the relevant class under the UCO as at a specified date, such as 31 August 2020.



However, note:

• A good working knowledge of the UCO and the 2020 Regulations is obviously essential.

• Care is needed to exclude undesirable uses which otherwise fall within the use class specified.

• Ensure that the lease states that any reference to the UCO or 2020 Regulations is intended to refer to the Use as enacted at a particular date, such as the date of the lease. Otherwise, to some extent, the permitted user will be taken out of the hands of the landlord. This happens where the uses are amended, for example, to widen a particular class. If, as is often the case under a commercial lease, there is a proviso in the lease stating that references to legislation are to be construed as including amending legislation, the scope of the user covenant will, without further provision, be widened by the amendment.

• In any case, control over use may be taken out of the parties’ hands to some extent by judicial interpretation.

Positive or negative? Covenants such as:

• “to use the Premises as a shop for the retail sale of ladies' clothes”

• “to keep open for trade during Normal Business Hours”

both impose a positive duty on the tenant, which will be breached by non-user.

A covenant which makes use of the emphatic negative, for example:

• “to use the Premises only as a shop for the retail sale of children’s shoes”

does not impose a positive duty, as it is restrictive in nature.



With positive covenants, the courts are willing to award damages for breach against a tenant who ceases to carry on its trade. However, the courts are not prepared to grant mandatory injunctions forcing the tenant to stay open for business (see Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1997] 23 EG 141).

If the covenant is positive:

• The tenant should try to qualify the obligation to allow closure for normal business reasons, for example, for repair, or refurbishment and perhaps on assignment.

• Consideration needs to be given to what amount to the normal business hours of the shopping parade.

7.3 Change of Use

Absolute restrictions With an absolute covenant, the tenant will be at the mercy of its landlord should it seek a change of use. Thus, the tenant should be confident that the permitted user at the outset is wide enough for its (and any assignee’s) immediate and foreseeable needs.

From the landlord's point of view, it may demand a consideration (or lease variation) should it be prepared to permit a change of use.

Qualified restrictions With simple qualified covenants, there is no statutorily implied proviso that the landlord's consent is not to be unreasonably withheld. The tenant is, therefore, in no better position than if the covenant were absolute.

The only positive benefit of this kind of restriction is that, if the landlord is prepared to grant consent, it cannot, as a general rule, require a fine or an increased rent in return for giving that consent (s19(3) Landlord and Tenant Act 1927).

Fully qualified restrictions In view of the limited effect of the Landlord and Tenant Act 1927, the tenant should ensure that the lease contains an express proviso that the landlord's consent to a change of use shall not be unreasonably withheld.

However, there is no positive statutory duty on the landlord to give consent and nor is there a duty to act without unreasonable delay. Therefore, from the tenant's point of view, the restriction should refer to the landlord's consent not being unreasonably withheld or delayed.

Whilst this sort of clause gives the tenant a considerable degree of freedom, the tenant should look out for other lease clauses (eg, alterations, applications for planning permission) which might have the effect of blocking what might otherwise be a reasonable change of use.

7.4 Effect on Rental Values

The parties should be aware of the potential effect of the permitted use upon rental value at review. It is firmly established that a court cannot assume that consent may be given under a qualified covenant where there is no proviso for the landlord to act reasonably, and the landlord cannot unilaterally vary the user covenant.



The landlord may seek to provide a narrow actual user clause but provide that for the purposes of rent review the permitted user is, for example, any retail [or office] use except those likely to reduce market rents. This is clearly unfair to the tenant and may be an onerous covenant which is ultimately adverse to the landlord on review.

8. RENT REVIEW

“… the purpose of a rent review clause is to ensure that the rent payable during the term of a long lease reflects changes in the value of money and of the property let”: per Mummery J in British Airways plc v Heathrow Airport plc [1992] 19 EG 157 Ch D.

8.1 Types of Review Clauses

There are various ways in which rent, and rental increases, can be calculated over the duration of a commercial lease.

Underlease rents Some leases will be granted on the basis that the headlease rent is to be geared to rents receivable (or capable of being received) under underleases.

Index Linked Increases Since the purpose of a rent review is to provide the landlord with increases in income to reflect changes in the value of money and property, one way of achieving this is by linking rents to an index such as the Retail Prices Index.

Fixed Increases This type of “review” clause is rare, because the parties can never be sure that the fixed increases, they have agreed to will accurately reflect changes in the property market between the date of the lease and the date of the increase.

Turnover Rents In retail, the rent (or part of it) may be linked to the turnover generated by the tenant.

Clearly, such provisions can only be used where the tenant’s business is such that it will generate turnover at the premises.

Open Market Rent Reviews This is the most common form of review clause.

8.2 The Open Market Clause

8.2.1 The Hypothetical Letting

The most frequently encountered rent review clause is one which provides for the rent to be revised periodically in accordance with current open market rental values. This requires a revaluation after, say, every five years of the lease term.



Under an open market review clause, either the parties will agree, or a valuer of commercial leasehold premises will be asked to find, the rental value at the review date. However, rental value is dependent upon several factors:

• The state, condition, and nature of the premises.

• The length of time for which the premises are available for letting.

• The terms upon which the premises are available for let.

• The current local economic climate.

• Other factors peculiar to a letting of the subject premises.

It is important to appreciate that it is not the rental value of the premises which is being sought; it is the rental value of a lease of the premises. However, it is not the tenant’s actual lease which is being valued because that may contain factors which affect the rent in an inappropriate manner (eg, there may only be left five years of the actual term). Thus the rental value of a hypothetical (or notional) lease is sought.

Terms of The Hypothetical (Notional) Letting Although the hypothetical interest valued at review is not the actual lease, it is usually (and should be) modelled very closely on it. The terms of the hypothetical lease should bear as close a resemblance to reality as possible, as a court will be tempted to adopt a commercially purposive approach to rent review provisions which require a departure from the reality of the actual letting.

The review clause will, therefore, require a valuation of a hypothetical lease which is granted upon the terms of the actual lease, save that certain assumptions about the letting will be made and certain factors will be disregarded.

8.2.2 Defining “Open Market Rent”

“THE BEST RENT AT WHICH THE PREMISES MIGHT REASONABLY BE EXPECTED TO BE LET....”

“best rent” It is possible that the tenant’s occupation of adjacent property or the desire by an adjacent occupier to expand leads to an “overbid” for the subject premises at review. This overbid, although above usual market levels, would be the best rent for the subject premises, and might therefore lead to the tenant seeking to amend the clause [albeit the presence of the words “might reasonably be expected to be let...” may well negate the overbid argument].

“the Premises” The hypothetical letting is usually a letting of the tenant’s actual premises. Care should be taken:

• To check the extent of “the Premises”.

• To see if there are sufficient easements to enable a hypothetical tenant to enjoy the premises.



• To deal with any valuable rights (eg, parking rights), especially where they are given by supplemental documentation. Check that such rights are capable of being rentalised under the review clause. If they are of a personal nature, they would not be available to the hypothetical tenant.

Rental valuation is conducted on the basis of a comparison between the hypothetical letting and comparable lettings of similar properties, let upon similar terms in the locality.

“AFTER THE EXPIRY OF A RENT FREE PERIOD”

A clause which is often inserted into leases by landlords requires the hypothetical letting to be:

“upon terms that the incoming tenant would commence paying rent immediately upon the relevant Review Date at the rate which would reasonably be expected to become payable....after the expiry of any rent-free or reduced rent period of such length as would be negotiated in the open market upon a letting of comparable premises...”

Purpose To understand the purpose of this clause, it should be appreciated that in some lettings (which may be used as comparable evidence for the purposes of this review), the tenant may receive the benefit of a rent-free period (as an inducement). On rent review the landlord may seek to discount the effect of this type of concession thereby keeping the level of rent, on review, artificially high. The landlord is trying to achieve a headline rent rather than an effective rent.

A headline rent is the rent which appears to be payable from the face of the lease but which may be propped up by rent free periods or other inducements. An effective rent is the rent which is effectively payable over the term and which would be the level of rent payable at day one if no inducements were being offered.

Example: Take a five year term at £100,000 p.a. with a 12 month rent free period.

