Granting a lease or underlease - Completion and post-completion steps

Learning Outcomes

This article explains the final stages involved in the grant of a commercial lease or underlease. It outlines the key procedural steps taken by both the landlord's and tenant's solicitors leading up to and including completion. It also details the essential post-completion requirements, focusing on Stamp Duty Land Tax (SDLT) or Land Transaction Tax (LTT) and HM Land Registry formalities. Your understanding of these completion processes is fundamental for advising clients effectively in property practice scenarios encountered in SQE1.

SQE1 Syllabus

For SQE1, you are expected to understand the practical steps required to complete the grant of a lease or underlease and the subsequent administrative requirements. This includes knowing the procedures for execution, payment of taxes, and registration.

Focus your revision on:

  • The process and significance of completing the grant of a lease or underlease.
  • The execution formalities for leases and counterpart leases.
  • Apportionment calculations for rent and other outgoings on completion.
  • The requirements for payment of Stamp Duty Land Tax (SDLT) or Land Transaction Tax (LTT) following completion.
  • The procedures for registering leases at HM Land Registry, including applicable time limits and the consequences of non-registration.
  • The requirement to serve notices on superior landlords following completion of an underlease.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Which document is typically executed by the tenant on completion of the grant of a lease?
    1. The lease
    2. The counterpart lease
    3. The transfer deed (TR1)
    4. The licence to underlet
  2. Within what period must SDLT generally be paid to HMRC following the completion of a lease grant in England?
    1. 7 days
    2. 14 days
    3. 21 days
    4. 30 days

  3. True or false? A lease granted for a term of exactly seven years must be substantively registered at HM Land Registry.

  4. What is the primary consequence if a lease required to be registered is not registered within the statutory time limit?
    1. The lease becomes voidable at the landlord's option.
    2. The lease operates only as a licence.
    3. The lease takes effect only in equity, not at law.
    4. The tenant is liable for a fine.

Introduction

The completion of the grant of a lease or underlease is the stage where the legal formalities are finalised, and the tenant typically takes possession of the property. This follows the pre-contract stage where terms are negotiated, title is investigated, and searches are undertaken. Completion involves the execution and exchange of the lease documents and payment of any initial monies due. Following completion, several essential administrative steps must be taken, primarily by the tenant's solicitor, including dealing with tax liabilities (SDLT or LTT) and ensuring the lease is correctly registered with HM Land Registry if required. Understanding these procedural steps is critical for ensuring the lease is legally effective and the tenant's interests are protected.

Pre-Completion Matters

Before completion can occur, both the landlord's and tenant's solicitors undertake preparatory steps to ensure a smooth transition.

Drafting and Agreeing the Lease

The terms of the lease document itself will have been negotiated and agreed upon during the pre-contract stage (see relevant articles on Lease Structure and Negotiation). It is assumed at this point that the form of the lease is finalised.

Engrossment and Execution Preparation

The final agreed version of the lease documents must be prepared for signing.

Key Term: Engrossment
The preparation of the final version of a legal document (like a lease) for execution by the parties, incorporating all agreed amendments.

Typically, the lease is prepared in two identical parts: the lease itself, which is signed by the landlord, and the counterpart lease, signed by the tenant.

Key Term: Counterpart Lease
An identical copy of the lease document, executed by the tenant and handed to the landlord on completion. The landlord retains the counterpart, while the tenant retains the original lease signed by the landlord.

The landlord's solicitor usually prepares the engrossments of both the lease and the counterpart. The tenant's solicitor approves these before arranging for the tenant to sign the counterpart. The landlord signs the main lease. Execution must comply with the formalities for deeds if the lease term exceeds three years.

Obtaining Necessary Consents

If the landlord has a mortgage over the property, the lender's consent to the grant of the lease will usually be required. The terms of the mortgage deed often restrict the landlord's ability to grant leases without consent. Evidence of this consent should be obtained before completion. Similarly, if an underlease is being granted, the consent of the superior landlord (via a licence to underlet) must be finalised.

Agreeing Completion Monies

The solicitors must agree on the exact amount of money the tenant needs to pay on completion. This typically includes:

  • The first instalment of rent (often apportioned).
  • Any premium payable for the grant of the lease (less any deposit paid if an agreement for lease was exchanged).
  • Any service charge or insurance rent payable in advance.
  • The landlord's legal costs if agreed.

The landlord's solicitor provides a completion statement detailing these amounts.

Key Term: Apportionment
The calculation used to divide ongoing costs (like rent or service charges) fairly between the landlord and tenant based on the date the lease commences, ensuring the tenant only pays for the period from completion onwards.

Rent is typically paid in advance. Unless the lease starts exactly on a rent payment day (e.g., a quarter day), the first payment will be an apportioned amount covering the period from the completion date up to the next rent payment day.

Completion

Completion is the point at which the lease formally commences and the tenant usually gains the right to occupy the property.

Mechanism of Completion

Similar to freehold transactions, completion can occur in person or, more commonly, by post using the Law Society Code for Completion by Post (2019). Funds (rent, premium etc.) are transferred electronically from the tenant's solicitor to the landlord's solicitor.

On completion:

  • The lease and counterpart lease are dated.
  • The landlord's solicitor releases the executed lease to the tenant's solicitor.
  • The tenant's solicitor releases the executed counterpart lease to the landlord's solicitor.
  • Keys or access arrangements are provided to the tenant.

Documents Exchanged

  • Tenant receives: The original lease signed by the landlord; certified copies of any superior title deeds (if applicable and agreed); copy lender's consent (if applicable).
  • Landlord receives: The counterpart lease signed by the tenant; completion monies.
  • Underleases: If an underlease is being granted, the completed licence to underlet (signed by head landlord, tenant, and undertenant) is also exchanged/confirmed as completed.

