A lease is the grant of exclusive possession of land or property for a defined period of time in return for payment of a rent. A lease could be granted out of a freehold title (a headlease) or out of another superior leasehold title (a sublease/underlease).
If a lease is a business lease of more than six months, this has important implications for both the tenant, who has certain statutory rights to remain in the property and be granted a new lease, and for the landlord, who may not be able to recover possession of the property at the end of the contractual term. A landlord and tenant usually agree that that these rights will not apply to the lease. There is a formal procedure that must be followed to do this, usually referred to as “contracting out”.
A landlord, whether it is an institutional one or not, owns property for investment and/or business purposes and requires that property to provide a secure income. To achieve this objective, a landlord will try to ensure that all the costs associated with the property will be paid by the tenant such as repair and maintenance costs, utility costs and business rates. The landlord wants the rental income it receives to be as close to pure profit as possible.
In terms of the lease documentation, this translates into a full repairing and insuring lease. This means that all repairing liabilities are borne by the tenant and the cost of repairs to common parts are recoverable from the tenant through a service charge. In addition, the costs of insuring the property and any building of which the property forms part will be recoverable from the tenant(s). If the lease is for more than five years, the tenant should also expect an upwards-only open market rent review to protect the landlord’s income stream and the investment value of the property. If the rent is subject to VAT, then VAT (currently 20%) will be added to it.
The grant of a lease with a rental value over a certain level will be a taxable transaction and notifiable to UK tax authority (HM Revenue and Customs). In that case, a return will need to be filed and any Stamp Duty Land Tax paid.
Leases granted for more than 7 years need to be registered at the Land Registry. Leases of between 3 and 7 years may only be noted on the superior title.
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