A lawyer who suggests that landlords and tenants should never enter into leases without taking legal advice will face inevitable allegations of self-interest. But before you all collectively shout, “Well, he would say that, wouldn’t he?” please bear in mind that every example given in this article is real, writes Bill Chandler.
Temptation
There are many reasons why a landlord or a tenant may decide to enter into a lease without involving lawyers.
The obvious one is cost, especially in the context of low-value transactions where legal fees may feel disproportionate. There may also be a perception that involving lawyers will delay a transaction. Or perhaps the landlord is concerned that appointing lawyers may prompt an otherwise unrepresented tenant to respond in kind rather than simply signing whatever document is produced for them.
If the premises have been let before, the landlord may have the benefit of a professionally drawn lease for the premises. In an age where recycling is generally encouraged, what could possibly go wrong if the parties reuse an existing lease that was prepared for a previous letting?
Party time
Who are the landlord and the tenant? It seems an obvious question, but it is amazing how many people get this wrong in DIY leases.
The most common error is granting a lease to a tenant that simply doesn’t exist. The lease might, for example, be granted to “Fred’s Sheds”, which is not a legal entity but simply the trading name of Fred Bloggs. Similar problems arise with partnerships, since general partnerships and limited partnerships have no separate legal personality and cannot hold property in their own name, although limited liability partnerships (LLPs) can.
Equally, an unrepresented landlord is less likely to check their own title and can easily overlook which particular individual or company actually owns the premises.
Don’t lose your head
Another area where things often go awry with DIY leases is execution. Leases over three years must be granted by deed, which requires certain formalities to be observed.
Common errors include a failure to have signatures witnessed. Where the landlord or tenant is an individual, their signature must always be witnessed. Witnesses are not required when a company executes by two directors (or one director and the company secretary), but a witness is required where a single director signs on behalf of a company.
Security alert
Landlords run a particular risk if they don’t want the tenant to obtain security of tenure and renewal rights under the Landlord and Tenant Act 1954 (the 1954 Act).
Contracting-out of the 1954 Act is a tedious and overcomplicated process, involving the service of notice by the landlord and the tenant making a declaration in response. The process almost seems designed to trap landlords, with the risk that the tenant acquires full statutory rights.
I have encountered landlords using incorrect forms of notice and declaration, while others have made basic mistakes in completing the notice or declaration that may invalidate the contracting-out. It is also important to obtain a statutory declaration rather than a simple declaration from the tenant where the lease is to be completed within 14 days.
The contracting-out process must be completed before the tenant becomes legally bound. That means remembering to comply before any agreement for lease is entered into, but in the context of unrepresented landlords it can simply mean making sure the process is concluded before the lease is completed. I have seen enough statutory declarations sworn after the lease was completed to no longer be surprised.
Checklist
■ Who is the correct landlord?
■ Which legal entity should be the tenant?
■ Is a guarantor required?
■ Is consent required, eg from a superior landlord or mortgagee?
■ Are the tenant’s statutory rights to be excluded?
■ If so, has this been done correctly?
■ Have all parties executed the lease correctly?
■ Is SDLT (or Land Transaction Tax in Wales) payable on the lease?
■ Does the lease require registration at the Land Registry?
■ If so, does the lease include prescribed clauses?
A more understandable mistake (but a mistake nonetheless) occurs where a landlord attempts to contract-out a periodic tenancy. This is frequently attempted, but the 1954 Act only permits fixed term tenancies to be excluded from its protection.
Have sympathy for the landlord who correctly served notice and obtained a statutory declaration in response, but didn’t include the actual agreement to exclude the tenant’s statutory rights in the lease!
The notice and declaration procedure does not of itself exclude the tenant’s rights, it merely validates the agreement contained in the lease itself.
Repent at leisure
Assuming that everyone does the decent thing and honours the deal that was struck, the fact that the documentation is defective may never cause a problem in practice. Indeed, it may not even be noticed.
Problems can arise when the landlord tries to remove the tenant. Any uncertainty over the legal status of the tenant’s occupation may be exploited by a tenant who doesn’t want to go and who instructs a lawyer to find some legal loophole that will allow them to stay, or at least bring the landlord to the negotiating table.
More commonly, problems arise when the landlord comes to sell their property, or tries to raise finance on the strength of the income stream. We regularly encounter troublesome DIY leases when acting for banks and other lending institutions. At best, they can delay a transaction and escalate costs while the position is investigated and (if necessary) rectified. At worst, the absence of a properly documented lease or the presence of unintended rights can frustrate a potentially lucrative transaction, or at least result in a lower value for the property.
Imagine that a landowner is approached by a developer, who makes a generous offer for his land. The property is tenanted, but the tenant occupies on a short-term contracted-out lease, so that vacant possession can be obtained relatively quickly and easily. Or so the landowner believes, until the developer’s solicitor points out some fundamental defect in the contracting-out procedure.
That sounds bad enough, but what if it then transpires that the lease wasn’t properly executed, throwing the whole basis of the tenant’s occupation into disarray. Is there potentially an agreement for lease? Or an implied periodic tenancy? Annual periodic tenancies require six months’ notice, which must expire at the end of a year of the tenancy. That can delay termination by anything up to 18 months, and you still have to deal with the tenant’s rights under the 1954 Act. You can imagine the effect this might have on achieving vacant possession and its implications for the transaction.
Swings and roundabouts
It isn’t just landlords who can become unstuck by badly documented occupation. While tenants generally benefit from defects in the contracting-out procedure, they can be prejudiced by defects in the lease itself or its execution.
Question marks may be raised when the tenant wants to deal with their leasehold interest, such as on a proposed assignment of the lease. Particular problems arise on a sale of the tenant company. A defective lease may mean that the company does not have sufficient title in key business premises to satisfy the buyer and its funder.
Even if the lease is in order, it is common for unrepresented tenants to overlook post-completion formalities. Non-payment of stamp duty land tax creates a tax liability (including penalties and interest), not to mention potential criminal liability. Failure to register at the Land Registry renders the lease vulnerable. Late registration may not be straightforward if the lease does not include the mandatory “prescribed clauses”, or if there are restrictions on the landlord’s title, or if the landlord has changed since the lease was granted.
Some friendly advice
The grant of a lease involves the creation of a legal estate in land. This is a serious business and should not be undertaken lightly. In an ideal world, everyone who grants or receives a lease would take proper professional advice. In reality this will not always be possible (or economic), but those who choose to proceed without representation must appreciate the risks of doing so and understand that this may create problems in the future. As a minimum, using the checklist in the box above may help to avoid some of the most common pitfalls.
Bill Chandler is a professional support lawyer at Hill Dickinson LLP
Main image: Sodapix/REX/Shutterstock
