Granting a lease or underlease - Completion and post-complet...

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. In addition, it clarifies practical points such as rent apportionment on completion, the interaction of VAT with SDLT/LTT on lease premiums and rent, and the evidential documents required for registration (AP1/FR1, supporting schedules and certificates). It highlights the significance of priority protection through official searches (OS1/OS2) and the consequences of missing statutory time limits, including the risk that the lease takes effect only in equity. It further addresses service of notices—both the landlord’s completion/charge notice and any notice to a superior landlord on the grant of an underlease—plus Companies House registration for a tenant company charge where relevant. 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 required 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, with a focus on the following syllabus points:

• The process and significance of completing the grant of a lease or underlease.
• The execution formalities for leases and counterpart leases (including delivery, witnessing and company execution).
• Apportionment calculations for rent and other outgoings on completion, and handling retentions where figures are estimated.
• The requirements for payment of Stamp Duty Land Tax (SDLT) or Land Transaction Tax (LTT) following completion, including the concept of substantial performance and the effective date.
• The procedures for registering leases at HM Land Registry, including applicable time limits and the consequences of non-registration.
• Priority protection via official searches (OS1/OS2) and understanding the registration gap.
• The requirement to serve notices on superior landlords following completion of an underlease and to serve notices of a tenant’s charge on the landlord/management company.
• Use of the Law Society Code for Completion by Post and practical completion arrangements (time, place, undertakings).
• Where relevant, registration of tenant company charges at Companies House within the 21-day time limit.

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, searches are undertaken, and any required consents (for example, superior landlord consent to an underlease, or lender consent where the landlord’s title is charged) are secured. Where the parties agree to exclude statutory security of tenure under Part II of the Landlord and Tenant Act 1954, the prescribed contracting-out notices and declarations must be correctly dealt with before the tenant becomes contractually bound; failure to comply will leave the business tenancy protected.

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), registering the lease where required, protecting shorter leases on the landlord’s title by notice, and serving any required notices (to the landlord/management company and, where applicable, the superior landlord). 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. Particular care should be taken with rent commencement dates (especially if completion is unlikely to occur on a rent period start date), with service charge/insurance rent provisions that might require up-front payments, and with any contracted-out security of tenure requirements under the Landlord and Tenant Act 1954.

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.

Execution must comply with the formalities for deeds if the lease term exceeds three years. For individuals, signature must be witnessed by an independent witness. A company may execute by affixing the seal (if used), by two authorised signatories, or by one director in the presence of a witness. Deeds are often “delivered” to take effect on completion—where execution occurs before completion, the parties usually agree that the deed is held in escrow until it is dated. In practice, signatures may be obtained in advance so the engrossments are ready to exchange on completion. HM Land Registry accepts appropriately executed documents (including those signed using the accepted “Mercury” approach) provided formalities are satisfied.

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 to avoid breach of covenant. Similarly, if an underlease is being granted, the consent of the superior landlord (via a licence to underlet) must be finalised. Licences typically require the undertenant to covenant directly with the head landlord to observe covenants relevant to the underlet premises, to provide privity of contract as needed. Granting an underlease without a required consent can expose the tenant to forfeiture risk.

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 (in accordance with the lease).
• Rent deposit if required under the lease.
• 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. For charges estimated in advance (such as service charge on-account payments), parties sometimes agree a short retention if final accounts are pending and the apportionment is only an estimate.

Pre-completion Priority Protection

Before agreeing completion, the tenant’s solicitor should obtain an official search with priority to protect the lease registration (if it will be registrable) and, more generally, to guard against adverse entries during the registration gap.

Key Term: Official Search with Priority (OS1/OS2)
An HM Land Registry search that both updates title information and grants a 30-working-day priority period for registration. OS1 is used for whole of a title; OS2 is used where the disposition affects part only (for example, a lease of part).

An OS1/OS2 search gives a 30-working-day window within which the registration application must be lodged. This priority prevents intervening entries from taking precedence over the tenant’s registrable lease. Where the landlord’s title is unregistered, a pre-completion land charges search is not generally relevant on a grant of a new lease of registered land, but would be relevant if the lease were granted out of unregistered land and the tenant required first registration of the new lease.