• £400,000 is payable over the term • The headline rent is £100,000 p.a. • The effective rent is £80,000 p.a.

Practical arguments Tenants will argue that it is unfair to discount the effect of rent free periods which are being granted in the marketplace as it artificially inflates the level of rent payable on review and is an unacceptable departure from reality.

Landlords have relied on a variety of clauses designed to avoid this argument, but with limited success, as shown in Broadgate Square plc v Lehman Bros [1995] 01 EG 111.



The use of this type of clause is declining because:

• Tenants argue that it is unfair, as it gives the landlord an unrealistic benefit.

• The Broadgate Square case indicates that chances of success are limited.

• This type of clause may in any case be self-cancelling, in that its incorporation into the hypothetical lease makes that lease onerous.

The form of wording above may still appear in leases, but tenants should ensure that the operation of the clause is limited to rent free periods which are offered for fitting out purposes only.

“..EITHER AS A WHOLE OR IN PARTS...”

This gives the landlord the choice of requiring a valuation on the basis of a letting as a whole or in individual parts. Unless the lease allows the tenant to sub-divide the premises, this type of provision may be unfair to the tenant.

“A WILLING LANDLORD AND A WILLING TENANT”

When the rent review date arrives, the state of the property market may be such that there is no tenant willing to take a lease of the premises (and, indeed, the landlord would perhaps, if the premises were empty, prefer to keep them for itself, and may therefore itself be unwilling). There has to be a hypothetical market and so a willing landlord and tenant must be assumed.

If the market is well and truly dead, then despite such an assumption, a landlord’s only protection is an upwards only review clause (so that, at least, the rent cannot go down).

“...WITHOUT A PREMIUM...”

If an incoming tenant pays a premium, the rental value will be lower.

“...WITH VACANT POSSESSION OF THE WHOLE” The assumption of vacant possession reinforces the hypothesis of a letting in the open market.

However, a necessary consequence of assuming that the premises are vacant is that it has to be assumed that the actual tenant has left (even though in reality it has not) and that it has taken whatever fixtures and fittings it can lawfully remove. The premises are, therefore, assumed to be bare (even though in reality they are not).

The consequential logic is, therefore, that the hypothetical tenant will require time (usually given by way of rent-free period) to fit out the premises to its own specifications, or to find undertenants. As seen above (with headline rents), rent-free periods have the effect of reducing rental value.

The review clause should therefore make it clear that the premises are in fact fitted out and ready for occupation by the hypothetical tenant, commonly by an assumption to this effect.



“...SUBJECT TO THE PROVISIONS OF THIS LEASE...”

The hypothetical letting is on the terms of the actual lease. If those terms are onerous, it will lead to a reduction in rental value. If those terms are generous, it will lead to an increase. Consider therefore:

• The effect of a narrow user covenant, where change of use from a narrow permitted use is allowed subject to landlord’s consent but there is no requirement on the landlord to act reasonably. It cannot be assumed that the landlord will give its consent to widen permitted use.

• Failing to incorporate rent review provisions into the hypothetical letting. Tenants pay higher rents in return for longer periods without any increase. It is therefore imperative that the tenant ensures that the rent review clause is not excluded from the terms of the hypothetical lease.

• Danger of incorporating fixed review dates into the hypothetical letting, (eg, review fixed at 2026, 2031 and 2036; hypothetical term of 15 years - consider the position on the 2031 review).

• Incorporation of terms contained in deeds of variation and licences. Are these deemed to constitute part of the provisions of the lease?

• Inappropriate or excessive conditions or circumstances under s19(1A) LTA 1927.

• Onerous repair covenants (eg, to rebuild and replace).

“...FOR A TERM EQUAL TO 15 YEARS...” The actual lease is a diminishing term. What length of term should be valued at review?

• That which actually remains unexpired?

• That which was originally granted?

• Some other specified fixed term?

Valuation advice needs to be taken on what is most desirable in the market and care needs to be taken in giving effect to that advice in order to avoid ambiguity. Also consider the effect on the length of the hypothetical term of:

• A landlord’s break clause. The term may unexpectedly be cut short and so the lease is less attractive in the market, although the proximity of the break date (in relation to the hypothetical term) will be relevant.

• A tenant’s personal break right. A break right is a valuable right which increases rental value, as it gives the tenant the option of cutting short its liability. However, if personal to a named tenant, it will not be available to the hypothetical tenant.

• The prospect of renewal of the term under the Landlord and Tenant Act 1954. It will be considered, having regard to the circumstances of the hypothetical tenant.



8.2.3 The Assumptions

The Fully Fitted Out Assumption See earlier: (“with vacant possession of the whole”).

No Reduction for Rental Concessions See earlier: (“after the expiry of a rent free period”).

Performance of Covenants

Fairness dictates that although the premises to be valued are the premises occupied by the actual tenant, it should be assumed that they are in repair.

Consider how fair it is to assume that the landlord has performed its obligations eg, provision of services, repair of structure and common parts? If the value is to be fixed on the basis that the disrepair has not occurred, the landlord appears to be gaining a higher level of rent despite not having performed its part of the bargain. However, it should be borne in mind that the tenant has remedies for non-performance that it could exercise in any event. Therefore without this assumption the tenant could obtain compensation for disrepair and in addition obtain a lower rent at rent review, reflecting the state of disrepair, thus obtaining “compensation” for disrepair twice. A common compromise is to state that the landlord has complied with its covenants unless there is a material outstanding breach at review.

Assumption Regarding User

If the hypothetical lease makes no express reference to user, the incoming tenant will assume liability under the actual user covenant. It is necessary to evaluate whether the tenant’s actual user covenant will be attractive in the market, or not.

Consider:

• Is the covenant unduly wide or narrow? Just because the covenant is absolute does not necessarily make it narrow.

• Positive “keep-open” trading covenants. Despite the unavailability of specific performance, these covenants can still be viewed as onerous.

Depreciatory Works Assumption

What if works carried out by the tenant decrease rental value? It should be assumed elsewhere that “...no works have been carried out to the Premises which have diminished rental value...”. However, the tenant may wish to add “except where these have been undertaken to comply with statutory provisions”.

Recovery of VAT

If the incoming tenant is found to be a VAT-adverse organisation (i.e. someone whose business cannot recover VAT charged to them, since its business is one which only makes exempt supplies), it may reduce his rental bid to reflect the fact any VAT charged by the hypothetical landlord will have to be absorbed as an overhead of the business.



The landlord may therefore try to assume that the incoming tenant can recover VAT (or is making taxable supplies; or that the landlord has covenanted not to opt to tax).

If the actual tenant is a VAT-adverse organisation, this assumption is artificial and unfair.

8.2.4 The Disregards

Fixtures

The tenant should ensure that the landlord is not allowed to rentalise fixtures which the tenant would have a right to remove at the end of the term.

It may be that some tenant’s fixtures are in any case disregarded as improvements (see below).

Occupation

The actual tenant is capable of fitting the description of the hypothetical tenant and would be prepared to pay more than most other tenants to avoid the cost of having to relocate. Occupation is therefore disregarded to avoid the “sitting tenant’s overbid”.

It should be extended to cover occupation by any undertenant.

Goodwill

It is considered fair that the rent review clause disregards the rental effect of the tenant’s goodwill. Consider whether goodwill is in fact generated by the tenant, and whether it is generated at the premises, or elsewhere, or by someone else (eg, the landlord).

The disregard should be extended to cover goodwill generated by any undertenant.

Improvements

The tenant should not have to pay twice over for the cost of its improvements and so they are usually disregarded at review.

In drafting this disregard, consider:

• What are improvements? Works which, viewed through the eyes of the tenant, increase the value or usefulness of the premises (Lambert v F W Woolworth & Co Ltd [1938] 2 All ER 664).

• What about works which are not carried out by the tenant? Works carried out by the landlord should be brought into account, but where they have been carried out at the tenant’s expense (or at joint expense) the tenant would expect the rental effect of those works to be disregarded (or a fair proportion to be disregarded, having regard to the amount of the tenant’s contribution).

• What if carried out without consent? A landlord will usually penalise the tenant for failing to get consent, by requiring those works to be brought into account. The tenant should ensure that works carried out where the landlord was unreasonably refusing consent are not brought into account.



