Peta Dollar focuses on important provisions to be borne in mind when dealing with long leases
As is well known, commercial lease lengths have fallen significantly over the past few years. More than 80% of UK leases signed in the year to June 2013 were for a term of less than five years, the highest proportion since measurement began. At the same time, the average new lease length fell to 5.8 years, lower even than the six years seen in 2009.
Even in the residential sector, many leases are now very short, especially assured shorthold tenancies. The Labour Party manifesto states that 9m people now rent their homes privately, mostly on tenancies of between six and 12 months. If elected, it intends to change the law to make three-year tenancies the norm, so that tenants will have greater stability.
However, it remains important to be aware of particular issues that may arise for those clients intending to grant (or take) a new long lease. There are a number of statutory provisions and requirements that only apply to long leases.
Section 19(1)(b) of the Landlord and Tenant Act 1927
The tenant under a building lease (that is, a lease that requires the tenant to carry out the erection or substantial improvement of buildings) for a term of more than 40 years can take advantage of a useful statutory provision, namely section 19(1)(b) of the Landlord and Tenant Act 1927.
If section 19(1)(b) applies (there are exceptions for agricultural and mining leases and for certain public sector landlords), any express requirement in the lease for the landlord’s prior consent to be given for a proposed alienation, such as assignment or underletting, is overridden, as long as the transaction is completed more than seven years from the end of the term. This means that the tenant can go ahead and alienate without consent, as long as notice of the transaction is given to the landlord within six months of the transaction taking effect.
The effect of section 19(1)(b) on assignments will vary depending on whether or not the lease is a new tenancy under the Landlord and Tenant (Covenants) Act 1995 (generally it will be a new tenancy as long as it was not granted before 1996) and whether it relates to residential property or not. Basically, section 19(1)(b) will not apply to an assignment of a new tenancy unless the property is let wholly or mainly as a single private residence. It will, however, apply to an assignment of both commercial and residential property let under an old tenancy (generally a lease granted before 1996).
In addition, section 19(1)(b) will apply to underletting, charging or parting with possession, regardless of whether or not the tenant has an old or new tenancy and regardless of whether the property is commercial or residential.
Note, however, that even if section 19(1)(b) does apply to the proposed alienation, the tenant will still have to comply with any other clauses of the lease that impose conditions on alienation, such as a requirement for a guarantor.
Section 84(12) of the Law of Property Act 1925
Any tenant under a lease of more than 40 years (except a mining lease) can, where at least 25 years of the term have expired, take advantage of section 84(12) of the Law of Property Act 1925 (“the 1925 Act”), which allows the Upper Tribunal (Lands Chamber) to discharge or modify restrictions affecting that leasehold land as if it were freehold. So the tenant can apply to change any of the covenants in its lease once 25 years have elapsed. Section 84 is seldom used in relation to leasehold covenants; it is far more common for it to be used in relation to restrictive covenants that bind freehold land.
Section 153 of the Law of Property Act 1925
Section 153 of the 1925 Act allows tenants of certain long leases to “enlarge” the term of their lease into a freehold interest. The right applies to a lease granted for an original term of at least 300 years where there are at least 200 years left to run, as long as certain conditions are met: that the rent is of no monetary value (either a peppercorn rent or where the obligation to pay has ended – for example, an annual rent of £1 or less is deemed to have ceased to be payable, for this purpose, if it has not been paid for a continuous period of at least 20 years); there is no landlord’s right to forfeit; there is no trust or right of redemption affecting the lease term in favour of the landlord; and, if the lease is an underlease, the superior lease also satisfies these conditions.
Perpetually renewable leases
Where a perpetually renewable lease is created – and the courts will try to avoid this where possible – section 145 of and Schedule 15 to the Law of Property Act 1922 will convert that lease into one granted for a term of 2,000 years from the original contractual term commencement date (assuming that
the immediate reversion is the freehold).
A perpetually renewable lease is normally created by mistake, where a tenant’s option to renew is expressed to be a right to a renewal lease on the same terms as those contained in the original lease (so that the renewal lease will also contain a right to renew, and so on).
