Leases and underleases - Options for the term of a lease

Learning Outcomes

This article outlines the legal principles and practical options for structuring terms of leases and underleases in residential and commercial contexts, including:

• Term options: fixed terms, periodic tenancies (contractual and implied), reversionary leases, and tenancies at will
• Legal and equitable leases; the parol lease exception under s54(2) LPA 1925; and registration thresholds and requirements under the Land Registration Act 2002
• Break clauses, rent review clauses, renewal mechanisms, and security of tenure under the Landlord and Tenant Act 1954 and relevant residential regimes
• Privity of contract and privity of estate; liability for leasehold covenants pre- and post-assignment; the Landlord and Tenant (Covenants) Act 1995 (old and new leases)
• Authorised Guarantee Agreements (AGAs), their operation and limitations, section 17 notices for recovery of fixed charges, and the possibility and mechanism of an overriding lease
• Statutory and contractual control of alterations and improvements: absolute, qualified, and fully qualified covenants; LTA 1927 s19 and s1; and LTA 1988 duties and procedures
• Underleases: creation, risks, legal consequences, and distinction from assignments
• Deduction and investigation of title for new leases and underleases; superior landlord consent and documentation; completion and post-completion steps (SDLT/LTT and Land Registry requirements)
• Registration, protection, and priority of legal and equitable leasehold interests; overriding interests, notices, and land charges; and implications for renewal and termination

SQE1 Syllabus

For SQE1, you are required to understand lease and underlease term options, creation and transfer of leasehold interests, and related statutory controls, with a focus on the following syllabus points:

• The main types of lease term (fixed, periodic, contractual periodic tenancy, tenancy at will) and their legal consequences
• Reversionary leases and the 21‑year rule (LPA 1925 s149(3))
• The distinction between legal and equitable leases, including the s54(2) LPA “parol lease” exception and registration thresholds under LRA 2002
• Assignment: privity of contract and privity of estate; the old/new lease divide under the Landlord and Tenant (Covenants) Act 1995
• Authorised Guarantee Agreements (AGAs): when they can be required, their scope, and the outgoing tenant’s continuing liability
• Section 17 notices for recovery of fixed charges from former tenants/guarantors and the possibility of an overriding lease
• Statutory control of consent to alienation and alterations: LTA 1927 s19 and LTA 1988 duties (reasonable time, reasons)
• Alteration/improvement covenants: absolute/qualified/fully qualified, “improvement” seen from the tenant’s standpoint, and compensation for improvements (LTA 1927 s1)
• Underleases: relationship with the head lease, need for superior landlord’s consent, privity via direct covenants, and the effect of assignments
• Protection and priority: when leases must be registered, overriding status of short legal leases, and protection of equitable leases by notice

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 are the main differences between a legal lease and an equitable lease?
2. What is privity of contract and how does it affect liability after a lease is assigned?
3. What statutory rule modifies an absolute covenant against alterations in a lease?
4. What is the effect of an Authorised Guarantee Agreement (AGA) under the Landlord and Tenant (Covenants) Act 1995?
5. What is the minimum formality required to create a legal lease for more than three years?

Introduction

Leases and underleases give exclusive possession of land for a defined period, and the structuring of their term—whether fixed, periodic, reversionary, or at will—determines many of the legal risks, obligations and procedures involved in their grant, assignment, and termination.

A lease may be granted out of the freehold (“head lease” or “superior lease”) or out of an existing lease (“underlease” or “sublease”). In all cases, the term chosen affects not only the duration of occupation but also the application of statutory regimes, the requirements for registration or deduction of title, the enforceability of leasehold covenants, and the routes available for renewal and termination. In practice, the correct identification of the term is essential to determining the practical and legal status of the tenancy, its transferability, security of tenure, and the exposure of parties to liabilities.

Key Term: fixed term lease
A lease granted for a specific, defined duration (for example: 6 months, 1 year, 10 years, 99 years), which expires automatically at the end of the period, unless continued by agreement or statutory protection.

Key Term: periodic tenancy
A tenancy that runs from one period to the next (such as weekly or monthly), potentially indefinitely, and is renewable each period until validly terminated.

