Grant of a Lease — SQE1 FLK2 Property Law and Practice

A tenant has four years left on his lease of commercial premises. He wants out, but he does not want to deal with the freeholder. So he grants what he calls an underlease of the whole premises to a friend's company. Four years, ending on the same day as his own lease, at the same rent of £18,000 a year. He goes on thinking of himself as their landlord. He is not. He has just assigned his lease and walked out of the picture.

Nothing about that document said assignment. It is a grant of a lease that went wrong by one day. This is Grant of a Lease, and most of it is procedure. Drafting, an agreement for lease, consents, execution, completion, tax and registration. But procedure is where transactions actually fail, and the thresholds and the deadlines are where the marks are. Keep our tenant in mind.

Here is the route. What a lease actually needs to be a lease. Then the agreement for lease, and what signing one commits your client to. Then title and consents, which is where underleases get complicated. Then execution as a deed, which has more traps than you would expect. And last, the post-completion clock. Tax, registration, and the deadlines nobody can move.

Start with the shape of it. Granting a lease follows the same path as a freehold conveyance. Investigate title, raise enquiries and searches, execute, complete, register. What is added is leasehold. The interest being created is carved out of somebody else's estate, and that usually means consents.

What does a lease actually need? Four things. The parties. The demise, a clear description of the property. Operative words of grant. And a term certain. Rent is almost always reserved, but it is not strictly essential, and a term of years can be a lease without one. Repair, insurance, alterations, alienation, break, forfeiture, all of that is bargain rather than validity. Their absence does not stop the document being a lease. It just has consequences.

One consequence worth naming. Without a forfeiture clause, the landlord has no right of re-entry for breach. And on drafting, model precedents from the Law Society and the trade bodies are a starting point, not an answer. A shopping centre precedent dropped into a lease of a standalone roadside shop carries clauses about a centre that does not exist.

Next, the agreement for lease. A contract committing the parties to grant and take a lease in the future on agreed terms. It is used where the building is not finished, or where fit-out has to happen first. And it is used because it lets the tenant into the property early without giving them the lease yet.

Two labels, one document. An agreement for lease and a contract for lease are the same thing, and nothing turns on the heading. What matters is substance. It must be in writing, incorporate all the expressly agreed terms, and be signed by both parties. That is section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Get that right and, if the agreement is specifically enforceable, the tenant has an equitable lease pending the grant. Walsh v Lonsdale.

But subject to contract is a different animal. Heads of terms headed subject to contract are not a section 2 contract, and the label shows both sides know they are not yet bound. A bakery owner who spends £30,000 on ovens and shopfitting on the strength of subject-to-contract heads of terms gets nothing when the developer lets to a national chain instead. Commercial parties negotiating subject to contract each take the risk the other walks away.

What goes in an agreement for lease? The completion date. The lease terms, usually attached as a draft. Rent commencement. Early access rights. Works obligations and who pays. Conditions precedent. And a long-stop date, letting either party walk away if the works are not done by it. That last one is the clause tenants most often wish they had.

Title next. Where the landlord owns the freehold, investigation follows the freehold process. Where the landlord is itself a tenant, granting an underlease, the questions multiply. Does the head lease permit underletting at all? Is the superior landlord's consent required? Will the underlease term fit inside the head lease term? Raise those early. If the head lease forbids underletting, the transaction has nowhere to go.

Consent, and the statute does real work here. Where the covenant is qualified, prohibiting underletting without consent, the Landlord and Tenant Act 1927 deems it subject to a proviso that consent is not to be unreasonably withheld. And that applies notwithstanding any express provision to the contrary. The parties cannot contract out of it. Only an absolute prohibition leaves the landlord free to refuse as it pleases.

And once the tenant applies in writing, the Landlord and Tenant Act 1988 adds a duty. Decide within a reasonable time. Serve written notice of the decision. Give reasons for any refusal or condition. The landlord bears the burden of proving a refusal was reasonable, and breach is actionable as a breach of statutory duty. A blank refusal with no reasons sounds in damages.

Enquiries and searches, briefly. Commercial tenants raise the Commercial Property Standard Enquiries. Residential leaseholders have their own set. Add a local authority search, planning, and environmental. The tenant is buying a relationship for years, so it checks before it signs.

Execution, and here are the two thresholds you must not merge. Creation. A term of more than three years must be granted by deed to take effect at law. That is section 52 of the Law of Property Act 1925. The exception is section 54(2), for a term of three years or less, taking effect in possession, at the best rent, with no premium. Those can be created in writing or even orally. Registration is a different threshold entirely, and we come to it shortly.

Individuals signing a deed must sign in the presence of a witness, who then signs and gives their name and address. And the witness must actually see the signature being made. An attestation filled in afterwards by someone who was not in the room does not satisfy it. Electronic signatures are accepted. Remote witnessing by video link is not.

Companies are different. Under section 44 of the Companies Act 2006 a company executes a deed in one of three ways. Two directors signing. One director and the company secretary signing. Or one director signing in the presence of a witness who attests it. Now the question. A company with two directors and a secretary. Both directors sign. Nobody witnesses, and the seal is not used. Valid?

Yes. Two directors is the first of the three routes, and no witness is needed for it. The seal has been optional for years. The only route that needs a witness is the single director route, which is also how a company with just one director has to execute.

One more execution point. A deed takes effect only when it is delivered, and delivery is a question of intention, not of handing anything over. It happens when a party indicates that it intends to be bound, and it can happen while the deed sits on that party's own file. So a solicitor who writes confirming the client treats itself as bound has delivered the lease, and a better offer arriving the next day is too late.

Which is why practitioners write that an executed lease is held to order pending completion. That delivers it in escrow instead. The party is not bound until the condition is met. Three words of standard wording, doing a great deal of work.