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. Unless varied, the standard time for completion is by 2 pm; if funds arrive after that time, completion is deemed to occur on the next working day.

Key Term: Law Society Code for Completion by Post
A framework under which the landlord’s solicitor acts as unpaid agent on completion, gives undertakings to send completion documents out the same day, and holds funds/documents to the buyer/tenant’s order until completion is agreed.

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; any agreed certified copies of superior title deeds (if applicable); copy lender's consent (if applicable); a receipted completion statement where apportionments apply; copies of any ancillary documents (e.g., licences, consents) referred to in the lease.
• Landlord receives: The counterpart lease signed by the tenant; completion monies; any agreed undertakings (for example, to serve post-completion charge notices on the landlord).
• Underleases: If an underlease is being granted, the licence to underlet (signed by head landlord, tenant, and undertenant) must be completed and exchanged, and any direct undertakings/covenants required by the head landlord provided.

Key Term: Completion Information and Undertakings
A standard form used pre-completion to confirm practical arrangements (bank details, sum due, keys/possession), and to give undertakings relevant to completion. In lease grants, it ensures both sides align on money flows and document exchange.

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.

For SDLT in England, tax on a lease can arise on two components:

• Any premium paid (calculated as for a freehold purchase).
• The NPV of rent (for non-residential leases; residential rent under new leases typically does not attract SDLT).

For LTT in Wales:

• Premium is taxed similarly to a freehold purchase; higher residential LTT rates may apply to “additional” residential property buyers and to company purchasers.
• Residential leases: LTT does not charge on the NPV of rent.
• Non-residential leases: LTT charges on the NPV, with bands differing from SDLT.

If VAT is payable on rent or premium (e.g., landlord has opted to tax), SDLT/LTT is calculated on the VAT-inclusive amounts.

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/WRA provide calculators and formulae for determining NPV.

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’. The effective date may be completion or earlier if the lease is ‘substantially performed’ (e.g., tenant takes possession or pays a substantial part of the premium before 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.

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 (a reversionary lease), which requires registration at HM Land Registry to operate at law.

Key Term: Reversionary Lease
A lease (of any length) granted on one date but commencing in possession more than three months after the date of grant. It must be registered to take effect at law.

• Application for First Registration (Form FR1): Used if the landlord's title is unregistered and the lease itself is registrable. Must be submitted within two months of completion. Failure means the grant is void as regards creation of the legal estate; it will only operate in equity and the legal estate reverts to the landlord, who will hold on trust for the tenant.
• Application to Register a Registrable Disposition (Form AP1): Used if the landlord's title is already registered. Must be submitted within the OS1/OS2 priority period (usually 30 working days). Failure to register within the priority period risks loss of priority to other interests lodged 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 protected by notice on the landlord’s title (using AN1 for agreed notice or UN1 for unilateral notice). Leases for three years or less cannot be noted but take effect as overriding interests.
• Easements in the lease: Where a short or medium lease includes express easements (for example, rights of way or rights to pass services), registration of those easements against the superior title is good practice so they operate in law; the lease should contain a clause recording the landlord’s consent to entry of any required notice.

Key Term: Form AP1
HM Land Registry application form used to register a registrable disposition of an already registered title (for example, a registrable lease or notice of a short lease).

Key Term: Form FR1
HM Land Registry form used for first registration of title (including a registrable lease granted out of unregistered land).

Key Term: Form DI
The disclosable overriding interests form used to declare any known overriding interests when applying to register a lease or other disposition.

Key Term: DS1
Form executed by the lender confirming discharge of a registered charge over the whole of a registered title; electronic discharge (e-DS1 or ED) may be used instead.

Key Term: DS3
Form executed by the lender confirming discharge of a registered charge over part only of a registered title. It must have a plan identifying the released land.

• 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—especially to a purchaser of the reversion—until the tenant secures registration. In unregistered land, failure to lodge FR1 within two months means the legal estate never vests; only an equitable interest arises.

Where the tenant is a company and has granted a legal charge over the lease (for example, to finance fit-out works), registration of the charge at Companies House is mandatory within 21 days of creation. If missed, the charge may be void against a liquidator/administrator and creditors.