Key Term: contractual periodic tenancy
A periodic tenancy expressly created by agreement (for example: “yearly from 1 January 2023 at an annual rent of £12,000, payable monthly”), as opposed to one implied by conduct.

Key Term: tenancy at will
A form of tenancy arising when a person occupies by permission, but either party can terminate at any time without notice; this confers no security of tenure or presumption of periodicity.

Types of Lease Terms

The term structure of a lease is fundamental to determining what legal protections and consequences attach to it, the formalities required for its creation, how it is terminated, and whether statutory security of tenure arises.

Fixed Term Leases

A fixed term lease confers exclusive possession for a defined period, bringing clarity regarding the lease’s end date—they automatically expire on the agreed date unless specifically continued. Fixed term leases may be for substantial or short periods; for example, student tenancies might be for 9 months, residential or commercial leases for 1 year, 5 years, 25 years or even 999 years (the latter common in long residential leaseholds).

These leases may include mechanisms to provide flexibility:

• Break clauses: Permit either or both parties to terminate the lease early, usually on stated dates and conditions. A break clause must be exercised strictly as outlined in the lease—failure to comply means the lease continues until the next break (if any) or to the end of the fixed period.
• Options to renew: Grant tenants a right to take a further lease after expiry; these must be validly exercised and are often tightly drafted.
• Rent review clauses: Frequently found in commercial long leases, these provide for periodic rent adjustment, based on indices or market value.

Key Term: break clause
A lease provision giving a party (or both) the right to end a fixed-term lease on specified terms, subject to conditions such as payment of rent or service of notice.

Long leases, such as those of 99 or 125 years, are common in the residential sector, primarily to ensure enforceable covenants within a block of flats. In such leases, a premium (“capital price”) is usually paid up-front, with a ground rent and service charges during the term; these leases tend to operate almost as quasi-freeholds.

A fixed term lease will end by effluxion of time at its natural expiry unless specific protection applies (such as security of tenure under the Landlord and Tenant Act 1954 for business leases, or statutory provisions for certain residential tenancies). If a tenant remains in occupation and the landlord accepts rent, a new type of tenancy may arise by implication, often with increased protection.

Worked Example 1.1

A commercial landlord grants a 7-year lease to a business tenant, containing a tenant break clause exercisable after 3 years, provided there are no arrears and the tenant provides 6 months’ notice. The tenant serves notice correctly but is in arrears of service charges at the break date.

Answer:
The break fails for non-compliance with the precondition (no arrears). The lease continues until the next break date (if any) or to the fixed expiry.

Reversionary Leases

Unlike a standard lease that commences immediately, a reversionary lease is granted now but takes effect at a future date. Section 149(3) LPA 1925 imposes a limit: a lease will be void if the gap between grant and commencement of possession is more than 21 years.

Key Term: reversionary lease
A lease granted to begin in the future, which is valid only if the interval before possession does not exceed 21 years from the date of grant.

Worked Example 1.2

On 2 January 2023, an owner grants a 25-year lease due to begin on 3 January 2047.

Answer:
The grant is void, as the start of the lease is more than 21 years after grant (breaching s149(3) LPA 1925).

Periodic Tenancies

A periodic tenancy endures from period to period (e.g. week to week, month to month, quarter to quarter, or year to year), with no predetermined end date. It may arise by express agreement (contractual periodic tenancy) or by implication or operation of law—for instance, a tenant holding over after a fixed term lease with the landlord’s acquiescence and continuing to pay rent by reference to a period.

The length of notice required to terminate a periodic tenancy is generally that of the period itself (e.g. one month's notice for a monthly tenancy), although yearly tenancies require at least six months’ notice at common law. Notice must expire at the end of a period. Statutory rules or lease terms may require longer notice. In commercial property, a periodic tenancy will typically attract security of tenure (unless specifically contracted out), and its protected status may complicate efforts at termination.

Key Term: periodic tenancy
A lease or tenancy which is automatically renewed at the end of each period unless properly terminated.

Key Term: contractual periodic tenancy
A periodic tenancy expressly agreed to by the parties in writing or orally, distinguishing it from a periodic tenancy implied by conduct (sometimes known as a “statutory periodic tenancy” if it arises automatically under statutory provisions).