Now the second threshold. Registration. The grant of a term of more than seven years out of a registered estate is a registrable disposition, and it does not operate at law until it is registered. That is section 27 of LRA 2002. The lease gets its own registered title, and a notice of it goes on the landlord's title. The application is made on form AP1.

And below seven years, nothing to register. A legal lease of seven years or less binds a buyer of the freehold automatically as an overriding interest. No title of its own, no notice needed. So the deed threshold is three years, and the registration threshold is seven. Different numbers, different jobs, and mixing them up is the single most common error in this topic.

Tax. Stamp duty land tax on a lease grant can bite twice. Once on any premium. And separately on the net present value of the rent over the term, discounted back to the grant. Tax at 1% on so much of that value as exceeds the non-residential nil-rate band. The two are calculated independently and added. So a finance director who budgets for tax on the premium alone has budgeted for half the bill.

One return, filed within 14 days of the effective date. And the effective date is completion, or any earlier substantial performance. Which is why letting a tenant into occupation under an agreement for lease can start the clock before the lease exists. Neither that deadline nor the registration requirement can be moved by agreement between the parties. If the timetable is inconvenient, what moves is completion.

Two more post-completion items. For underleases, notify the superior landlord, usually within a stated period and usually with a fee. Failure does not invalidate the underlease, which is perfectly good between tenant and undertenant. What it does is put the tenant in breach of its own covenant, which is a ground for forfeiture and an obstacle next time consent is needed.

And the rent deposit. Commercial leases commonly require one, typically six months' rent, held by the landlord and drawn on if the tenant breaches. A deposit deed sets out the terms.

Which brings us back to our tenant. An underlease is carved out of the tenant's own term, so the tenant must keep a reversion, however short. Try it. A tenant has exactly six years left, and consent to underlet the whole. What is the longest underlease he can grant? Six years less one day. Not six years. Grant the whole of the residue and you keep no reversion at all.

And then it is not an underlease. A grant of the whole premises for the whole of the residue passes the tenant's entire estate. It takes effect as an assignment by operation of law, whatever the parties call it. Milmo v Carreras. The undertenant holds directly of the superior landlord. The tenant drops out, keeps no rental income, and if the head lease required consent to assign, is very likely in breach of that too.

Two more things about underleases. An underlease cannot outlast the head lease, and it falls with the head lease if that is forfeited, unless the undertenant obtains relief. And the consents you need are not only the superior landlord's. Where the landlord's freehold is mortgaged, the mortgage will usually forbid letting without the lender's written consent.

That one has teeth. A lease granted in breach binds the landlord, who cannot deny the tenant's title. It does not bind the lender. On enforcing its security the lender can take possession free of the lease, and the tenant loses both the premises and everything it spent fitting them out.

A word on how SQE1 tests this. You will not be asked to recite section numbers or case names. You get a scenario, five answers, and one instruction. Pick the best. This topic is mostly procedure, so what carries marks is the thresholds, the deadlines and the order things happen in.

If you keep only three things, keep these. Three years for the deed, seven for registration, 14 days for the tax return. Walsh v Lonsdale, for the equitable lease that a specifically enforceable agreement gives you before the grant. And Milmo v Carreras, for what happens when a tenant keeps no reversion.

Four traps. One. An agreement for lease is not a formality on the way to the real document. It is the real document. Once your client signs, they are committed, and the remedy for refusing is specific performance, not just damages.

Two. Improper execution does not produce nothing. It produces an equitable lease, and that is worse than it sounds. Specific performance is discretionary, and the interest has to be protected by notice on the register if it is to bind a buyer of the freehold.

Three. The post-completion deadlines are not negotiable. 14 days for the tax return, running from the effective date. Registration, without which a lease over seven years is not legal at all. And the priority period from the pre-completion search, which simply runs out.

Four. Check who else has to consent. The superior landlord is the obvious one. The landlord's lender is the one that gets missed, and a lease granted without its consent does not bind it. Your tenant can lose the premises and the fit-out together.

Quick check. A woman agrees to take a five-year lease of a studio at the full market rent, with no premium, starting immediately, out of the landlord's registered freehold. Her brother, a retired conveyancer, gives her some advice. Because the term is under seven years, he says, the parties can simply sign a short written agreement. And nothing more is needed for her to have a legal lease that will bind anyone who later buys the freehold.

Is he right? Three candidate answers. One. Yes, because a lease not exceeding seven years may be created informally and binds a buyer automatically. Two. No, because a five-year term must be granted by deed to be legal, though once granted it needs no registration and overrides a later sale. Three. No, because the lease must both be granted by deed and be protected by notice. Pause here if you want a moment.

The answer is two. Two thresholds, and the brother has merged them. Creation. More than three years means a deed, and the short-lease exception stops at three years, so a five-year term signed as a simple written agreement is at most equitable. Registration. Only terms of more than seven years are registrable, so a five-year legal lease cannot have its own title and does not need one.

It binds a buyer of the freehold automatically, as an overriding interest. Why the others fail. Option one is right about binding and wrong about creation. It uses the seven-year number to answer a three-year question. Option three adds a notice this lease does not need.

Five things to take away. One. A lease grant runs on the freehold rails, plus consents. Two. The two thresholds. More than three years needs a deed. More than seven needs registration, and until it is registered the lease is equitable only.

Three. An agreement for lease binds on signature, needs writing, all the agreed terms and both signatures, and gives an equitable lease pending the grant. Four. Tax on the premium and on the net present value of the rent, one return, 14 days from the effective date.

Five. Keep a reversion. And back to our tenant with four years left. He called it an underlease, he kept calling himself the landlord, and by granting the whole of the residue he assigned his lease instead. One day shorter and none of that happens. Next time, Assignment of Leases, which is where he now finds himself.

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.