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. If the lease includes express easements over other parts of the building or estate, the tenant should seek registration of those easements against the superior title so they take effect at law.

Worked Example 1.3

A landlord grants a 3-year reversionary lease on 1 June, with the lease to start in possession on 1 November (i.e., more than three months after the grant). The landlord’s title is registered.

Must this lease be registered, even though the term is only three years?

Answer:
Yes. A lease of any term that takes effect in possession more than three months after the date of grant is registrable. The tenant must lodge an AP1 within the OS1/OS2 priority period to ensure it takes effect at law; otherwise, it will only take effect in equity.

Worked Example 1.4

Before completion of a 12-year lease, the landlord allows the tenant early access under a written licence to occupy for fit-out. The tenant takes possession and pays the agreed fit-out licence fee.

When does SDLT fall due on the lease?

Answer:
SDLT may fall due on substantial performance of the lease, which includes the tenant taking possession of the premises or payment of a substantial part of the premium before completion. If early occupation constitutes substantial performance, the effective date for SDLT is the date of substantial performance (not the later completion date), and the SDLT return and payment must be made within 14 days of that effective date.

Worked Example 1.5

A tenant grants an underlease of part with rent payable quarterly in advance. The headlease requires the superior landlord’s consent to underletting and stipulates that notice of any underlease must be served with a fee in duplicate within 28 days of completion. Consent is obtained, but the undertenant forgets to serve the notice.

What are the implications?

Answer:
The underlease remains valid between the tenant and undertenant, but failure to serve notice is a breach of covenant under the headlease/licence terms. The superior landlord may take action under the headlease (for example, requiring rectification and payment of the fee, or in serious cases treating it as part of a pattern of breach), and it may affect the undertenant’s ability to rely on estoppels or evidential presumptions against the superior landlord. The tenant should promptly serve notice in duplicate with the fee and retain the receipted copy.

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. Where headleases stipulate notice of dispositions (including underleases), service within the specified timeframe is essential.

• Procedure: Send notice in duplicate with the appropriate fee (if specified in the lease or licence).
• 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), mindful of substantial performance that may accelerate the effective date. Timely Land Registry registration is essential for leases over seven years and for reversionary leases of any length; registration must be within the OS search priority period (registered titles) or within two months (first registration out of unregistered land). Failure to register a registrable lease means it only takes effect in equity. Shorter leases (3–7 years) should be protected by notice on the superior title, and express easements in a lease should be registered so they take effect at law. Serving notices on landlords/management companies, including notice of tenant charges and of underleases to superior landlords, is often required. Where a tenant company grants a charge over the lease, Companies House registration must be made within 21 days.

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; completion is commonly effected under the Law Society Code for Completion by Post.
• Apportionments for rent and outgoings are calculated based on the completion date; retentions may be agreed where figures are estimated.
• SDLT (England) or LTT (Wales) is payable by the tenant on the premium and, where applicable, the NPV of the rent, with strict deadlines (14/30 days). The effective date may be earlier than completion if the lease is substantially performed.
• Leases granted for more than seven years must be registered at HM Land Registry. Reversionary leases (possession more than three months after grant) must be registered irrespective of term.
• Application for first registration (unregistered landlord title) must be within two months of completion (FR1). Application to register a registrable disposition (registered landlord title) must be lodged within the OS search priority period (AP1).
• Failure to register a registrable lease means it takes effect only in equity, exposing the tenant’s interest to priority risks.
• Leases between three and seven years can be protected by notice on the landlord's registered title (AN1/UN1). Express easements in short/medium leases should be registered so they operate at law.
• Notices of completion and any new mortgage/charge are often required to be served on the landlord/management company; notices of underleases are commonly required under headleases/licences.
• Tenant company charges must be registered at Companies House within 21 days of creation.

Key Terms and Concepts

• Engrossment
• Counterpart Lease
• Apportionment
• SDLT/LTT
• Net Present Value (NPV)
• Registrable Lease
• Reversionary Lease
• Official Search with Priority (OS1/OS2)
• Law Society Code for Completion by Post
• Completion Information and Undertakings
• Form AP1
• Form FR1
• Form DI
• DS1
• DS3