Worked Example 1.3

A tenant’s one-year fixed-term lease ends, but the tenant remains in occupation with the landlord’s consent and pays weekly rent.

Answer:
An implied weekly periodic tenancy arises, terminable by one full week’s notice ending on the day before a new period would begin.

It is important to distinguish between a tenancy at will (see below) and a periodic tenancy. Conduct such as acceptance of rent by period without reference to a new agreement may inadvertently create a periodic tenancy, with potential statutory rights.

Tenancy at Will

Where a person occupies premises by the permission of the landlord, and either party is free to terminate the arrangement at any time and without notice, a tenancy at will arises. It is a flexible, short-term solution—commonly used when waiting for formal completion of a new lease, or when the landlord and tenant are in negotiations, or following the expiry of a lease but before a renewal is agreed or possession is taken.

A tenancy at will does not confer any security of tenure or any presumption of renewal. By express agreement or by implication from conduct, a tenancy at will can arise. To avoid creating a periodic tenancy unintentionally, parties should avoid regular rent payments or recording the arrangement in terms suggesting periodicity.

Key Term: tenancy at will
An arrangement where occupation is by consent and can be terminated without notice by either party at will.

A tenancy at will is excluded from the protection of the Landlord and Tenant Act 1954 and most residential security regimes.

Worked Example 1.4

Business tenants stay on after lease expiry while negotiating a new lease. The landlord writes stating the occupation is “at will” and no rental period is agreed. After one month, the landlord requires the tenants to vacate immediately.

Answer:
The landlord may terminate the tenancy at will immediately; the tenants must leave.

Leases Void for Uncertainty

A valid lease must have a certain maximum duration at the outset; it cannot be “until the landlord wants possession” or “for as long as the premises are used for business purposes.” Otherwise, the arrangement is void for uncertainty and may only create a licence or a periodic tenancy (if rent is paid by reference to a period and the facts otherwise support it). However, a fixed term lease with a break clause is certain, as the maximum term is fixed even if determinable earlier.

Worked Example 1.5

A lease is granted “for as long as the tenant keeps the premises tidy and pays rent”. Is this a valid lease?

Answer:
No. The maximum term is uncertain; therefore, no valid lease has been created.

Underleases

An underlease (sublease) is a lease granted by a tenant out of their own leasehold interest. An essential requirement is that the underlease must be for a period shorter than the lease of the grantor (head-lease), allowing at least one day less than the unexpired residue of the head lease. If the grant is for the whole term or longer than the head tenant’s reversion, the arrangement is not an underlease and may operate as an assignment.

The grant of an underlease almost always requires compliance with the terms of the headlease, including obtaining superior landlord consent via a licence to underlet. The underlease is typically drafted to “mirror” key obligations in the headlease, and to incorporate as many of the main covenants, rights and restrictions as possible, subject to exceptions where the undertenant’s obligations cannot exceed those of the head tenant.

A valid underlease must:

• Reserve a reversionary interest to the head tenant (i.e. the underlease does not exhaust the tenant’s own title in the premises).
• Be for a term less than the residue unexpired in the head lease at the date of the grant.

If the underlease is for a term equal to (or exceeding) the residue of the head tenancy, it operates as an assignment of the head lease, potentially breaching alienation prohibitions.

Key Term: underlease
A lease created by a leaseholder out of their own leasehold title, for a period less than their remaining term, subject to the terms of their own lease and superior interests.

Worked Example 1.6

A tenant under a 12-year lease with 7 years left grants a “new lease” for 8 years. Is this an underlease?

Answer:
No. The underlease cannot exceed the grantor’s remaining interest. The purported underlease is likely to operate as an assignment of the head lease (or be void), potentially breaching alienation covenants if consent has not been obtained.

Legal and Equitable Leases

The division between legal and equitable leases is central to enforceability, the requirement for registration, and the protection of the parties’ interests against third parties.

Legal Lease Requirements

At common law, a lease may be created orally, by deed, or in writing, with particular requirements depending on its duration.

