Often the last person you speak to when you have decided to enter into a lease of a residential or commercial property is a solicitor to get a quote for the work. When you get the quote, which on top of the other professional and administrative costs you are obliged to pay, can seem steep, no one can blame you for considering if there is a way to short cut this extra cost or indeed if you can just agree the draft lease yourself and save money and time.
So, why should you spend extra monies on instructing a solicitor to draft and negotiate the lease for you when the key financial terms are all agreed?
The answer is manifold and we outline below a few of the principal reasons:
1. The Lease plan/description of the property to be transferred by the lease
In order for the Lease to be effective, it needs to clearly show the premises transferred by it in terms of a clear description and a to-scale plan. If the Lease needs to be registered at the Land Registry, the plan must meet some strict criteria as to scale and layout.
A solicitor will be able to assist you in ensuring that a correct plan is drawn up by an architect or surveyor so that the Lease can be easily interpreted in the future.
2. A protected commercial tenancy
As a landlord or a tenant you are likely to want the certainty of knowing when your lease will come to an end and when the premises will be handed back/vacated. However, if the tenancy is a business tenancy it may be that the tenant will have acquired statutory rights to remain in occupation at the end of the term and to request a new lease from the landlord (subject to certain exceptions). In order to avoid this, the parties can agree to “contract out” of these statutory rights provided under the Landlord and Tenant Act 1954 (“L&TA1954”).
A solicitor will be able to fully advise you of the implications of the L&TA1954 and carry out the procedure on your behalf should you wish to exclude these rights from the tenancy.
3. An effective break or assignment/underletting clause
It may be an essential term of the lease that either the tenant or the landlord (or both) has a right to terminate the lease at a given date before the end of the lease term. There has been much recent case law on the effectiveness of such clauses in a lease when there has been a subsequent dispute between the parties as to whether such a right has been exercised correctly.
Your solicitor will be able to advise you of the key terms required in a “break clause” to ensure that the parties commercial terms are correctly reflected in the lease document.
A similar point arises in relation to the tenant’s ability to assign or sell its leasehold interest to a third party or indeed sublet the whole or a part of the premises to a third party should the business need to be downsized for whatever reason. Unless these clauses in the lease are carefully and tightly drafted, the intended terms of a lease may be different to the commercial terms agreed between the parties with potentially disastrous results should a tenant find itself in a position where it financially needs to assign the lease or sublet and the lease does not permit it to do so. Equally, if a lease contains very few checks and balances for a landlord on a tenant’s application to assign or sublet, a landlord could find itself with a tenant with a poor financial record which it would not have chosen (or at least without other security) on the open market.
4. Service charge- fair, reasonable and transparent
If a lease is of a part of an estate or building and the tenant has shared rights over common parts, it is likely that the lease will contain terms including the payment by the tenant of a service charge and in turn an obligation on the landlord to carry out a list of services including the general maintenance and repair of the building or estate.
There is no “one size fits all” service charge clause and it is therefore essential you consider with your solicitor what provisions are required in your lease to ensure it can be implemented as the parties intended.
It is worth noting that there is no obligation on a tenant to pay anything to the landlord other than what is provided in the lease.
5. Insurance clearly dealt with and no risk of “double insurance”
Who is obliged to insure the premises demised by the lease?
Is it insured as part of the building or in its own right?
What happens if the premises or building is damaged or destroyed by a risk against which either the landlord or tenant was obliged to insure?
In a commercial letting where the landlord is obliged to insure, what should the tenant be obliged to insure?
These are some of the many questions you need to consider with your solicitor and ensure the lease reflects what is agreed between the parties.
A standard insurance provision may turn out to be a very costly mistake if the terms of your letting contain anything unusual or different. Insurance is also a key concern of Mortgagees and therefore getting this right is fundamental.
6. Registration and tax obligations
As a lease is a “chargeable interest” for the purposes of Stamp Duty Land Tax* (“SDLT”), a tenant must calculate whether or not the lease it proposes to take will incur any SDLT costs. This is calculated by reference to the annual rent paid under the lease and any premium paid on the grant of the lease.
HMRC require a Land Transaction return for SDLT (and any payment due) to be made within 14 days of the “effective date” of the transaction which in most cases would be the date of completion of the lease. This can be done quickly and effectively online by your solicitor following completion of the lease.
Failure to do so within the stipulated time will result in a £100 fine plus the threat of further penalties and interest on any monies due.
Certain leases of a term longer than seven years (or if for more than three years with easements/rights granted over the landlord’s or a third parties’ land if such right is intended to be shared with the landlord), must be registered at HM Land Registry (“HMLR”). As with SDLT, this can be done easily and effectively by your solicitor online. A fee is payable for registration which is dependent on the annual rent payable under the lease and any premium paid on the grant of the lease. The application to register a lease at HMLR must be accompanied by evidence that SDLT requirements have been met. In addition, in order for a lease to be registered at HMLR, leases granted after 2003 also need to include “prescribed clauses”.
Obviously, should you wish to assign or sell your lease (if permitted by the terms of your lease), it is essential that the lease has been registered correctly (where required) to ensure the full market value is obtained for the lease.
*SDLT applies where the transferred property is in England. For properties in Wales, Land Transaction Tax (LTT) will be payable to the Welsh Revenue Authority and not SDLT.
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of advice, recommendation or opinion. DPM Legal Services Limited accepts no liability for any loss or damage, howsoever caused, as a result of any reliance on any information provided.