Granting a lease or underlease - Drafting the lease

Learning Outcomes

After reading this article, you will be able to identify and explain the essential elements required when drafting a lease or underlease, including operative clauses, covenants, and termination provisions. You will understand the statutory and practical requirements for valid leases, the relationship between headleases and underleases, and how to avoid common drafting errors. You will be able to apply these principles to SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the process and requirements for granting a lease or underlease, and the technical aspects of drafting the lease. As you work through this article, focus your revision on:

• The essential clauses and structure of a commercial lease or underlease
• The legal requirements for a valid lease and the consequences of non-compliance
• The relationship between headleases and underleases, including restrictions and limitations
• The main covenants and obligations of landlords and tenants
• Practical drafting issues, including rent, repair, insurance, alterations, user, and termination provisions

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. What is the difference between an absolute, qualified, and fully qualified covenant in a lease?
2. What must an underlease not do in relation to the headlease?
3. Name three essential clauses that must be included in a commercial lease.
4. What is the effect if a lease is not executed as a deed?
5. True or false? A tenant can grant an underlease for a longer term than their own lease.

Introduction

When a client wishes to grant a lease or underlease, the lease document must be carefully drafted to ensure it is legally valid and clearly sets out the rights and obligations of the parties. The lease is the central document governing the relationship between landlord and tenant (or tenant and subtenant), and errors in drafting can have serious legal and commercial consequences. This article explains the main requirements and practical considerations for drafting a lease or underlease for SQE1.

The Structure and Key Clauses of a Lease

A well-drafted lease or underlease will follow a logical structure and include certain essential clauses. The main sections are outlined below.

Parties, Date, and Property

The lease must clearly identify the parties (landlord and tenant, or in the case of an underlease, tenant and subtenant), the date of the lease, and the property being demised. The property should be described precisely, often by reference to a plan.

Key Term: demise
The grant of exclusive possession of defined premises for a specified term.

Term and Rent

The lease must specify the length of the term (start and end dates) and the rent payable. Rent clauses should state the amount, payment dates, and any rent review provisions.

Key Term: rent review
A mechanism for adjusting the rent during the lease term, usually at fixed intervals, based on market value or an agreed formula.

Rights Granted and Reserved

The lease should set out any rights granted to the tenant (such as rights of way or use of common areas) and any rights reserved to the landlord (such as entry for inspection or repairs).

Key Term: easement
A right benefiting one piece of land over another, such as a right of way.

Covenants and Obligations

The lease will contain covenants (promises) by both landlord and tenant. These are usually divided into:

• Tenant covenants (e.g., to pay rent, repair, not to assign or sublet without consent)
• Landlord covenants (e.g., for quiet enjoyment, to insure or repair if applicable)

Key Term: covenant
A legally binding promise in a lease or deed, either to do something (positive) or not to do something (restrictive).

Key Term: quiet enjoyment
The tenant’s right to use the premises without interference from the landlord or anyone claiming under the landlord.

Types of Tenant Covenants

Tenant covenants restricting assignment, subletting, alterations, or change of use may be:

• Absolute: total prohibition (e.g., "The tenant shall not assign the lease")
• Qualified: permitted only with landlord’s consent (e.g., "The tenant shall not assign without landlord’s consent")
• Fully qualified: permitted with landlord’s consent, not to be unreasonably withheld (e.g., "The tenant shall not assign without landlord’s consent, such consent not to be unreasonably withheld")

Key Term: fully qualified covenant
A covenant where the landlord’s consent is required and cannot be unreasonably withheld.

Repair and Insurance

The lease must allocate responsibility for repair and insurance. In a full repairing and insuring (FRI) lease, the tenant is responsible for all repairs and for reimbursing the landlord’s insurance costs.

Key Term: full repairing and insuring (FRI) lease
A lease where the tenant is responsible for all repairs and for insuring the premises (or reimbursing the landlord’s insurance premium).

Alterations and User

The lease should state whether the tenant may make alterations or change the use of the premises, and if so, on what terms. Alterations are often subject to landlord’s consent, and user clauses may restrict the permitted use to a particular purpose or class.

Termination and Forfeiture

Termination clauses set out when and how the lease may end before expiry, such as by break clause or forfeiture for breach of covenant (e.g., non-payment of rent).

Key Term: forfeiture
The landlord’s right to terminate the lease early for tenant default, usually after following a statutory procedure.

Drafting an Underlease: Special Considerations

An underlease (sublease) is a lease granted by a tenant out of their own leasehold interest. There are additional requirements and risks when drafting an underlease.

• The underlease must not grant a longer term than the headlease (even by one day), or it will operate as an assignment of the headlease.
• The underlease must not grant more extensive rights than the headlease allows.
• The underlease should require the undertenant to comply with relevant covenants in the headlease.
• The head landlord’s consent may be required before granting an underlease.

Key Term: underlease
A lease granted by a tenant (the head tenant) out of their own leasehold interest, for a term less than the headlease.

Key Term: headlease
The original lease granted by the landlord to the tenant, out of which an underlease may be granted.

Worked Example 1.1

A tenant holds a 10-year headlease and wishes to grant an underlease to a subtenant for 12 years. Is this possible?

Answer: No. The underlease must be for a term less than the headlease. If the underlease is for 12 years, it will operate as an assignment of the headlease, not as an underlease.

Execution and Statutory Requirements

A lease (or underlease) for more than three years must be executed as a deed to be valid at law. The deed must be signed, witnessed, and delivered as a deed by the parties.

Key Term: deed
A formal legal document that must be signed, witnessed, and delivered, used to create or transfer legal estates or interests in land.

Key Term: execution
The act of signing and completing a legal document, such as a deed.

If the lease is not executed as a deed, it may only take effect as an equitable lease (if the requirements for a contract are met), not as a legal lease.

Worked Example 1.2

A landlord and tenant agree the terms of a 5-year lease, sign a simple contract, but do not execute a deed. What is the status of the lease?

Answer: The lease is not valid at law, as it was not executed as a deed. However, if the contract is in writing, signed, and contains all agreed terms, it may take effect as an equitable lease.

Prescribed Clauses and Registration

Leases granted out of registered land for more than seven years must include prescribed clauses at the front of the lease, as required by Land Registry. The lease must be registered with its own title number.

Key Term: prescribed clauses
Standard information required at the start of a registrable lease, including parties, property, term, and rent, to facilitate Land Registry registration.

Key Term: registration
The process of recording a legal interest (such as a lease over seven years) at HM Land Registry, giving it legal effect and priority.

Exam Warning

For SQE1, be alert to questions where an underlease is for a longer term than the headlease, or where the lease is not executed as a deed. These are common traps.

Revision Tip

When drafting an underlease, always check the headlease for restrictions on subletting, covenants to be imposed, and the need for head landlord’s consent.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The essential structure and clauses of a commercial lease or underlease
• The legal requirements for a valid lease, including execution as a deed and prescribed clauses
• The main covenants and obligations of landlords and tenants, and the difference between absolute, qualified, and fully qualified covenants
• The special requirements and risks when drafting an underlease, including term, rights, and headlease restrictions
• The consequences of non-compliance with statutory requirements, including the risk of an equitable lease only
• The importance of registration for leases over seven years

Key Terms and Concepts

• demise
• rent review
• easement
• covenant
• quiet enjoyment
• fully qualified covenant
• full repairing and insuring (FRI) lease
• forfeiture
• underlease
• headlease
• deed
• execution
• prescribed clauses
• registration