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Monday, 27 July 2009

10 Howlers to look out for in a Lease

There are some very serious defects which can be found in leases. These defects can be like time bombs ticking away waiting for a prospective assignee to find them. Then all of a sudden you have a lease which you cannot assign without obtaining a Deed of Variation from the Landlord and guess what? He wants some money if he is going to allow you to vary the Lease.

Here are some of the 10 most serious howlers I have found in existing Leases:

1. The term is defined as including the holding over period under the Landlord and Tenant Act 1954 which means that according to a recent High Court case that this is not a lease with a term certain and so the exclusion order/Tenant's declaration is ineffective and the Tenant gets security of tenure. This is a very common defect found in a lot of leases.

2. The rent review is triggered by a notice from the Landlord and if the Tenant does not respond with a counter notice within a set period of time, the new rent is fixed at the Landlord's figure. The Landlord will naturally put a very high figure in the Landlord's notice expecting to get beaten down by the Tenant or its surveyor but if the Tenant does not respond and often there is a very short time limit to respond, the Tenant becomes contractually bound to pay the new rent. This may bankrupt the Tenant instantly.

3. The break clause is subject to a pre-condition that the Tenant must have complied with all of the obligations in the Lease. This is always intepreted strictly by the courts and effectively means that the Tenant can never operate its break option because there is always bound to be some minor breach of the Lease which will prevent the exercise. Even if the wording is qualified to "material breaches" only, it can still thwart the Tenant's break option. A very common defect found in many leases.

4. There is no forfeiture clause in the Lease or (in relation to a residential Lease) the lease may be forfeited in the event of bankruptcy of the Tenant. Both these defects makes a residential lease unmortgageable/impossible to assign.

5. The rent review provisions in a commercial lease provide for the rent to be reviewed to the higher of retail use or leisure use when the user covenant only permits one of those leisure use (or vice versa). This means the Landlord can pick the most favourable use from a rent review whilst the Tenant is limited to the one use.

6. No mutual enforceability covenant from the Landlord on a multi-let building or a lease of part. This can mean that the ground floor shop tenant cannot do anything about the state of repair of the roof which is leaking into their unit. The tenants above may be absent or unwilling to carry out repairs and there is nothing the ground floor tenant can do about it.

7. No rights of way over estate roads on a lease on a business park or estate. Sounds obvious but a very common error and of course, this could be disastrous or very costly to rectify.

8. No obligation on the Landlord to provide services to the building on a lease of part of the building but the Tenant still has an obligation to pay the service charge. Quite a common defect.

9. Time is of the essence in a rent review. This is particularly of concern where the Tenant has to respond to a Landlord's notice (see 2 above).

10. There are no rent suspension provisions in the Lease in the event of damage, destruction of the building such that the Tenant cannot occupy its premises.

I am sure there are many other howlers which you may have found. It is always a good idea to get a lease checked out by a lawyer before committing in relation to a leasehold property because of the flaws which may be contained in the document.