Post-Completion Steps

Following completion, several administrative tasks must be undertaken, primarily by the tenant's solicitor, to formalise the lease and comply with legal requirements.

Stamp Duty Land Tax (SDLT) / Land Transaction Tax (LTT)

SDLT (in England) or LTT (in Wales) may be payable on the grant of a lease.

Key Term: SDLT/LTT
Taxes payable to HMRC (for SDLT) or the Welsh Revenue Authority (WRA for LTT) on land transactions, including the grant of a lease. Calculation for leases is based on any premium paid and the Net Present Value (NPV) of the rent.

The tenant's solicitor is responsible for calculating the tax due, submitting the relevant tax return (SDLT1 or LTT return), and paying the tax within the statutory time limit.

  • Deadline (England): SDLT return and payment within 14 days of the 'effective date' (usually completion).
  • Deadline (Wales): LTT return and payment within 30 days of the 'effective date'.

Failure to meet these deadlines attracts penalties and interest. A certificate (SDLT5 or WRA certificate) is issued upon submission/payment, which is required for Land Registry applications.

Key Term: Net Present Value (NPV)
The total value of the rent payable over the entire term of the lease, discounted to reflect its current value today. HMRC provides calculators and formulae for determining the NPV for SDLT/LTT purposes.

HM Land Registry Formalities

Certain leases must be registered at HM Land Registry to take effect as legal estates.

Key Term: Registrable Lease
A lease granted for a term of more than seven years, or a lease of any duration that takes effect more than three months after the date of grant, which requires registration at HM Land Registry to operate at law.

  • Application for First Registration (Form FR1): Used if the landlord's title is unregistered. Must be submitted within two months of completion. Failure means the grant is void as regards the creation of a legal estate; it will only operate in equity.
  • Application to Register a Registrable Disposition (Form AP1): Used if the landlord's title is already registered. Must be submitted within the priority period (usually 30 working days) conferred by the tenant's solicitor's pre-completion official search (OS1/OS2). Failure to register within the priority period means the lease may lose priority to other interests registered first.
  • Noting a Lease: Leases granted for a term of more than three years but not more than seven years out of a registered title cannot be registered with their own title but can be noted on the landlord's title register (using form AN1 for agreed notice or UN1 for unilateral notice). This protects their priority. Leases for three years or less cannot be noted but take effect as overriding interests.
  • Consequences of Non-Registration: If a registrable lease is not registered in time, it operates only as an equitable lease. This makes the tenant's interest vulnerable, particularly to a buyer of the landlord's reversionary interest.

Worked Example 1.1

A tenant completes the grant of a new 10-year commercial lease of premises in Manchester (England) on 1st March. The landlord's title is registered. The tenant's solicitor carried out an official search (OS1) which conferred priority until 12th April.

What are the key immediate post-completion deadlines the tenant's solicitor must meet?

Answer: The solicitor must submit the SDLT return and pay any SDLT due to HMRC by 15th March (within 14 days of completion). They must also submit the application (Form AP1) to register the lease at HM Land Registry by 12th April (within the OS1 priority period).

Worked Example 1.2

A landlord grants a 5-year lease of part of an office building to a tenant. The landlord's title is registered. The tenant's solicitor asks whether the lease needs registering at HM Land Registry.

Advise the tenant's solicitor.

Answer: No, the lease does not require substantive registration with its own title because the term granted (5 years) does not exceed seven years. However, as the term exceeds three years, the tenant can apply to note the lease against the landlord's registered title using Form AN1 (agreed notice) or UN1 (unilateral notice). This is advisable to protect the lease's priority against subsequent dispositions of the landlord's title.

Notices to Landlord/Management Company

The lease often requires the tenant to give formal written notice to the landlord (and any management company) of the completion of the lease, particularly if a mortgage has been granted over the leasehold interest. Even if not required by the lease, the UK Finance Mortgage Lenders' Handbook mandates serving notice of a charge on the landlord.

  • Procedure: Send notice in duplicate with the appropriate fee (if specified in the lease).
  • Receipt: Request the landlord/management company to sign and return one copy as acknowledgement. This receipted copy should be kept with the lease documents.

Summary

Completion finalises the grant, involving execution and exchange of lease/counterpart and payment of initial monies. Post-completion steps are critical for legal validity and protection. The tenant's solicitor handles SDLT/LTT returns (14/30-day deadlines) and ensures timely Land Registry registration for leases over 7 years (2-month deadline for first registrations, OS priority period for registered titles). Failure to register a registrable lease means it only takes effect in equity. Noting shorter leases (3-7 years) is advisable. Serving notice on landlords/management companies, especially regarding mortgages, is often required.

Key Point Checklist

This article has covered the following key knowledge points:

  • Completion involves dating and exchanging the lease and counterpart, paying initial rent/premium, and handing over possession.
  • Apportionments for rent and outgoings are calculated based on the completion date.
  • SDLT (England) or LTT (Wales) is payable by the tenant on the premium and NPV of the rent, with strict deadlines (14/30 days).
  • Leases granted for more than seven years must be registered at HM Land Registry.
  • Application for first registration (unregistered landlord title) must be within two months of completion.
  • Application to register a disposition (registered landlord title) must be within the OS search priority period.
  • Failure to register a registrable lease means it takes effect only in equity.
  • Leases between three and seven years can be noted on the landlord's registered title.
  • Notice of completion and any new mortgage must often be served on the landlord/management company.

Key Terms and Concepts

  • Engrossment
  • Counterpart Lease
  • Apportionment
  • SDLT/LTT
  • Net Present Value (NPV)
  • Registrable Lease
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