• For leases OVER three years: Creation by deed is required (LPA 1925 s52), and certain terms must be contained (parties, premises, commencement date, term, rent or premium).
• For leases not exceeding three years, at best rent and not in reversion: These may be created orally or in writing, without a deed (the “parol lease” exception: s54(2) LPA 1925). These short “parol leases” can be legal provided they take effect in possession, are at the best rent reasonably obtainable, and involve no premium or fine.

Key Term: parol lease
A legal lease not exceeding three years, taking effect in possession, at the best rent, and not made by deed; created orally or in writing under s54(2) LPA 1925.

If a lease (or assignment of a lease) is for more than seven years, or a reversionary lease is created to begin more than three months from the date of grant, it is a registrable disposition in registered land (LRA 2002 s27), and must be substantively registered to take effect at law. Failure to register a registrable lease does not defeat the contract but relegates the lease to equity: it is not a legal estate, but is usually enforceable as an equitable lease.

Assignments of registered leases are also registrable dispositions, and completion of registration is necessary for legal title to pass (LRA 2002, s27). Assignments must be executed by deed.

Legal leases for less than seven years do not require registration (although registration is optional) and will be overriding interests under Schedule 3 LRA 2002, capable of binding a purchaser for value even if not entered on the land register.

Short legal leases are often referred to as “overriding” leases because they bind a purchaser of the reversion regardless of registration (LRA 2002 Sch 3, para 1).

Key Term: legal lease
A lease that is created by deed (if for more than 3 years), or orally/in writing (if short, pursuant to s54(2)), and in the case of leases of more than 7 years, is completed by registration in registered land.

Equitable Lease

If a lease fails to comply with one or more legal formalities (e.g. not by deed, or not registered if registrable), but there exists a valid contract satisfying section 2 Law of Property (Miscellaneous Provisions) Act 1989 (writing, signed by the parties, setting out all the agreed terms), then equity will treat the lease as an equitable lease—“equity regards as done that which ought to be done” (Walsh v Lonsdale).

An equitable lease is enforceable in personam and is specifically enforceable, so the parties may insist on a grant of a legal lease if necessary. However, the estate is only equitable, making it vulnerable to third parties who take for value without notice. In registered land, protection is achieved by registration of a notice against the title; in unregistered land, by a Class C(iv) land charge.

If not protected properly, a bona fide purchaser for value of the legal estate without notice of the equitable lease takes free of it (in the case of unregistered land).

Key Term: equitable lease
A leasehold interest arising when a valid contract for a lease exists in writing, but legal requirements have not been met (e.g. no deed, or not registered).

Worked Example 1.7

A landlord and tenant sign an agreement for a ten-year lease, but do not execute a deed. The tenant occupies and pays rent from the start.

Answer:
This creates an equitable lease, not a legal one, as the formal deed requirement has not been satisfied. The tenant is entitled to specific performance, but should protect the lease by registration/notice.

Worked Example 1.8

A three-year lease is created orally, and the tenant takes immediate possession at a monthly rent. Is this a valid legal lease?

Answer:
Yes, provided it takes effect in possession and at the best rent without a fine or premium. This meets the “parol lease” exception under s54(2) LPA 1925.

Registration and Priority

In registered land, leases for more than seven years, reversionary leases with a start date more than three months after grant, and discontinuous leases must be registered. If such leases are not registered within two months, the purported legal lease is void at law and instead takes effect as an equitable lease until registration is completed.

Short legal leases (not exceeding 7 years) override registered dispositions and will bind a buyer or mortgagee of the reversion, regardless of whether the lease appears on the register. However, prudent practice suggests entering a notice even for such leases to avoid disputes about the actual existence and terms of the lease.

In unregistered land, equitable leases must be registered as a Class C(iv) land charge against the name of the estate owner; otherwise, they risk being void against a purchaser for value of the legal estate who has no notice.

Assignment of Leases

The assignment (transfer) of a leasehold interest from one tenant to another must always be by deed. If the lease is itself registered or otherwise registrable, an assignment must also be completed by registration to transfer legal title. Lease assignments typically require landlord consent, and are often regulated in the lease itself with varying degrees of restriction (absolute, qualified, or fully qualified as to the requirement for consent).

Privity of Contract and Estate

The assignment of a lease triggers complex issues of continuing liability. The law distinguishes between two types of privity:

Key Term: privity of contract
The relationship between the original parties to the lease, under which each is personally liable for the performance of all lease covenants.