Minimum energy efficiency standards
The Energy Act 2011 and the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015 No 962) will prevent a landlord of either residential or commercial property, subject to certain exemptions, from granting a new tenancy (including a renewal lease) after 1 April 2018 where the property is rated below band E in its energy performance certificate.
Furthermore, the landlord will not be able to continue to let the property after 1 April 2020 (in the case of a residential property) or 1 April 2023 (in the case of a commercial property) even if the lease had been granted before the Act and regulations came into force.
However, these restrictions will not apply to a lease for a term certain of at least 99 years.
CRC
The CRC Energy Efficiency Scheme requires large businesses and public sector organisations in the UK to measure and report on their energy consumption and buy “allowances” for the amount of CO2 emissions associated with that consumption. Landlords are liable for their tenants’ emissions if they are responsible for supplying energy directly to their tenants and most leases do not enable landlords to recoup these costs from their tenants.
However, in the case of a lease for at least 30 years where the tenant agrees to construct (and where so required, remove) any buildings and the tenant agrees to be responsible for installation of any gas, electricity or water services, responsibility for compliance with CRC transfers from the landlord to the tenant.
Community infrastructure levy
The person liable to pay community infrastructure levy (“CIL”) is the person who “assumes liability” by submitting an “assumption of liability notice” to the collecting authority. Where no one assumes liability, the liability will default to the owner or owners of the land on commencement of development (as defined in section 56(4) of the Town and Country Planning Act 1990). Owners are defined in regulation 4 of the CIL Regulations 2010 and include freeholders of land and any leaseholders with a lease expiring more than seven years following the date on which planning permission for the development was granted. Liability for CIL will be apportioned between the different owners and each owner will bear responsibility for its own apportionment.
Registration of leases
Leases granted on or after 13 October 2003 for a term of more than seven years are compulsorily registrable at the Land Registry, whether granted out of registered or unregistered land. An unregistered lease that has more than seven years of the term unexpired on assignment will also be compulsorily registrable.
Leasehold enfranchisement
Only long leaseholders have rights to enfranchise under the Leasehold Reform Act 1967 (in respect of houses) or to collectively enfranchise under the Leasehold Reform, Housing and Urban Development Act 1993 (flats). Generally, this means that the term of the original lease must be for more than 21 years. The same applies to the right to call for an extended lease of a house or flat, and to the right to manage under the Commonhold and Leasehold Reform Act 2002.
Why this matters
Obviously it is important to know that a particular statutory provision may affect the long lease that your client is about to grant (or take), particularly where that provision will override the express provisions of the lease itself.
Normally, the longer the lease of commercial property, the fewer restrictions it will place on the tenant. So a lease for, say, 99 years will not normally contain the restrictions on alterations, alienation, user etc that might be expected in a lease for a standard term of, say, 15 years.
There are also practical issues in relation to long leases, including:
- A long lease is frequently granted at a premium, with only a peppercorn or other small rent being paid during the term. This means that the lease is a valuable asset in the hands of the tenant and should be able to be charged as security for a loan. If, however, the forfeiture clause permits forfeiture in the event of the tenant’s insolvency, this will normally preclude the lease being acceptable as security, so the tenant will want to amend any such provision.
- A commercial property, such as a shopping centre or office block, will normally need to be rebuilt (or substantially refurbished) after, say, 20 to 30 years in order for it to compete with more modern buildings. Who should pay for such rebuilding/refurbishment? Can the tenant force the landlord to allow him to carry out such works?
- Likewise, the equipment, such as lifts and air conditioning, within a building will need to be replaced several times during the term of a long lease.
- If a long business lease is to be renewed under the Landlord and Tenant Act 1954, the court cannot order a lease for a term greater than 15 years (although the parties are free to agree a longer lease term if they wish).
- The standard of repair required of a tenant in relation to terminal dilapidations will be based, in part, on the nature of the locality in which the property was situated at the date of grant of the lease. The longer the lease, the more likely it is that the nature of the locality will have changed by the end of the lease term, and this could increase the burden on the tenant.
Peta Dollar is a freelance lecturer, writer and trainer
