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Explanatory Notes
Underlease of Part of a Building
This form of lease is intended for use of a sub-letting of part of a building which is let for commercial office purposes. Where the length of the term is 7 years or longer, the lease is subject to registration at the Land Registry and must include the Prescribed Lease Clauses. Where a tenant proposes to grant an underlease of all or part of the premises, he must have regard to the terms of his own lease. In particular, he should have regard to the terms of the sub-letting provisions, which is likely to control or regulate in some way the content of the lease. In drafting the lease, the tenant will attempt to mirror the provisions of the head lease. He should be careful not to allow the sub-tenant scope to do anything at the premises which is forbidden under the terms of the head lease. The head lease will usually require the tenant to obtain the consent of the head landlord before granting the lease. Landlord and tenant law is a complex area of law and specialist legal advice is always recommended before entering into a lease whether you are a landlord or a tenant. Section 1 Land Registry Clauses Land Registry Clauses are a set of standard details, which must appear at the beginning of any lease, which is for a period of 7 years or more. The prescribed clauses contain the information which the Land Registry needs in order to complete registration of the lease. (Refer to Land Registry website – www.landreg.gov.uk to download Practice Guide 64 entitled 'Prescribed clauses lease'). This section does not need to be completed if the term is less than 7 years. If in doubt, take specialist legal advice. Section 2 Definitions This section needs to reflect the particular circumstances of your contract: • Building - this is the whole of the office block out of which the lease is to be granted. • Permitted use: stated as use for offices within Class B1 of the Town and Country Planning (Use Classes) Order 1987. • Details of the Premises – the extent of the premises to be let needs to be carefully and fully described (and see Schedule 1). In the case of a registrable lease, the requirements of the Land Registration Rules must be followed. If the lease is granted out of a registered title, there must be a lease plan unless the landlord's title plan clearly identifies the land which is leased, in which case the leased land may be described in writing only. • The Rent: expressed to be an annual sum and the date the rent starts from. • Rent review dates for example, if there is a 15 year lease, it might be subject to 5 yearly rent reviews. These dates would usually be the dates of the rent reviews applicable in the Head Lease. • The length of the lease ('Term'). The tenant should ensure that the term of the lease is at least one day shorter than the unexpired length of the term of the head lease, since a sub-lease for the whole of the remaining term of the head lease term will take effect as an assignment of that term. Section 3 Interpreting this lease This section sets out provisions relating to, for instance: • The meaning of certain words used in this lease. • Reference to adjoining property. Whether break clauses on the part of the Landlord and/or the Tenant are applicable. Note that the exercise of a break clause in a head lease may operate to terminate any sub-lease, which has been created. This is certainly the case in the event of exercise by the head landlord. The sub-tenant may, however, have the right to remain in possession if he is protected under the 1954 Act. • A jurisdiction clause: stating that English law will apply to this lease and that the parties submit to the jurisdiction of the English courts. • Obtaining any relevant consents from the Landlord (eg to proposed alterations or to assignments). • The exclusion of the operation of the Contracts (Rights of Third Parties) Act 1999, the effect of which might otherwise be to give certain third parties the benefit of provisions in the Lease. • That the lease is a new tenancy for the purposes of the Landlord and Tenant (Covenants) Act 1995. This means it is a tenancy granted on or after 1 January 1996 (other than following an agreement entered before that date or an order of a court made before that date). • The procedure for notices which have to be served in accordance with the terms of the lease. • Interpretation of 'Responsibility' – providing that the obligations of the Head Landlord under the Head Lease shall remain with the Head Landlord if the same obligations are stated to fall on the Landlord under this lease. Section 4 Rights This section describes the rights granted to the Tenant and the rights reserved to the Landlord together with other rights to which the lease is subject. Care should be taken to ensure that these rights reflect and do not conflict with the provisions of the Head Lease. Rights and reservations, whether in a lease of whole or part, are important. They can have implications for a landlord's freedom to deal with or develop neighbouring land and with the tenant's ability to use the premises and carry out its business. Section 5 Rent, interest and other payments This section lists payments the Tenant must make to include Rent and all outgoings in respect of the Premises to include VAT. The Landlord will want to ensure that the rent to be paid by the Tenant is as high as the market will currently allow and, if the lease is to be granted for anything longer than a short term, the Landlord will want to review the rent from time to time. Careful attention must again be paid to the assignment and sub-letting provisions in the head lease, which might dictate the terms upon which any sub-lettings are granted. It is common for the head landlord to attempt to include several requirements in the head lease: • that any sub-letting by the tenant is granted at a rent which is the greater of the rent payable under the head lease and the full open market rent for the premises; • that any sub-letting is granted without the payment of a premium; and • that the sub-letting contains provisions for review of rent (in an upwards direction only), which match the head lease review provisions in terms of frequency, timing and basis of review. Section 6 Rent Review This section deals with the procedure for agreeing a new rent and the possible appointment of an expert if there is disagreement. Please also note the comments in section 5 above. Section 7 Services and Service Charge This section has been structured on the basis that: • The services are detailed. The services may be provided either by the Landlord or by the Head Landlord, depending on the terms of the Head Lease. • The Tenant pays the service charge. This is the relevant proportion of the service costs. • The service costs are the costs to the Landlord of providing the services. If the services are provided by the Head Landlord the Landlord's service costs will be the service charge payable by the Landlord under the Head Lease. • The Landlord covenants to repair the common parts and to provide certain of the other listed services. • The service charge is reserved as rent and is payable quarterly in advance on the rent payment days by reference to an estimate prepared by the Landlord with a balancing charge after the end of the service charge year. There is no provision for a reserve fund or a sinking fund. There is provision for staff costs. Section 8 Repair and decoration The same repairing obligation as affects the Landlord (or an even tighter one) ought to be imposed upon the Tenant. The Tenant's obligation will be to repair 'the premises' and it is therefore important that the Premises are adequately defined in the lease so that the division of responsibility for repair is clear. The Landlord should also ensure that the lease obliges the Tenant to decorate the Premises as frequently as and at the same times and in the manner required by the head lease. Section 9 Alterations and additions This section provides that the Tenant must not make any structural internal or external alterations or additions to the Premises. It requires the Tenant to obtain the Landlord's consent (which will include the Head Landlord's consent – see section 3.5.3) in respect of all other alterations. It also sets out the procedure for obtaining Landlord's consent to those alterations. A pro forma in respect of the application for consent is attached to the lease. Section 10 Using the Premises Section 10.1 sets out the right of the Tenant to quiet enjoyment of the Premises as long as the Tenant is paying the rent and complying with its other obligations under the Lease. 10.2 sets out that the Premises may only be used for the use for which they are let. 10.3 lists restrictions on the Tenant's use of the Premises which should normally mirror the restrictions in the Head Lease. Section 11 Signage This section deals with the signs which the Tenant may and may not affix to the Premises and must reflect and not conflict with the provisions of the Head Lease. The Landlord is likely to have to get any proposals approved by the Head Landlord.
