As a chartered surveyor, I have dealings with property leases on a daily basis, whether advising landlords and tenants on new or existing leases or undertaking valuations of investment property.
There is significant value to having a robust and appropriate lease in place when allowing third parties to occupy property. It’s worrying that so many landlords, especially owners of secondary and tertiary property are content to rely on leases they have taken from the internet, or have used before.
There are a few pointers to getting things right.
Particulars
It is vital that the lease sets out the basic details correctly. The landlord and tenant should be named in full. If one party is a limited company then it is the company details (with the company registration number) that should be noted, not the individual parties. Contact addresses should be included alongside the parties’ names.
The address of the property should be correctly stated. If the letting only covers part of a property (e.g. the ground floor) then this should be made clear, along with any shared or communal areas.
Rent
The rent should be correctly stated, along with the payment period – for example monthly or quarterly. If quarterly, is it due on the usual quarter days, or not? There should also be a note of any rent reviews and the basis on which these are to be conducted (e.g. to market rent or RPI increases). In many commercial leases, reviews are not time critical, but if they are then this should be noted. Procedures for dealing with disputes in rent reviews must be included.
Repairs
Many commercial leases are known as FRI – Full Repairing and Insuring – and these require little involvement from the landlord. The tenant has full responsibility for the property; repairs may be on an “as let” basis which is evidenced by a schedule of condition, or a “put and keep” basis which requires more input.
For some lettings an FRI lease is not appropriate, perhaps because tenants will not accept this on a commercial basis, or maybe there are shared facilities which makes an FRI lease unviable. Notwithstanding the commercial aspects, landlords should strive for an “effective FRI” lease; this is where maintenance of communal areas is dealt with by way of a service charge.
Often for second/tertiary properties there is agreement between landlord and tenant as to how the repairing obligations are split. In such cases, the lease needs to be explicit as to where responsibility lies.
Service charges
We often see references to service charges in leases. In many cases this is a genuine position to recover costs for communal areas (see above), but in some cases is just an additional rent charge, to make the headline rent seem cheaper. There are strict rules on managing service charges and a requirement to account to tenants for funds they have paid over.
Contracted out leases
It is possible for leases to be contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954. This means that the term of the lease is absolute – the tenant has no right to renew the lease when it comes to an end. There are strict provisions as to how contracting out works, with a requirement to give the tenant advance notice (at least 14 days prior to the lease start). We often see leases with contracting out provisions, but no advance documentation; in such cases contracting out has not occurred.
Lease term/break clauses
It is important that the lease includes the term, i.e. the start and end dates. If there are break clauses then these also need to be set out clearly. Can both parties break or is it limited to one of them? What criteria are there for the break? What notice period is needed?
Other matters
Besides the points set out above there is a raft of other clauses that will be required. For example, rights to assign, Land Registry requirements (if registration is needed), who pays utilities and rates, service of notices, conditions for return and general covenants.
It is worth pointing out that lettings require an Energy Performance Certificate (EPC) which must be a band E or better (potentially moving to a band C). This requirement now applies to existing leases, not just new lets.
Summary
Having a clear and robust lease is the starting point to avoiding disputes, but more than that it can add value to the property. If selling an investment property and it can be demonstrated to a buyer the extent of their liability, then the property is a more attractive proposition. If terms are vague, buyers will make a discount to reflect the risks they are taking.
Graham Bowcock MRICS MRAC
Managing Director
