Lease Structure and Content — SQE1 FLK2 Property Law and Practice

A man runs a picture-framing business from a workshop unit on an industrial estate. The document he signed is headed licence throughout, describes him as the licensee, and says the arrangement creates no tenancy. It gives him that unit for three years at £900 a month, and he has the only key. Nothing in it reserves any right for the owner to enter or to move him elsewhere.

The owner now says it can put him out on a fortnight's notice, because he is only a licensee. Is that right? No. He has a lease. This is Lease Structure and Content. It starts with that gap between what a document says it is and what it does, then walks the clauses of a lease. Keep our framer in mind. He comes back.

Here is the route. What a lease is, and how to tell one from a licence. Then the formalities: which leases need a deed, and which need registering. Then the clauses themselves, in the order you meet them in a lease: the demise and the term, the rent, the obligations, the money, and the ways out. Then residential against commercial. And last, the Code for Leasing Business Premises.

Start with what a lease is. An interest in land giving the tenant exclusive possession for a fixed term in exchange for rent. It is a hybrid, and that is worth holding on to. A lease creates a property interest, a leasehold estate capable of binding successors in title. It is also a contract, with detailed terms. Property law and contract law at the same time.

Three essential elements, then. Exclusive possession, so the tenant can exclude everyone, including the landlord. A fixed term, meaning a definite duration or one capable of being determined. And rent, though that is the flexible one. It can be a peppercorn, or some other consideration.

A licence is the alternative. Personal permission to occupy, without exclusive possession. No property interest, so it does not bind successors, and the occupier has no security of tenure and can be asked to leave far more easily. So the classification decides everything that follows, which is why parties try to steer it.

And they cannot. Courts look at substance over form. The question is what rights the document actually confers, not what the parties chose to call them. Street v Mountford, from 1985, is the authority, and Lord Templeman's line is the one to carry. A five-pronged implement for manual digging is a fork, even if its maker insists that he has made a spade.

Back to our framer. Exclusive possession of an identified unit, a fixed term of three years, a monthly rent. All three hallmarks. And the owner reserved no right to enter, to share the unit, or to move him elsewhere. That is exactly the kind of term that would genuinely have negatived exclusive possession. Calling it a licence changed nothing.

One qualification, so you do not over-apply it. The label is not always irrelevant. It can help where the facts are genuinely ambiguous. And there are settled situations where exclusive possession does not produce a tenancy. Service occupancy, family or charitable arrangements, occupation with no intention to create legal relations. None of those fits a commercial letting.

Now formalities, and there are three numbers. A lease for more than 3 years needs a deed, under section 52 of the Law of Property Act 1925. A lease for 3 years or less can be made in writing or even orally, under section 54(2). But only if it takes effect in possession, at the best rent, with no fine. And a legal lease granted for more than 7 years must be registered, under section 27(2)(b) of the Land Registration Act 2002.

Miss those and you may still have something. Where there is a valid contract for a lease, complying with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, equity may treat it as an equitable lease. That is Walsh v Lonsdale. But an equitable lease is weaker. In unregistered land it can be defeated by a bona fide purchaser of a legal estate for value without notice.

In registered land, priority is governed by the Land Registration Act 2002 instead, and an equitable lease coupled with actual occupation can be an overriding interest. So the absence of a deed goes to whether the lease is legal or equitable. It does not go to whether there is a lease at all.

Now the clauses, in the order you meet them. The demise defines exactly what is being let. It describes the property, may include rights over common parts, and may exclude specific areas. Get it wrong and you get disputes about boundaries and about who repairs what. The property shown edged red on the plan beats a vague description every time.

The grant clause is the operative part that actually creates the leasehold estate. Then the term clause: the start and end dates, or a mechanism for working them out. Fixed or periodic. For commercial premises, five to ten years is typical, usually with a break at around years three to five.

Then rent. How much, when it is payable, usually quarterly in advance, and how it can change. Watch for a rent suspension provision, which stops the rent running if the property cannot be used after damage. And then rent review, typically every five years, to open market value, or index-linked, or by a third-party valuer.

Rent review carries the single most negotiated word in commercial leasing: upward-only. Most commercial leases have upward-only reviews, so the rent can never fall, even if the market does. It was controversial and it was upheld. A tenant signing one is committing to a floor under the rent for the whole term.

Obligations next, starting with repair, where the drafting does real work. Keep in repair means maintain the property in good condition, repairing defects as they arise. Put and keep in repair means bring it up to standard first, then maintain it. And internal repairing only limits the tenant to the interior. Three formulations, three very different bills.

Insurance usually runs the other way. The landlord insures the structure and the tenant reimburses the cost, as insurance rent or through the service charge. The clause sets out what is insured and how the proceeds are applied, normally to reinstatement. Contents and the tenant's own fittings are the tenant's problem.

Alterations clauses control what the tenant can change. Structural work, affecting walls, roof or foundations, is usually prohibited outright. Non-structural work, partitions and fixtures, needs consent, often with the words such consent not to be unreasonably withheld. Cosmetic work, decoration and carpets, is usually free. And works required by law are usually permitted.

So read the consent wording carefully every time. Consent not to be unreasonably withheld protects the tenant. Consent at the landlord's absolute discretion does not. The Landlord and Tenant Act 1927 provides some statutory protection, and the Landlord and Tenant Act 1988 bites on consent to assign. But the starting point is always the words in the clause.

The user clause says what the premises may be used for, often matched to planning use classes, with changes needing consent. The planning clause puts the planning risk on the tenant. Then the money clauses. Service charge lets the landlord recover the cost of services, apportioned usually by floor area.