Section 12 Legal Obligations This section sets out the Tenant's obligations to comply with all lawful requirements in respect of the Premises and to comply with all relevant codes of practice in relation to the way the Premises are used. Section 13 Planning This section relates to the Tenant's obligation to comply with all planning obligations in relation to the Premises and the procedure for making a planning application and implementing it. Section 14 Protecting the Landlord's Interests Section 14.1 obliges the Tenant to give notice to the Landlord of any defect in the Premises or matter in respect of which the Landlord may have a duty of care under the lease. 14.2 prohibits the Tenant from obstructing any window or right to light which the Premises has and requires the Tenant not to permit any person to acquire rights over the Premises. 14.3 sets out the terms of the indemnity which the Tenant must provide to the Landlord in respect of eg the use or condition of the Premises. 14.4 – 14.6 deal with liability, costs and the exclusion of the right for the Tenant to claim compensation from the Landlord on vacating the Premises. Section 15 Letting Others Use the Premises Section 15.1 deal with general restrictions to which the lease is subject. 15.2 allows members of the same group as the Tenant to share occupation of the Premises. 15.3 sets out the restrictions on the Tenant mortgaging or charging the lease. 15.4 deals with notice provisions on eg on a mortgage or assignment of the lease and the fee to be paid to the Landlord in that respect. 15.5 sets out that an assignment, charge or other disposition is to be effective on completion of the relevant transaction and not when it has been registered at the Land Registry. Section 16 Assignment and subletting It is unlikely that the head lease will allow any further sub-letting of the premises. Care should, therefore, be taken to impose appropriate restrictions in the lease. This section therefore prohibits assignment of part of the Premises and sets out the conditions the Landlord may impose to an assignment of the whole of the Premises. This section also prohibits subletting, sharing or parting with the whole or part of the Premises. Section 17 The Head Lease This section obliges the Tenant to observe and perform the covenants and conditions contained in the Head Lease in so far as they relate to the Premises. The provisions of the Head Lease may also require the Tenant to execute a separate deed in favour of the Head Landlord regarding the Tenant's obligations under the Head Lease. Section 18 Insurance and fire precautions This section has been structured on the basis that: • The terms of the insurance and the insurance obligations of both the Tenant and the Landlord are detailed. The insurance may be taken out either by the Landlord or by the Head Landlord, depending on the terms of the Head Lease. • The Tenant pays the insurance charge. This is the relevant proportion of the Landlord's insurance cost, being the insurance premium and other reasonable insurance expenses paid by the Landlord. If the insurance is taken out by the Head Landlord, the Landlord's insurance cost will be the insurance charge payable by the Landlord under the Head Lease. • The insurance charge is reserved as rent and is payable quarterly in advance on the Rent Payment Days. Section 19 The end of this lease 19.1 sets out (1) the right of the Landlord to affix notices for reletting the Premises during the 6 month period before the end of the lease and (2) the Tenant's obligation at the end of the lease to remove all tenant's fixtures and fittings and to hand back the Premises to the Landlord with all keys and landlord's fixtures and fittings in accordance with the Tenant's obligations under the lease. 19.2 sets out the Landlord's rights in relation to forfeiture of the lease. Section 20 Guarantee This section applies where there is a guarantor either as a party to the lease or following an assignment. It sets out the obligations and liability of the Guarantor during both the currency of the lease and in the event of a disclaimer. Section 21 Exclusion of Sections 24-28 of the 1954 Act If the Head Lease is contracted out of the Landlord and Tenant Act 1954, then any sub-lease should also be contracted out. If the Head Lease is not itself contracted out, the Landlord or the Head Landlord may want sub-leases to be contracted out, especially if they are short term. The assignment and sub-letting provisions in the head lease may require the sub-lease to be contracted out of the 1954 Act. The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 with effect from 1 June 2004 abolished the requirement in section 38(4) of the LTA 1954 of the need for a prior court order to authorise an agreement to contract out of Part II of the LTA 1954. If the Head Lease was contracted out before the new regulations came into force, it will contain reference to a court order.
Schedule 1 The Premises It is important that the description of the Premises fully and accurately identifies the boundaries of the Premises to be let so that, for instance, the Tenant is clear about his repairing obligations in respect of the Premises. The description of the boundaries in this Schedule assumes a modern office block and may need amendment to accord with the construction of the particular building and the layout of the floors and common parts. Application for Consent to make Alterations This pro-forma is for you to complete, as required. Please refer to the additional notes on signing agreements and contracts at the end of these Explanatory Notes.
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