• What if the tenant was obliged to improve? If that was the bargain struck, the improvements should be taken into account. Improvements carried out under an obligation owed to the landlord are usually allowed to be brought into account by rent review clauses.

• What about improvements carried out by others? Improvements carried out by undertenants and third parties on behalf of the tenant should also be disregarded.

8.2.5 The Mechanics of Review

Frequency of Review

This is a matter for negotiation. However:

• If using phrases such as: “...every fifth anniversary of the Term...” is it clear when the term commenced, and beware backdating of the term commencement to such a degree as to bring forward the first review date?

• If using fixed dates, there may be problems if those dates are incorporated into the hypothetical letting.

• Is the Term defined to include a statutory continuation? Note that rights or obligations that arise on anniversaries of the term commencement do not continue into the statutory continuation of the tenancy (Willison v Cheverall Estates Ltd [1996] 26 EG 133).

Is Time of The Essence?

United Scientific Holdings Ltd v Burnley Borough Council [1977] 2 All ER 62.

The answer is “no” unless:

• The lease expressly makes time of the essence, or there are sufficient indications from the wording of the lease; or

• There is a sufficient interrelationship between the review and other lease terms (eg, options to break).

Best practice would be to state, in every case, whether or not time was to be of the essence.

Initiating the Review

A negotiated process (with reference to a third party in default of agreement) is preferable to a procedure initiated by trigger notices, since litigation frequently arises as to whether a communication amounts to a notice required by the clause or whether it has been served “out-of-time”.

Note that there is no requirement upon the landlord to be reasonable in specifying a level of rent in its notice (Amalgamated Estates Ltd v Joystretch Manufacturing Ltd (1980) 257 EG 489) which can be fatal for the tenant if time is of the essence.

Reference to A Third Party in Default of Agreement

Expert or arbitrator? Should you leave it so that the landlord can choose at the time of the review?



Arbitrator: - Judicial process (Arbitration Act 1996). - Hears evidence and receives submissions from parties. - Can be lengthy and costly. Expert: - Does not need to take evidence (but lease usually provides for this). - Acts on own skill and judgement. - Quicker and cheaper. - Appropriate where comparables available. The decision of an expert cannot be challenged so long as the expert carries out the task required.

Ability of Tenant to Implement/Refer

When acting for the tenant, ensure that they have the ability to refer the matter to the third party, since a delay by the landlord could prejudice a tenant’s proposed business sale or could lead to hefty interest charges on unpaid increases of rent fixed some time after the review date has passed.

Payment on Account Pending Determination

The tenant continues to pay the old rent until the date the new rent is ascertained.

Payment of Shortfall Upon Determination

The lease may also require the tenant to pay interest on the shortfall.

Memoranda of Revised Rent

The landlord and tenant are usually required to sign memoranda of revised rents (each bearing their own costs) recording what has been agreed.

9. Parcels and Repair

9.1 Clarity of The Parcels Clause

The parcels clause describes the land which is to be the subject matter of the demise. Clarity is essential - it serves the purposes of both parties:

• Both tenant and landlord need to know the full extent of the property that may lawfully be occupied.

• In addition, the tenant’s repair covenant will usually be linked to the definition of the premises, in that it will covenant to repair “the Premises”.

If using plans, note the difference between the phrases “more particularly delineated” and “for the purposes of identification only”. Is the plan intended to be the definitive description of the property or is it simply a location plan?

Note that where the lease is registrable, the lease plan MUST comply with Land Registry Requirements. Refer to Land Registry Practice Guide 40.



Particular Problems with a Lease of Part of Premises

Clarity is more difficult to achieve where the lease relates to part only of the building which contains the demised premises.

A good scale plan is essential. However, with a lease of part, plans can rarely define the premises with the precision required. It is important that all vertical and horizontal boundaries are identified with minute precision, so that the parties to the lease can tell clearly where the tenant’s repairing responsibility ends.

9.2 Drafting Considerations The precise extent of the demise must be made clear by use of appropriate wording, so that those parts of the walls, floors and ceilings intended to be within the demise are included. Particular issues which may need to be considered include:

• Dealing with the external walls. If the intention is that they are to be excluded from the demise (so that they are retained by the landlord), consider ownership of the paint and other finishes on the inside face. Should these parts be part of the subject matter of the tenant’s repair covenant?

• Other load-bearing parts (eg, walls and columns which are located internally within the demised premises). Are these to be excluded from the demise? Consider ownership of paint and other finishes, as above.

• Internal non-structural walls. Are adjoining tenants to be made jointly liable for the repair of these walls (by vertical severance of the walls and the grant of mutual rights of support) or are the walls to be retained by the landlord and dealt with under the service charge provisions?

• Ceilings. Are they suspended? Who is responsible for what is above a suspended ceiling? If not suspended, where does the ceiling end, and the floor of the room above begin? Who is to be responsible for the joists and beams on which a floor is laid?

• Foundations, basement area and roof. Is a tenant of the basement responsible for repairs to the foundations? Should a tenant of the top floor be responsible for the roof? The landlord should consider placing an upper limit on the extent of the demise.

• Ownership of ceiling and floor finishes, doors and windows, and the conducting media.

Is There Damage or Deterioration?

A covenant to repair involves making good defects in the physical condition of the subject matter of the demise.

The concept of repair is elucidated by several judicial quotes:

• "A covenant to repair is not a covenant to give a different thing from that which the tenant took." Lord Esher in Lister v Lane [1893] 2 QB 212.

• "Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole." Buckley LJ in Lurcott v Wakely [1911] 1 KB 905.

• "If the work done is the provision of something new for the benefit of the occupier, that is, properly speaking an improvement; but if it is only the replacement of something already



there, which has become dilapidated or worn out, then, albeit that is a replacement by its modern equivalent, it comes within the category of repairs and not improvements." Denning LJ in Morcom v Campbell-Johnson [1953] 3 All ER 264.

A tenant is expected to carry out such works of repair as, having regard to the age, character, and locality of the premises, would make them reasonably fit for the occupation of a reasonably minded tenant of the class likely to take on the premises. A court will have regard to the age, character and locality of the premises existing at the time the lease was entered into and measure any deterioration of the premises in the light of that.

The ordinary concept of repair does not require:

• Renewal or replacement of the whole or substantially the whole of the premises.

• Improvement of the premises.

• The remedy of a lack of amenity, inefficiency, or a failure of function.

• The execution of work on the demised premises to prevent inevitable future damage where no current physical damage is present.

But note:

• That if the premises are in disrepair at the date of the lease a covenant "to keep in repair" will require the tenant to first put them into repair and then to keep them in repair (Proudfoot v Hart (1890) 25 QBD 42).

The wording used may require the tenant to undertake works beyond those normally contemplated as repair (Welsh v Greenwich LBC [2000] EGCS 84 and Pullman Foods Ltd v Welsh Ministers and another [2020] EWHC 2521 (TCC).A schedule of condition or dilapidations can be agreed prior to the lease being entered into.

9.2.1 Landlord’s Drafting Considerations

A clear lease

The landlord will want a clear lease (i.e. a lease that ensures its rental income is receivable free from any outgoings in respect of the property).

This is achieved either through a full tenant's repairing covenant or via a service charge.

Repair on notice

The extent of a landlord's covenant to keep in repair the demised premises is that the obligation is only broken if and when the landlord fails to repair within a reasonable time of receiving notice of the disrepair.

If the covenant is to keep in repair retained and/or common parts, liability runs from the moment that the disrepair occurs. The landlord may wish to deal with this by inserting an express provision that it shall not be liable until it has received notice of the disrepair.

Self-help default powers

If the tenant is in breach of its covenant to repair, most leases are drafted to enable the landlord to carry out the works in default and recover the cost from the tenant. This enables



the landlord to avoid the provisions of the Leasehold Property (Repairs) Act 1938 and s18 Landlord and Tenant Act 1927 (Jervis v Harris (1996) 1 A11 ER 303).

9.2.2 Tenant’s Drafting Considerations

Duration of lease

The shorter the term, the lighter the responsibility? A tenant taking a relatively short lease will ideally resist contributing towards items that are perhaps disproportionate with the length of term.