Key Term: privity of estate
The legal relationship between a landlord and the person currently entitled to immediate possession under the lease (the current tenant); privity of estate allows for enforcement of covenants that "touch and concern" the land during the tenant’s occupation.

Old and New Leases

Where a lease was granted before 1 January 1996 (“old lease”), the original tenant remains liable by privity of contract for the performance of lease covenants throughout the original lease term, even after lawful assignment. As a result, a landlord may pursue the original tenant if subsequent assignees default.

Where a lease is granted on or after 1 January 1996 (“new lease”), the Landlord and Tenant (Covenants) Act 1995 has fundamentally altered this position. The tenant is released from the tenant covenants on assignment, unless lawfully required to enter into an Authorised Guarantee Agreement (AGA).

The provisions for privity of estate remain: whoever is currently entitled to the term (the tenant for the time being) is liable to perform covenants that touch and concern the land; when the lease is assigned, the incoming tenant assumes these liabilities.

Worked Example 1.9

A lease granted in 1994 is assigned in 2024 by the original tenant to another party, who fails to pay rent. Can the landlord pursue the original tenant?

Answer:
Yes. Under an “old” lease, the original tenant remains liable under privity of contract unless expressly released by the landlord.

Authorised Guarantee Agreements (AGAs)

Key Term: Authorised Guarantee Agreement (AGA)
An agreement required by a landlord (in “new” leases only) as a condition of consenting to assignment whereby the outgoing tenant guarantees the performance of covenants by the immediate assignee. The AGA cannot make the outgoing tenant liable for the default of further assignees.

The AGA is a statutory creation under the 1995 Act and must be expressly required in the lease or otherwise be reasonable in all the circumstances to require it. The obligation only covers breaches by the immediate successor tenant and lapses once the lease is assigned again.

Worked Example 1.10

A lease granted in 2002 is assigned to a new tenant. The landlord requires an AGA from the outgoing tenant. The new tenant later assigns the lease again. What is the outgoing tenant’s position under the AGA?

Answer:
Once the immediate assignee assigns the lease, the outgoing tenant’s liability under the AGA ceases.

Consent to Assignment and Section 17 Notices

Most commercial leases limit assignment by an absolute or (more commonly) a qualified covenant (assignment not permitted “without consent”, such consent not to be unreasonably withheld). Under section 19(1A) Landlord and Tenant Act 1927, express conditions and circumstances to assignment may be deemed reasonable, especially if contained in the lease.

Where a tenant or (under an AGA) an outgoing tenant or guarantor remains potentially liable for a “fixed charge” (rent, service charge or similar sums) after assignment, the landlord must serve a section 17 notice under the Landlord and Tenant (Covenants) Act 1995 within six months of the sum falling due. Failure to serve this notice in time means recovery of that sum from the former tenant or guarantor is barred.

A person who pays in response to a section 17 notice may then claim an overriding lease from the landlord, which has the effect of inserting the payer between the landlord and the defaulting tenant, allowing the payer to step in, take possession and if necessary forfeit or relet the premises.

Key Term: section 17 notice
A notice served under s17 LT(C)A 1995 by a landlord on a former tenant or guarantor, in order to recover arrears of “fixed charges” (such as rent or service charge) within six months of the charge falling due.

Key Term: overriding lease
A lease granted by operation of law to a former tenant or guarantor who has made payment following a s17 notice; it “slots in” between the landlord and defaulting tenant.

Worked Example 1.11

A landlord wishes to claim unpaid service charges from a tenant who assigned the lease a year ago. No section 17 notice was served.

Answer:
The landlord cannot recover the fixed charges from the outgoing tenant; s17 notice must be served within six months or the remedy is lost.

Effect of Assignment and Underleases

Upon assignment, the assignee becomes the landlord’s immediate tenant, bound by privity of estate for covenants that run with the land. If there are existing underleases, they “run with the land” — the new head tenant takes subject to any underleases already granted, as undertenant’s rights derive from their grant, not the personal status of the immediate landlord. The loss of the head lease by forfeiture will almost always lead to the forfeiture of any underleases. However, underlessees may apply for relief from forfeiture.