A good service charge clause says what is covered, how it is apportioned, and whether there is a cap. Then alienation, controlling assignment and subletting, which is how the landlord keeps a grip on who occupies. It may require consent, impose conditions, or prohibit dealing altogether.

Then the ways out. A break clause lets one or both parties end the lease early, on specified dates, typically on three to six months' notice, and usually conditional. Conditions matter enormously, because a break that is conditional on paying every penny of rent, or on giving vacant possession, is a break that is easy to miss.

Holding over is what happens when the tenant simply stays after the term ends. The lease may say. Otherwise a periodic tenancy may arise by implication, and a landlord who accepts rent may find it has created one. Which is why what a landlord does after expiry matters as much as what it says.

And forfeiture, the landlord's nuclear option. A forfeiture clause lets the landlord end the lease and re-enter on breach, typically non-payment of rent or another serious breach. Section 146 of the Law of Property Act 1925 sets out the procedural requirements. And a landlord must beware of waiver, meaning conduct that affirms the lease despite knowing of the breach. Peaceable re-entry without a court order is risky.

Residential and commercial now, because they are regulated quite differently. Commercial leases are freely negotiated, with the Landlord and Tenant Act 1954 giving security of tenure unless the parties contract out. Residential lettings are consumer territory, and Part 2 of the Consumer Rights Act 2015 restricts terms causing a significant imbalance to the consumer's detriment.

And residential law has just moved. The Renters' Rights Act 2025, in force on 1 May 2026, abolished section 21 no-fault evictions and assured shorthold tenancies. All assured tenancies are now periodic, and a landlord seeking possession must rely on a statutory ground under a section 8 notice. Add deposit protection within 30 days, the Homes (Fitness for Human Habitation) Act 2018, and the Tenant Fees Act 2019.

Last, the Code for Leasing Business Premises, England and Wales. First edition, February 2020, effective 1 September 2020, replacing the 2007 Code. It promotes best practice in commercial lease negotiation. Shorter and more flexible terms, fair break clauses, clearer allocation of repair, transparency in service charges, and a reasonable approach to alienation.

And here is the point people get wrong about it. The Code is not legislation and does not bind the parties to a lease. But it is an RICS professional standard, and parts of it are mandatory for RICS members and registered firms, which is a change from the wholly voluntary 2007 Code. Courts may take a failure to follow it into account. Not law, but not nothing either.

A word on how SQE1 tests this. You will not be asked to recall a case name or a section number. You get a scenario, five answers, and one instruction: pick the best. This topic is mostly about reading clauses, so learn what each clause does and where the risk in it sits.

If you keep only three pegs. Street v Mountford, where substance beats the label and a fork is a fork. Section 52 of the Law of Property Act 1925 with its three-year line, and the seven-year line for registration. And the Code for Leasing Business Premises, which is not law but is partly mandatory for RICS members.

Four traps. One: the label never decides it. A document headed licence, denying any tenancy, is still a lease if it grants exclusive possession for a term at a rent. Look for a genuine reserved right to enter or relocate, not for the heading.

Two: no deed does not mean no lease. It means the lease may be equitable rather than legal, which affects priority and enforcement against successors, not existence. And a short lease within section 54(2) needs no deed at all.

Three: put and keep in repair is two obligations. Keep is maintenance during the term. Put bites on disrepair that was already there on day one. A tenant taking a building in poor order needs a schedule of condition annexed to the lease, not a low rent.

Four: do not dismiss the Code. It is not legislation and does not bind the parties. But parts of it are mandatory for RICS members and registered firms, and courts may take account of a failure to follow it. Any option calling it purely voluntary guidance is describing the old 2007 Code.

Quick check. A woman takes a fifteen-year lease of a warehouse, under a covenant to put and keep the demised premises in good and substantial repair. When the lease was granted the gutters were rotten and two loading doors had corroded through. She knew, and the rent was set low to reflect it. Three years in, the landlord serves a schedule of dilapidations requiring her to renew the gutters and the doors.

Must she put right disrepair that existed when the lease was granted? Three candidates. One: yes, because an obligation to put in repair extends to disrepair existing at the grant. Two: no, because a repairing covenant cannot require the tenant to improve the premises. Three: no, because the low rent shows the parties accepted the building's condition. Pause here if you want a moment.

The answer is one. Put and keep in repair is two obligations. Keep requires her to maintain during the term. Put requires her first to bring the premises up to the covenanted standard, and it bites on disrepair that was there on the first day. Her knowledge and the rent discount change nothing. The covenant is where the risk was allocated.

Why the others fail. Option two calls these works improvement, but they are repair. Rotten gutters and corroded doors are squarely in disrepair, and renewing them restores the warehouse rather than transforming it. Option three treats a low rent as a variation of the covenant. It is not. What she needed was a schedule of condition.

Five things to take away. One: exclusive possession, a fixed term and rent make a lease, and the label does not decide it. Our framer had all three, and a document headed licence did him no harm at all. Two: a deed for more than 3 years, writing or word of mouth for 3 years or less within section 54(2), and registration for more than 7 years.

Three: read the repair covenant word by word. Put and keep is two obligations, and internal repairing only is a different bill again. Four: the money and exit clauses are where the value sits. Upward-only rent review, service charge, alienation, conditional breaks, forfeiture under section 146.

Five: residential lettings are consumer territory and have just changed, with the Renters' Rights Act 2025 abolishing section 21 and assured shorthold tenancies from 1 May 2026. Commercial lettings are freely negotiated. Next time, Grant of a Lease.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.