Total cover

If there are separate landlord and tenant repairing obligations, the tenant must make sure that the landlord assumes responsibility for those parts of the building excluded from the tenant's covenant. In the absence of express provision, it is unlikely that a term would be implied.

Insured risks

Ensure that the repairing covenant contains an exclusion in respect of damage caused by insured risks as well as any uninsured risks that the landlord has assumed liability for. Check that the landlord is fully liable to reinstate if the building is destroyed or damaged by an insured risk. This may need to be extended where the tenant has managed to negotiate an exclusion for damage caused by uninsured risks.

Inherent defects

There are no special rules relating to the repair of inherent defects. Therefore a tenant of a new building may become liable for damage attributable to defects inherent in the construction or design of the building or in the materials used in construction under the terms of its covenant to repair (Ravenseft Properties Ltd v Davstone Holdings Ltd [1980] QB 12).

However (as in all cases), there must be disrepair and not just merely a defect (Post Office v Aquarius Properties Ltd [1987] 1 All ER 1055).

Where the tenant becomes liable to repair inherent defects, the tenant will face difficulties in recovering expenditure incurred in remedial works from the building contractor or members of the design team who caused the defect. This is because the tenant has no contract with those persons, and an action in tort does not permit the recovery of pure economic loss.

The tenant should consider excluding liability for damage caused by inherent defects (ensuring total cover is achieved by placing the responsibility on the landlord as well as a specific exclusion from the service charge) or as an alternative it should enquire about the availability of contractual warranties from the construction and design team.

Impact on other clauses

The effect of the repairing obligation may impact on rent review if the clause is considered to be onerous.

Also, if the tenant has the benefit of an option to break, this may be conditional upon the performance by the tenant of its covenants, in which case even a trivial breach may prevent the exercise of the option.



10. INSURANCE

10.1 By Whom and In Whose Name? It is common practice for the landlord to effect the insurance cover. The lease should require the landlord to produce evidence of the terms of the policy and of payment of the premiums at least once a year.

In whose name? If the landlord is to insure, should the tenant press for it to be taken out in joint names? This avoids the risk of subrogation which is the right of the insurer to take over rights of action which the insured may have against others (including the tenant). But note that even in the absence of joint insurance the landlord (and therefore its insurer) is unlikely to have a right of action against an otherwise negligent tenant where the lease obliges the landlord to insure and requires the tenant to bear the cost or a proportionate part: Mark Rowlands Ltd v Berni Inns Ltd [1986] Ch 211. In reality, it is not usual for insurance to be effected in joint names. The landlord and tenant have such disparate interests in the property in terms of value and joint insurance would put them on an equal footing in dealing with any insurance claim. The tenant will covenant not to do (or omit from doing) anything which may render the insurance monies irrecoverable. The tenant must check that this is not drawn too widely because if it is breached it is likely that the proviso to the tenant's repairing covenant and the rent suspension proviso will not operate. This makes it imperative for the tenant to see details of the landlord's policy and be informed of any changes.

Who is to pay? Most leases will contain a covenant requiring the tenant to reimburse the landlord the cost of the premiums paid.

Noting the tenant's interest

It is often thought that the noting of a tenant's interest ensures that the tenant will be notified before the policy is allowed to lapse and, as such, protects the tenant against the insurers subrogating themselves to the rights of the insured (landlord). In practice it has little or no effect.

10.2 Risks Covered

The tenant must ensure that the “Insured Risks” are adequately defined, since damage by an insured risk will usually trigger:

• Exemption from repairing responsibility for the tenant.

• A landlord’s re-instatement obligation.

• Suspension of rent pending re-instatement.

Care should be taken with the definition of insured risks. In particular the tenant should analyse the range of risks covered. Whilst a fully comprehensive range of risks is, of course, desirable, it should be remembered that it is the tenant who is bearing the cost. The greater the range of risks, the higher the premium.



Once the range of risks is fixed, the landlord should covenant to provide insurance against those risks. The landlord should note that the obligation is absolute and, if a risk is not insurable, a breach of covenant will still occur. Accordingly, qualifications should be made to the insured risks. It may be appropriate to qualify the range of insured risks so that they include only those which are “readily insurable on reasonable terms and at reasonable rates in the insurance market”. This means that if cover is either unavailable or available but only on prohibitive terms, it ceases to be an insured risk.

If the policy (or certain risks) carry excesses, who is to foot the bill for the shortfall in insurance proceeds - landlord or tenant? The landlord will usually oblige the tenant to pay the excess on any claim.

The risks may also include “such other risks against which the Landlord may from time to time decide to insure” (known as a sweeping-up provision).

10.3 The Sum Insured

The full cost of reinstatement is sufficient in most cases. The cover should also expressly include demolition and site clearance, recovery of professional fees and other expenses incidental to the rebuilding.

Since the tenant is likely to get the benefit of a rent suspension pending re-instatement, the landlord will want to insure (at the tenant’s expense) against loss of rent. Such insurance should cover no longer than the period for which rent can be suspended but should take into account the possibility of the suspended rent being increased by rent reviews which are programmed to arrive during the suspension period.

10.4 What If the Premises Are Damaged?

The consequences to consider (which are dealt with more fully below) are:

• The lease may be frustrated.

• The tenant may be obliged to repair the damage.

• Without contrary provision, rent continues to be payable.

• The premises will need to be rebuilt or re-instated.

• One (or both) of the parties may want to end the lease. Frustration It is unlikely that the lease will be frustrated unless the subject matter of the lease is completely destroyed and extremely unlikely to be re-instated during the term.

Repairing the damage

Since the tenant is paying the landlord for the cost of insurance, the tenant must ensure that damage caused by any of the insured risks is expressly excluded from any repairing obligation otherwise borne by the tenant (provided the insurance has not been vitiated by the acts or omissions of the tenant). The exclusion should apply to insured risks whether the landlord has insured or not.



Will the tenant still be liable for the rent? Rent continues to be payable despite damage. The tenant must ensure that the lease contains the usual proviso for suspension of rent in the event of damage or destruction by an insured risk which renders the premises unfit for occupation or use, or incapable of access (provided, again, the insurance has not been vitiated by the tenant).

The proportion of rent suspended usually depends upon the extent of damage (i.e. whether full or partial). The parties should consider whether the proviso for rent suspension should extend to other payments too, such as service charge and insurance rent.

Consideration should be given to the period of suspension. It should run from when the premises are unfit for "occupation or use" until the time they are fit for "occupation and use". If, as is possible, the re-instatement could take some time, the landlord will seek to limit the suspension to the maximum period for which loss of rent has been insured (eg, three years).

Who will reinstate?

The landlord should be required to give an express covenant to reinstate the premises. In giving this covenant, the landlord may wish to ensure:

• That the covenant does not require money received for loss of rent to be laid out in reinstatement.

• That the obligation does not apply where circumstances beyond its control prevent reinstatement (eg, unavailability of planning permission).

• That the obligation permits reinstatement with modifications. Reinstatement does not require precise replication, but the premises have to be fit for the equivalent purpose to those used before the damage (see Vural Ltd v Security Archives Ltd (1990) 60 P&CR 258).

• That the landlord has sufficient access rights to effect the works of reinstatement (since, of course, the tenant retains the right to exclusive possession).

The tenant should carefully examine the extent of the obligation. Does it only require the landlord to "lay out the net proceeds received”? If so, the tenant would want the lease to contain a provision for the landlord to make up any shortfall. Ideally the tenant would prefer a covenant to reinstate regardless of the availability of insurance proceeds (unless the tenant itself had vitiated the policy).

Other issues to be considered include:

• Dealing with the situation when reinstatement becomes impossible, impractical or where the parties agree not to reinstate. After a reasonable period, either party may wish to terminate (the period should not exceed the period for which loss of rent is insured). This can be achieved by an option to break given to either or both parties. In addition to the break notice, the landlord may have to end the tenancy under the Landlord and Tenant Act 1954.

• In the event of termination, who is entitled to the insurance proceeds?

• How to deal with a situation where damage has been caused by an uninsured risk. This could be a risk that the landlord has not covenanted to insure against or a previously insured risk that has become uninsurable (eg, flood) or where the scope of damage covered by the policy becomes limited. (eg, through the insurers excluding damage caused by terrorist activity). This can be a very significant issue in lease negotiation.