Use of an underlease instead of an assignment is sometimes preferred, especially where assignment is prohibited or restricted or carries continuing liability for the assigning tenant.

Formalities of Assignment

Assignments of legal leases must always be by deed. In registered land, registration of the assignment is necessary for the transfer to take effect at law. Dealings in breach of covenant (for example, an assignment without landlord’s consent where such is required) will remain valid as between assignor and assignee, but the assignor will be in breach and may face claims for damages or forfeiture.

If the landlord refuses consent to assign or underlet, and this refusal is unreasonable, the recommended remedy is to seek a declaration from the court, rather than proceed with the transaction and risk a breach.

Covenants Restricting Dealings

Leases may contain absolute, qualified, or fully qualified covenants against assignment or underletting:

• Absolute covenant: Assignment or underletting is completely prohibited.
• Qualified covenant: Prohibited “without consent”, with no express qualification as to reasonableness. Under s19(1) LTA 1927, consent “shall not be unreasonably withheld”.
• Fully qualified covenant: Prohibited “without consent, such consent not to be unreasonably withheld or delayed”.

The law imposes further duties on landlords (especially in commercial tenancies) by requiring that decisions on consent be made within a reasonable time, with reasons given if refused (Landlord and Tenant Act 1988, s1). Consent must not be withheld on grounds unconnected to the landlord-tenant relationship (International Drilling Fluids), in order to control tenant mix (Moss Bros), or for anticipated breach of user covenant by assignee (Ashworth Frazer). Case law suggests that “reasonable time” is usually 28 days (Dong Bang Minerva), but facts may vary.

Alterations and Improvements

Lease covenants often restrict tenants’ ability to alter or improve leased premises. The law divides such covenants into:

Key Term: absolute covenant
A term in a lease absolutely prohibiting a specified act—such as any alteration or addition—without exception.

Key Term: qualified covenant
A term permitting an act (e.g., alteration, improvement) only with the landlord’s consent.

Key Term: fully qualified covenant
A covenant requiring landlord’s consent, and expressly stipulating that consent “is not to be unreasonably withheld.”

Statutory controls improve tenant protection, especially for improvements.

• Section 19(2) of Landlord and Tenant Act 1927: Upgrades a qualified covenant against alterations of improvement to a fully qualified one. The landlord’s consent “shall not be unreasonably withheld” for improvements (but not necessarily all alterations). “Improvement” is construed from the tenant’s position (Lambert v Woolworth & Co): an act that would improve the premises for that particular business, even if not for the landlord overall.
• Section 1 of the Landlord and Tenant Act 1988: Imposes a duty to deal with consent requests for alterations “within a reasonable time”, to give written reasons for withholding consent, and to ensure that any conditions imposed are reasonable.

Landlords cannot lawfully demand a fine or a premium in exchange for consenting to improvements. Reasonable conditions, however, are allowed to ensure that the landlord’s interest is protected (e.g., reinstatement at lease end, professional supervision, security for carrying out works).

Key Term: improvement
Any addition or change that, from the tenant’s position, improves their use or enjoyment of the premises—not necessarily an improvement for the landlord.

For non-improvement alterations (structural changes, external works), lease terms may remain absolute or qualified covenants with no statutory intervention.

Tenants making unpermitted alterations in breach may face forfeiture, claims for damages or obligations to reinstate the premises.

Compensation for Improvements: LTA 1927 s1

In certain business tenancies, where the tenant is entitled to remain in occupation or is entitled to a new lease, section 1 LTA 1927 allows application for compensation for certain improvements on the discontinuance of the tenancy. Strict procedures apply (such as notice of intention), and “improvements” are construed liberally. The improvement must add value to the premises (assessed for the tenant’s particular business), and compensation aims to reflect improvement in letting value unless the lease requires removal.

Worked Example 1.12

A tenant wishes to install energy-efficient plant and fixings requiring minor building works. The lease prohibits structural alterations but allows internal non-structural changes subject to landlord’s consent (not to be unreasonably withheld). The landlord refuses consent for the improvements without explanation.

