The residential market
Short term residential lettings
Short-term letting of residential property refers to the grant of lease for a short period of time such as a full year at open-market rent rates. This lease does not have any capital value and the process of granting them is very informal; often by letting agents. Usually, neither property is represented by a legal counsel, nor will the tenant make any enquiries about the property. As for the landlord, his only concern is the tenant shall pay his rent on time and shall not damage any property. Also, it is common for the leasehold to contain a clause that the lease shall not be assigned by the tenant.
As the entire transaction takes place in a rather informal setup, usual conveyancing procedures are not available. Such leases however lead to certain statutory rights and protection in favour of tenants.
The residential long lease
Once upon a time it was common for units in housing estates to be sold on long leases rather than freehold. This may be uncommon today, but they are provided when the units that are being sold are a part of a larger building such as maisonettes or block of flats. As said earlier, people now prefer this because of the fact that positive and negative covenants are easy to enforce. In such instances, the property is let out for a very long period of time in return for a lump sum payment and low ground rent.
These leases have a capital value and the landlord has little control over the tenant’s ability to dispose of the property through assignment. Sometimes, controls are added on the tenant’s freedom to assign part of the property- as against letting the whole or sub-letting. Thus, leases on such properties can be sold as freehold. In fact, if it was not for the need to ensure positive and negative covenants, leasehold would not be required to be imposed at all in long lease cases.
Conveyancing processes for residential long leases often are the same as conveyancing procedures for freehold property. This is true in the case of a first lease or even if it involves subsequent leases. Once the lease is granted, the developer can charge a purchase price, and when he sells the lease, it is sold for a capital sum. As for making enquiries about valid title etc. it shall be made by the original tenant or the purchaser from the tenant. They will have to consider about funding for the acquisition, and other such issues. The freehold model of exchanging contracts is undertaken before completion.
Given the low rent, and the low yield through the property, ownership of freehold in such circumstances is not considered a noteworthy investment. The tenants of such properties have various rights to extend the terms of their lease; thus landlords usually find it difficult to regain position of the property. Thus, it is now common for landlords to dispose of the common parts of the building to a maintenance company, rather than retaining an interest after completion.
The commercial property market
Leasehold is common among commercial occupants of a property. In fact, commercial property becomes a very important part of investment portfolios of institutions like insurance companies, pension funds etc. It has also given rise to an all new branch called ‘institutional lease’. There are several reasons for this; first and foremost, leaseholds offer flexibility to businesses. For instance, a start-up business may or may not be successful and hence may choose a leasehold property to set up an office. If the business is successful, they may move to a larger office, but if it is not they may remain in the same office or even shift to a smaller place. Short-term leases offer this flexibility. Also, freehold properties are very expensive and most businesses would not want to hold up capital even if money were readily available. And lastly, when the office is a part of the building, issues related to the effective enforcement of positive and negative covenants applies.
For the landlord, lease of property for commercial occupation makes a lot of sense as he can pass on the day-to-day expenses of maintaining the property to the companies, while enjoying the rent as profit from them.
Conventionally, leases were for a period of five to twenty one years, but in recent years the trend has shifted towards short-term leases- those that range from five to fifteen years. While a capital sum is payable, this is less than usual in the case of grant or assignment of a long residential lease. Rather the cost to the tenant is paid through a ‘rent’ which is much higher than the rent paid under long residential lease. Also, this rent is subject to changes every few years (this is included in the terms of lease itself). Thus, irrespective of the length, commercial property leases usually have detailed controls on the tenant’s freedom to assign or deal with the property. This is to ensure that the landlord can be assured that the new assignee is as able as the current lender to meet liabilities under the lease.
Commercial lease terms are often subject to intense negotiation by both parties involved. In response to the government’s pressure for increased flexibility, the property industry has developed a code of conduct that aims to guide all leases. The latest edition of the Code for Leasing Business Premises in England and Wales 2007 can be found at, www.leasingbusinesspremises.co.uk. The Code only contains guidance, suggestions and options available to parties. Details of negotiations shall depend on the specifics of each case. It is nevertheless a valuable resource to small businesses and provides information about different obligations applicable to all parties.
Commercial property lease transactions do not follow the customary exchange of contract routine. Instead, the process straightway comes to completion. This is because, there is less need to synchronise a chain of reactions in commercial transactions than in residential transactions. However, the steps that make up a process for granting or assigning a commercial lease follow those for the sale of freehold. In the case of short-term leases, the prospective tenant may choose not to follow the conventional procedures of investigation etc. However, this is a commercial decision of the client.
Photo courtesy: Rona Proudfoot