• A number of landlords are willing to accept responsibility for uninsured risks to some degree. Typical provisions will allow the landlord to have an option to decide within 6 months of the uninsured damage whether or not to reinstate at their own cost. The tenant will benefit from a rent free from the date of damage. After the 6 month period if a landlord chooses to reinstate, the rent free will continue to the point at which the premises are fit for occupation and use or the expiration of a 3 year period (whichever is the earlier). If the landlord opts not to reinstate or if the premises are not ready at the end of the 3 year period, there is a mutual break right, immediate upon giving notice.

11. SERVICE CHARGE PROVISIONS

11.1 What services will be provided?

This depends on the facts of each case, but the landlord will want to recover:

• All expenses incurred in complying with the landlord covenants in the lease.

• The cost of all the other services which the landlord may decide are appropriate to provide.

• The costs and expenses incidental to providing the services and other costs arising out of its ownership of the property.

It would generally be considered reasonable for a landlord to seek to recover:

• Rates, water rates, insurance costs, drainage costs, gas, electricity, and other fuel costs.

• The cost of cleaning, repairing, maintaining, servicing and renewing structure, exterior, common parts, including gardens, parking areas, windows, doors, plant, machinery, air-conditioning, lifts, central heating.

• The cost of providing essential staff (eg, security and cleaning).

• Management fees and any banking costs.

It would generally be considered unreasonable for a landlord to seek to recover:

• Development costs (either original or subsequent).

• Expenditure which goes beyond repair or cost-effective replacement.

• Capital improvement costs.

• Estate management costs (eg, rent review, lease renewal, licence applications).

The landlord will want to include a "sweeping-up provision" to enable recovery of the cost of other services relating to the building provided by the landlord during the term and not expressly mentioned. The landlord will argue that this is necessary because it is not possible at the outset to envisage every aspect of expenditure which may be required and, over a period of time, the requirements of the building may change. Sweeping-up provisions are narrowly construed, but the tenant should in any case limit the clause to items of expenditure which are reasonably incurred, which are capable of benefiting the tenant and which are in keeping with principles of good estate management. Certain items might be expressly excluded.



11.2 The Landlord's Covenant

The landlord should covenant to provide what the parties consider are essential services. The landlord may also give itself a discretion to provide, at the tenant’s expense, a list of non-essential services.

The tenant should insist that the landlord gives an unqualified covenant to provide essential services. The tenant should not accept anything less than an obligation. Possible qualifications on the landlord’s covenant might include:

• A landlord's covenant to provide such services as “the landlord reasonably considers necessary”. This should be resisted by the tenant as, clearly, such a phrase is vague and imprecise.

• An obligation to use reasonable endeavours to provide the essential services. This is likely to be considered to be inadequate by the tenant.

The landlord should limit the ambit of its covenant to legislate for possible non-provision of services due to circumstances beyond its control (eg, strikes, lock-outs etc.).

The tenant will usually seek to incorporate a requirement for reasonableness in the standard of services provided, for example, by limiting recovery of costs to “expenses reasonably and properly incurred” and ensuring that services and works are to be provided “to a reasonable standard”.

11.3 The Tenant’s Covenant

In keeping with the concept of a clear lease, the landlord will seek to ensure that all costs incurred under the heads of expenditure listed are recoverable.

The landlord will seek a covenant from the tenant to pay service charge usually quarterly in advance, on the basis of estimates of expenditure for the year ahead.

The service charge will often be reserved as, or expressed to be payable as, rent so that the landlord has the same powers of recovery of service charge as he has for rent (i.e. forfeiture without the need for a s146 notice).

11.4 Apportionment of Costs Between Tenants

There are a number of possibilities:

Fixed percentages The aim of fixing percentages at the outset is to achieve certainty. However, the landlord encounters difficulties if it ever wishes to extend the site or alter the size of any of the units. Where fixed percentages are used, the tenant should ensure that the landlord bears the service charge costs in respect of those units which are from time to time unlet or unoccupied.

Floor area Basing service charge contributions on relative floor sizes seems fair in principle but works unfairly against a large retailer in a shopping centre who may use a large proportion of its floor space for storage purposes. Hence, some form of zoning of floor space may be required. The parties should ensure that an agreed method of measuring floor space is set



out in the lease to avoid disputes between surveyors over different techniques.

If service charge is calculated by reference to the floor space occupied by the tenant as a proportion of the floor space occupied in the development, this will enable the landlord to increase the size of the development without a radical overhaul of the service charge provisions. However, the tenant should again ensure that the landlord bears the cost in respect of those units which are from time to time unlet or unoccupied.

To be determined by landlord's surveyor The easiest method for the landlord may be to have a determination by its surveyor that “...the service charge is the tenant's fair proportion of each item of the Service Costs”. A tenant would obviously be wary of this type of provision and would want to be satisfied as to the status and independence of the surveyor and would want to qualify the determination with an element of reasonableness.

Differential service charge proportions It may be that different tenants in the building make different uses of the various services (eg, a ground floor tenant does not make use of the lifts). This problem can be accommodated by having a two-tier service charge so that, for example, all of the tenants share the cost of the services in a list of essential services, which relate to the whole of the building, but only the tenants of certain parts (eg, the upper floors) share in the expenses in a list of other services (relating, for example, to the lifts, escalators etc.).

11.5 The Amount Payable

Typically there are two stages in the mechanics of payment:

• Advance payments (or interim payments) for the forthcoming accounting period (usually paid with rent every quarter). The amount (usually expressed to be a fair and reasonable sum) can be based on previous year's actual expenditure or on an estimate of the likely expense for the year ahead.

• Balancing charges. At the end of the accounting period final accounts are prepared and an adjustment is made to reflect the actual expenditure incurred. Either the tenant becomes liable to make up any shortfall in advance payments, or a surplus is stated to be held over to set against expenditure incurred in the succeeding year.

To ascertain the amount of the balancing charge, the landlord is usually obliged by the lease to procure the issue of a certificate (prepared by its surveyor, and issued to the tenants) which sets out a summary of the landlord’s expenses in the accounting period just completed. Clearly, the tenant should scrutinise the certificate to check that expenses have been properly incurred. The lease then obliges the tenant to pay to the landlord its proportion of the sum certified in the certificate less any advance payments already made. If advance payments exceed the certified sum, the lease usually states that the surplus is to be credited against the next advance payment due from the tenant.

Points to note:

• Both the initial estimate (if there is to be one) and the final accounts should be “certified”; the estimate by the landlord's surveyor, and the final accounts by the landlord's accountant. The tenant should seek to ensure that these people are properly qualified and independent of the landlord.

• The landlord will usually want the accountant's certificate to be “final and conclusive”. The



tenant may seek to qualify this by adding “except in cases of manifest error”. It seems that, where the surveyor is truly independent of the landlord, a certificate stated to be final and binding will only be set aside if the certifier has made a manifest error or has acted outside the remit.

• Consider requiring the landlord to pay into the service charge account the service charge payable in respect of lettable parts of the building which remain unlet.

11.6 The Service Charge Code

The Royal Institution of Chartered Surveyors (RICS) launched the first edition of the Service Charges in Commercial Property Code of Practice in April 2007. The aim of the Code was to make the operation of service charge provisions less of an area of conflict between landlords and tenants.

The current Service Charge Code is the RICS Professional Statement “Service charges in commercial property 1st edition, September 2018” which took effect on 1 April 2019. It sets out best practice in the management and administration of service charges in commercial property and provides mandatory obligations that RICS members and regulated firms engaged in this area must comply with or ace legal and/or disciplinary consequences. It is expected that members engaged in service charges will comply with the whole document as opposed to just the mandatory sections and this means that the best practice requirements should also be adhered to unless a departure can be justified.

The Code cannot override lease terms but suggests those terms being read in conjunction with the Code. If the Code is not complied with, the tenant will still be liable to pay service charge pursuant to lease terms.

12. FORFEITURE

Need for an express right Forfeiture is only available if the landlord has expressly reserved the right to forfeit or if the lease is made conditional upon performance by the tenant of its covenants.

13. STAMP DUTY LAND TAX AND LEASES

The Finance Act 2003 (FA 2003) brought in stamp duty land tax (SDLT). This was a fundamental change to the law on stamp duty. Under SDLT, the tax is payable on transactions involving interests in land in the UK, not on documents.

14. THE LAND REGISTRATION ACT 2002 (LRA 2002)

LAND REGISTRATION RULES 2003 (LRR 2003)

ISSUES CONCERNING THE GRANT OF LEASES

The following key points should be noted for leases granted on or after 13 October 2003:



14.1 Leases requiring to be registered

• A lease of more than seven years, granted out of registered or unregistered land, requires to be registered (s4(1) and s27(2) LRA 2002).

• A lease requiring to be registered must also be noted against the landlord’s title where the landlord’s title is registered (Para 3, Sched 2 LRA 2002).

• A lease granted out of registered or unregistered land, to take effect in possession more than three months after its grant (reversionary lease), requires to be registered, whatever the length of its term (s27(2) LRA 2002). Note that the term must in any event take effect in possession within 21 years after the date of its grant; otherwise it will be void under s149(3) Law of Property Act 1925.

• Where a lease requires to be registered, sufficient details of the demise, by plan or otherwise, must be given in order for the application to be accepted.

• See 9.1 above for the Land Registry requirements where a lease requiring to be registered does not demise all the property above and below the land surface itself (for example, the lease of a floor of an office building).

14.2 Easements granted in leases

An easement granted in a lease which itself is granted out of a registered title, must be registered and noted against the landlord’s title in order to bind the landlord’s successors in title, whether or not the lease itself requires to be registered (s27(2)(d) and Para 7 Sched 2 LRA 2002).

Where the lease itself is registrable, any easement granted will automatically be registered and noted against the landlord’s title out of which the lease is granted. If the lease itself does not require to be registered, the easement should be registered so as to be registered as a legal easement and a notice of it entered against the landlord’s title.

So, for example, easements for passage of services and access through common parts, granted out of a registered title in a five year lease of an office building, require to be registered against the landlord’s title and a notice of them entered in the landlord’s title in order to bind a buyer of the building from the landlord.

Note that the landlord’s title that is affected by the tenant’s easements may include additional title numbers to the title out of which the lease is granted, and any such additional title numbers should be mentioned in the relevant application.

14.3 Restrictive covenants in leases Where a lease is granted out of a registered title and one party (usually the landlord) enters into a restrictive covenant affecting other land within its title (and/or other registered land it owns), then the burden of the restrictive covenant must be noted against the registered title/s affected (servient tenement) in order to bind the landlord’s successors in title under s29(2) LRA 2002, again whether or not the lease itself requires to be registered.

14.4 Prejudicial information/exempt information document

A lease may contain information that one or both of the parties considers confidential – for example, the existence of a break right or an upwards and downwards rent review.

A lease granted under LRA 2002 will be open to public inspection (r135 LRR 2003).



However, if a party considers that any document referred to on the register contains prejudicial information, the party can apply under r136 for the prejudicial information to be excluded from the copy of the document available for public inspection.

In the context of commercial transactions, prejudicial information broadly means information that would be likely to prejudice the commercial interests of the applicant were it to be available to anyone outside the parties to the document (r131 LRR 2003).

The application will be for the full document to be designated an exempt information document (EID) and for it to be unavailable for public inspection. If the application is successful then the EID will be kept off the register. The document available for inspection will be the edited document, and this will have excluded from it the wording containing the prejudicial information.

The Land Registry will accept the application unless they consider the application groundless or they consider that the designation could prejudice the keeping of the register. However, a third party can still apply under r137 LRR 2003 to see the EID. The Land Registry will then provide a copy of the EID if they decide that none of the excluded information is prejudicial or if, on balance, public interest merits the information being disclosed. However, they will notify the applicant for the EID of the third party’s application, and if the applicant for the EID objects to the third party’s application then the matter will be referred for determination by the Information Commissioner under the Freedom of Information Act 2000.

14.5 Prescribed Clauses

As a result of the Land Registration (Amendment) (No.2) Rules 2005, with effect from 19 June 2006, most registrable leases granted out of registered land must contain prescribed clauses. A lease does not have to contain the prescribed clauses when it is granted in a form expressly required either by an agreement entered into before 19 June 2006, by an order of the court, by an enactment or by a necessary consent or licence for the grant of the lease given before 19 June 2006. Additionally, a deed varying a lease that takes effect as a surrender and re-grant of the leasehold estate does not have to be a prescribed clauses lease.

The prescribed clauses must appear at the front of both the original and counterpart lease. Where the lease has a front sheet they may appear immediately after that front sheet. If there is nothing to enter in one of the prescribed clauses, the headings and sub-headings must not be deleted unless Schedule 1A to the Land Registration Rules 2003 specifically states they may be. The clause should be left blank or “none” inserted. Where the prescribed clause allows a cross-reference to the relevant part of the lease where the provision appears, the precise location must be given. If there is uncertainty as to whether or not a particular provision should be referred to in a prescribed clause the Land Registry recommend that it be included. They will then check the provision in the main body of the lease and make an entry where appropriate.

The Land Registry will rely solely on the information given in these prescribed clauses when registering the lease and when making entries in the registers in respect of rights created or reserved by the lease. Failure to submit a prescribed clause lease in the correct form may result in rejection of the tenant’s application for registration. In addition, if the correct information is not provided in the prescribed clauses, this may result in the landlord’s or tenant’s rights not being properly noted in the relevant title registers.



Drafting Commercial Leases DRAFTING EXERCISES



EXERCISE 1 – HEADS OF TERMS You are acting for Megabank Pension Fund Limited, the landlord of Unit 1 Riverside Retail Park. You have received the attached Heads of Terms for a new letting of Unit 1 to Books to Read (2020) Limited.

Are the Heads of Terms sufficient to enable you to prepare a draft lease for submission to the proposed tenant’s solicitors?

If not, what further instructions do you need and what points do you need to clarify with your landlord client?



HEADS OF TERMS FOR THE LETTING OF UNIT 1 RIVERSIDE RETAIL PARK

1. LANDLORD: Megabank Pension Fund Limited.

2. TENANT: Books to Read (2020) Limited of 1 High Street Bridgetown.

3. PREMISES: Unit 1 Riverside Retail Park. Various rights will need to be granted to the tenant. 4. RENT: Seventy Thousand Pounds (£70,000.00) per annum exclusive. Rent is to be reviewed at the end of the fifth year of the lease term on the usual basis.

5. LENGTH OF TERM: Ten years. Both landlord and tenant to have the right to break the lease at the end of the fifth year.

6. SERVICE CHARGE: Tenant to pay a contribution of 15% of the total service charge

costs. 7. INSURANCE: Landlord will insure and tenant will pay an appropriate contribution.

8. ALTERATIONS: Tenant will be permitted to carry out non- structural works of alteration subject to obtaining landlord’s consent.

9. ALIENATION: Tenant will be permitted to assign and underlet. No other dealings will be permitted.



EXERCISE 2 – REPAIR Please consider the wording below. What amendments would you make acting on behalf of a prospective tenant taking a lease of whole if:

(a) The premises were new?

(b) The premises were old and in a poor state of repair? “The Tenant covenants to repair the Premises and to keep them in repair except where damage is caused by any of the Insured Risks unless (through the fault of the Tenant its undertenants or anyone at the Premises expressly or by implication with their authority) the Landlord's insurance policy has been vitiated or the payment of the policy money is refused in either case wholly or in part.” NOTE: "the Premises" means all that land shown edged red on the attached plan and known as [ ] including all additions and improvements and all Landlord's fixtures and fittings "the Insured Risks" means fire lightning explosion impact storm tempest flood bursting and overflowing of water tanks apparatus or pipes impact from aircraft and other aerial devices and any article dropped from them earthquake riot civil commotion strikes locked-out workers and malicious persons and such other risks as the Landlord may from time to time insure against, but there is excluded from this definition any risk in respect of which insurance of the Premises may not from time to time be available, or which might not ordinarily be arranged with an insurer of good repute upon reasonable terms



EXERCISE 3 – SERVICE CHARGES

Service Charge Provisions Look at the following extracts from a draft lease of part. What amendments would you seek to make on behalf of a tenant?

1. Landlord’s covenant 1.1 Subject to payment by the Tenant of the Service Charge and any other payments

reserved by or payable under this lease the Landlord covenants to use reasonable endeavours to provide the services described in paragraph 3.1 of this schedule and will also provide such of the other services listed in paragraph 3 as it may in its absolute discretion decide

1.2 The Landlord may in its absolute discretion add to exclude modify or otherwise vary the Services and is not obliged to do anything which is the responsibility of the Tenant or any lessee under an occupational lease of any part of the Building

1.3 The Landlord is not liable for any consequences to the Tenant caused by breakdown absence or insufficiency of any of the Services or by any defect in any conduits machinery or systems in the Building or by any defect in the Building except where caused by the Landlord’s neglect or covered by insurance (unless the insurance is vitiated by the Tenant)

1.4 The Landlord is not liable for any interruption to any of the Services by reason of any cause which is beyond the Landlord’s reasonable control

2. Tenant’s covenant 2.1 On each of the usual quarter days during the Term the Tenant will pay to the

Landlord an advance payment comprising one quarter of the Landlord’s fair and reasonable assessment of the likely amount of the Service Charge for the next following financial year and the first payment (apportioned if necessary on a daily basis) is to be made on the date of this lease

2.2 At the end of each financial year the Landlord will prepare and copy to the Tenant certified accounts showing the total cost of providing the Services for that year and containing a fair summary of the Services provided in that year

3. The Services

3.1 Repair of the Building

The maintenance repair refurbishment and renewal of the main structure and exterior of the Building

3.2 Decorating and cleaning the Building The painting cleaning renovation and decoration of the exterior of the Building at such intervals as the Landlord decides and as and when the Landlord considers necessary the cleaning renovation and decoration of the Common Parts including cleaning the inside of the windows in the Common Parts and cleaning the outside of all windows in the Building



3.3 Common Parts The repair renovation alteration and improvement of the Common Parts and the provision of furnishings and equipment in the Common Parts including (but not limited to) carpeting tiling fire fighting equipment refuse disposal facilities and any appropriate heating and hot water as the Landlord considers necessary

3.4 Plant and Systems The provision and maintenance of any appropriate plant machinery systems and ancillary equipment for the Building

3.5 Ancillary Costs Compliance with statutory requirements and the payment of all rates taxes and impositions and costs imposed at any time on the Building or on the Building in common with other property

3.6 General

The provision of such other services as the Landlord reasonably considers necessary or desirable for the benefit of the Building or its occupiers.



EXERCISE 4 – BREAK CLAUSES Please review the draft break clause set out below and consider: (a) Why the landlord’s solicitor has drafted the clause in this way? (b) What issues the tenant’s solicitor will have with the drafting.

DEFINITIONS Break Date: 29 September 2026 Break Notice: Written notice to terminate this lease on the Break Date. 1. EXERCISE OF BREAK

The Tenant may terminate this lease by serving a Break Notice on the Landlord at least six (6) months before the Break Date.

2. CONDITIONS A Break Notice shall be of no effect if, at the Break Date: (a) The Tenant has not paid any part of the Annual Rent, or any VAT in respect of it, which was due to have been paid; (b) Vacant possession of the whole of the Property is not given; or (c) There is a subsisting breach of any of the tenant covenants in the Lease.

3. TERMINATION 3.1 Subject to clause 2, following service of a Break Notice this lease shall terminate on the Break Date. 3.2 Termination of this lease on the Break Date shall not affect any other right or remedy that either party may have in relation to any earlier breach of this lease.

3.3 If this lease terminates in accordance with clause 3.1 then, within 14 days after the Break Date, the Landlord shall refund to the Tenant the proportion of the Annual Rent, and any VAT paid in respect of it, for the period from and excluding the Break Date up to and excluding the next Rent Payment Date, calculated on a daily basis.



EXERCISE 5: USER COVENANTS You act for the landlord of a retail unit. The prospective tenant is Tastyfoods Supermarkets plc. Your assistant has drafted the suggested alternative user clauses. Consider the effectiveness of each from both the landlord and tenant’s perspective.

a) Not to use the Premises except for the business of a supermarket or for such other retail use as may be approved in writing by the Landlord.

b) To use and occupy the Premises for the purposes of a supermarket or for such other business as may be approved in writing by the Landlord (such approval not to be unreasonably withheld).

c) Not to use the Premises except as a supermarket by Tastyfoods Supermarkets plc or such other business use as may be approved in writing by the Landlord.

d) To use and occupy the Premises for the purposes of a supermarket or such other

use within Class A1 of the Town and Country Planning (Use Classes) Order 1987 (as amended) as the Landlord may approve in writing (such approval not to be unreasonably withheld)



EXERCISE 6: RENT REVIEW PROVISIONS The tutor will run a brief presentation outlining the basics of a well drafted rent review clause. Please then consider the definition of “Open Market Rent” included below and in particular: 1. Why have clauses (a), (b) and (c) been included and what do they mean? 2. Why have assumptions (g), (i) and (j) been included and what do they mean? 3. Why have the disregards been included and what do they mean?

“Open Market Rent”

means the annual rent at which the Premises could reasonably be expected to be let as a whole at the relevant Review Date in the open market:

(a) without a fine or premium; (b) by a willing landlord to a willing tenant; (c) which would be payable after the expiry of a rent free or reduced rent period (if

any) of such length as would be negotiated in the open market between the willing landlord and the willing tenant at the relevant Review Date;

(d) under a lease equal to the Term; and (e) otherwise on the same terms as this Lease, except as to the amount of the

Rent and assuming that there is (where relevant) a rent commencement date in such lease at such date after the relevant Review Date so as to provide for the rent free or reduced rent period referred to in paragraph (c) above

Assuming that:

(f) the Premises are available to be let with vacant possession; (g) the Premises and the Building and any land or Service Media over which any

rights granted by this Lease are to be exercised are in good and substantial repair and condition and if damaged or destroyed that they have been reinstated;

(h) the Premises have been fully fitted out at the cost of the willing tenant and are

ready for immediate occupation and use by the willing tenant;

(i) the Landlord and the Tenant have fully complied with their obligations in this Lease;

(j) no work has been carried out on the Premises by the Tenant or any

undertenant or their predecessors in title, or on any other part of the Building or any adjoining property of the Landlord before or during the Term, which would lessen the rental value of the Premises;



(k) the Premises can, in their assumed state, be lawfully used by the willing

tenant for the Permitted Use and for any other purpose to which the Landlord has, at the request of the Tenant, given its consent; and

(l) any consents or licences current or required at the relevant Review Date are

available to the willing tenant

But disregarding:

(m) any occupation of the Premises by the Tenant or any authorised undertenant; (n) any goodwill attached to the Premises by reason of the Tenant or any

authorised undertenant carrying on any business at the Premises;

(o) any improvements (including improvements which form part of the Premises at the relevant Review Date) carried out by the Tenant or any authorised undertenant, or their predecessors in title, before or during the Term, with the consent (if required) of the Landlord, at the cost of the Tenant or authorised undertenant, and not pursuant to an obligation owed by the Tenant or authorised undertenant to the Landlord or its predecessors in title.



EXERCISE 7: INSURANCE PROVISIONS The tutor will run a brief presentation on insurance during which the following provisions will be considered from a tenant’s point of view:

The definition of Insured Risks and Excluded Risk

• Is the sweeper-up clause (“such other risks”) acceptable?

• What additional provisions would you try to add in to deal with damage caused by an Excluded Risk?

Landlord’s covenant to insure

• Does the landlord insure for the right amount and against the correct range of risks?

Landlord’s covenant to reinstate

• What are the consequences of there being a shortfall on the landlord’s claim?

Tenant’s obligations

• How would you amend clauses 10.3.1 to 10.3.4 inclusive?

Proviso for rent suspension

• Exactly what sums will be suspended?

• Until when?



“Insured Risks”

means fire, explosion, lightning, earthquake, flood, storm, bursting or overflowing of water tanks, pipes, or other water or heating apparatus, impact, aircraft (other than hostile aircraft) and things dropped from such aircraft, riot, civil commotion and malicious damage and such other risks as the Landlord may from time to time insure against (whether at its own discretion or at the request of the Tenant), but to the extent that any risk is for the time being an Excluded Risk, it will not to that extent and for that time be an Insured Risk; “Excluded Risks” means any risk against which the Landlord does not insure (or in respect of which there is a partial exclusion to the extent that the partial exclusion applies) because insurance cover for that risk is either not ordinarily available in the London insurance market, or is available there only at a premium or subject to conditions which in the Landlord’s discretion are unacceptable; “Insurance Rent” means a fair proportion of the total of the cost to the Landlord (before any commission) of insuring the Building against the Insured Risks for its full reinstatement cost, including the costs of demolition and site clearance, temporary works, compliance with local authority requirements in connection with any works of repair or reinstatement, architects’, surveyors’ and other professional fees and other incidental expenses, and in each case with due allowance for inflation and VAT and against public liability of the Landlord in connection with any matter relating to the Building, its occupation or use, and the cost to the Landlord (before any commission) of insuring against loss of the Rent (having regard to the provisions for the review of the Rent) for a period of three years; “Rent” means the yearly rent of [AMOUNT IN WORDS] pounds (£[AMOUNT IN FIGURES]) subject to review in accordance with Schedule [ ];



10. INSURANCE

10.1 Landlord’s obligation to insure

The Landlord shall insure the Building, other than any part of the Premises installed by the Tenant or any other occupier, against the Insured Risks for the full reinstatement value, through an agency chosen by the Landlord and subject to any exclusions, excesses and conditions as may be usual in the insurance market at the time or required by the insurers or reasonably required by the Landlord.

10.2 Reinstatement

If the Premises are damaged or destroyed by an Insured Risk, then:

10.2.1 unless payment of any insurance moneys is refused because of any act or omission of the Tenant and the Tenant has failed to comply with clause 10.3.4; and

10.2.2 subject to the Landlord being able to obtain any necessary consents and to the necessary labour and materials being and remaining available,

the Landlord shall use the insurance moneys it receives, except moneys received for loss of rent, in repairing and reinstating the Premises (other than any part which the Landlord is not obliged to insure) or in building reasonably comparable premises as soon as reasonably possible.

10.3 Tenant’s obligations relating to insurance

The Tenant shall:

10.3.1 pay the Insurance Rent in accordance with this Lease;

10.3.2 comply with the requirements and recommendations of the insurers relating to the Premises and not do or omit to do anything which may make any insurance of the Building or of any adjoining property of the Landlord taken out by the Landlord or any superior landlord void or voidable, or which would result in an increase in the premiums for such insurance;

10.3.3 give the Landlord immediate written notice of any damage to or destruction of the Premises by an Insured Risk;

10.3.4 pay the Landlord on demand an amount equal to any amount which the insurers refuse to pay, following damage or destruction by an Insured Risk to any part of the Building or any adjoining property of the Landlord, because of any act or omission of the Tenant and the amount of any excess required by the insurers in connection with that damage or destruction;

10.3.5 not take out any insurance of the Premises against the Insured Risks in its own name other than in respect of any part of the Premises installed by or on behalf of the Tenant or any undertenant, and if the Tenant has the benefit of any such insurance, the Tenant shall hold all money receivable under that insurance upon trust for the Landlord; and

10.3.6 if requested by the Landlord remove its fixtures and effects from the Premises to allow the Landlord to repair or reinstate the Premises following damage or destruction by an Insured Risk.



10.4 Suspension of rent

10.4.1 If the whole of the Premises or any part which the Landlord is obliged to insure, are damaged or destroyed by an Insured Risk so as to make the Premises or any part which the Landlord is obliged to insure, unfit for occupation or use, the Rent (or a due proportion of it determined by the Landlord according to the nature and extent of the damage) will be suspended from the date of damage or destruction for a period of three years, or, if sooner, until the Premises, or such part, have been made fit for occupation and use.

10.4.2 Any advance payment of Rent made by the Tenant prior to the date of damage or destruction by an Insured Risk in respect of a period after that date shall (to the extent that the Rent is suspended) be repaid by the Landlord to the Tenant.

10.4.3 The Rent will not be suspended to the extent that any loss of rent insurance has been made ineffective, or payment of it has been refused by the insurers because of any act or omission by the Tenant, nor unless and until any arrears of Rent or other sums due under this Lease have been paid by the Tenant in full.

10.5 Insurance moneys All insurance moneys payable will belong to the Landlord.



EXERCISE 8: ALIENATION You are acting on behalf of Books to Read (2020) Ltd. As this is a new business, your client wants to ensure that the new lease is as flexible as possible in relation to assignment and underletting. If the business is not as successful as hoped, they may need to assign or underlet in the future.

Prepare to make a short presentation to your client on the provisions below, highlighting any provisions that are of particular concern.

11. ASSIGNMENTS

11.1 The Tenant shall not assign the whole of this lease without the consent of the Landlord, such consent not to be unreasonably withheld.

11.2 The Tenant shall not assign part only of this lease.

11.3 The Landlord and the Tenant agree that for the purposes of section 19(1A) of the Landlord and Tenant Act 1927 the Landlord may give its consent to an assignment subject to all or any of the following conditions:

(a) a condition that the assignor enters into an authorised guarantee agreement which is in a form required by the Landlord;

(b) a condition that a person of standing acceptable to the Landlord enters into a guarantee and indemnity of the tenant covenants of this lease in such form as the Landlord may require.

11.4 The Landlord and the Tenant agree that for the purposes of section 19(1A) of the Landlord and Tenant Act 1927 the Landlord may refuse its consent to an assignment if any of the following circumstances exist at the date of the Tenant's application for consent to assign this lease:

(a) the Annual Rent or any other money due under this lease is outstanding or there has been a breach of covenant by the Tenant that has not been remedied;

(b) in the Landlord's opinion the assignee is not of sufficient financial standing to enable it to comply with the Tenant's covenants and conditions contained in the lease.

11.5 Nothing in this clause shall prevent the Landlord from giving consent subject to any other reasonable condition, nor from refusing consent to an assignment in any other circumstance where it is reasonable to do so.

12. UNDERLETTINGS

12.1 The Tenant shall not underlet the whole of the Premises except in accordance with this clause nor without the consent of the Landlord, such consent not to be unreasonably withheld.

12.2 The Tenant shall not underlet part only of the Premises.



12.3 The Tenant shall not underlet the Premises:

(a) together with any premises or any right over premises that is not included within this lease;

(b) at a fine or premium or reverse premium.

12.4 The Tenant shall not underlet the Premises unless, before the underlease is granted, the Tenant has given the Landlord:

(a) a certified copy of the notice served on the undertenant, as required by section 38A(3)(a) of the LTA 1954, applying to the tenancy to be created by the underlease; and

(b) a certified copy of the declaration or statutory declaration made by the undertenant in accordance with the requirements of section 38A(3)(b) of the LTA 1954.

12.5 Any underletting by the Tenant shall be by deed and shall include:

(a) an agreement between the Tenant and the undertenant that the provisions of sections 24 to 28 of the LTA 1954 are excluded from applying to the tenancy created by the underlease;

(b) the reservation of a rent which is not less than the greater of the passing rent under this lease and the full open market rental value of the Premises at the date the Premises is underlet and which is payable at the same times as the Annual Rent under this lease;

(c) provisions for the review of rent at the same dates and on the same basis as the review of rent in this lease

and shall otherwise be consistent with and include tenant covenants no less onerous (other than as to the Annual Rent) than those in this lease and in a form approved by the Landlord, such approval not to be unreasonably withheld.

12.6 In relation to any underlease granted by the Tenant, the Tenant shall:

(a) not vary the terms of the underlease nor accept a surrender of the underlease without the consent of the Landlord, such consent not to be unreasonably withheld;

(b) enforce the tenant covenants in the underlease and not waive any of them nor allow any reduction in the rent payable under the underlease; and

(c) ensure that in relation to any rent review the revised rent is not agreed without the approval of the Landlord, such approval not to be unreasonably withheld.

Documents

Drafting Commercial Leases