Answer:
For improvements, the landlord cannot unreasonably withhold consent and must give written reasons for any refusal (LTA 1988). Tenant may be entitled to seek a declaration and/or compensation.

Worked Example 1.13

A tenant fitting a new shopfront (structural, external) in a building with a covenant against structural alterations seeks landlord’s consent. The landlord’s refusal is absolute, with no explanation.

Answer:
The landlord may refuse consent based on the absolute nature of the covenant as to structural, external works. However, if the works are improvements, and the covenant is only qualified, statutory rules upgrade it to fully qualified and refusal must not be unreasonable.

Types of Leasehold Improvements

Internal, non-structural works are often permitted by consent. Structural or external works are often absolutely prohibited. The distinction is essential: statutory rules upgrade only qualified covenants against “improvements” and not covenants against all “alterations”.

Conditions imposed on consent must be reasonable in all the circumstances and genuinely aimed at protecting the landlord’s interest in the property rather than extracting money or imposing arbitrary obstacles.

Remedies for Breach

Remedies for breach of alteration/improvement covenants include:

• Forfeiture (if the lease contains a forfeiture clause)
• Injunction (to prevent unauthorised alterations or require reinstatement)
• Damages (for loss in value or cost of reinstatement)
• Specific performance (in rare cases where it is practicable to supervise compliance; Rainbow Estates v Tokenhold).

If the lease contains a self-help clause (Jervis v Harris), landlords may enter, carry out remedial works themselves, and recover reasonable costs as a debt.

Underleases: Procedures, Constraints and Effects

The grant of an underlease is a common way for a tenant to “carve out” a new, shorter lease from their existing interest in the premises. In granting or taking an underlease, legal and practical steps must be followed to achieve an effective result:

• The term of the underlease must expire at least one day before the headlease.
• The underlease must not exhaust the grantor’s term (i.e., it leaves a reversion in the grantor).
• The underlease must not conflict with (and must generally duplicate) the obligations, restrictions, and user provisions of the headlease. If more restrictive, this does not invalidate it; if less restrictive, the undertenant risks action from the head tenant and, potentially, from the head landlord (especially if there are direct covenants).

Negotiation of an underlease will usually involve requirements to:

• Deduce title to both the headlease and, in many cases, the freehold; for underleases longer than 7 years, deduction of freehold and headlease title is generally required for registration with absolute leasehold title.
• Obtain and document any required superior landlord’s consent—usually in a formal licence to underlet. This may also create direct privity of contract between the head landlord and the undertenant in respect of specified obligations.
• Investigate title, raise commercial property standard enquiries, conduct pre-completion searches and ensure that SDLT/LTT liabilities are dealt with appropriately.
• Ensure correct execution, completion, apportionment of rent, payment of SDLT/LTT, and (where applicable) registration of the underlease at HM Land Registry (for leases over seven years or those otherwise registrable).

In practice, commercial underleases often mirror the terms of the headlease but will not (and cannot) grant the undertenant more rights or a longer term than the sub-landlord enjoys or can grant. The underlease automatically falls if the headlease is forfeited (subject to rights to apply for relief).

Worked Example 1.14

A tenant wishes to grant an underlease for six years out of a headlease with five years to run, with no break clause in the underlease. What is the legal position?

Answer:
The underlease is invalid as it purports to exceed the grantor’s interest; it will, as far as possible, operate as an assignment of the headlease, likely breaching alienation covenants if landlord’s consent has not been obtained.

Deduction of Title and Procedural Steps for Leases and Underleases

On the grant of any lease or underlease, the party taking the lease will need to investigate the grantor’s title. The requirements differ depending upon the length of lease, whether the reversion is registered, and whether the lease is new or an assignment.

For leases (or underleases) over seven years in duration (substantively registrable leases), deduction of the freehold reversionary title is usually required, and the title should be registered with absolute leasehold title where achievable, to avoid complications or imperfections in title.

For underleases, the undertenant will wish to see both the headlease (and any assignments over the last 15 years if unregistered), and, where necessary, the freehold. If the headlease is registered and held with absolute title, deduction of the freehold is not always strictly required, but often still sought in practice for due diligence reasons.

Where either the headlease or the freehold is mortgaged, the consents of relevant chargeholders may be needed before validly granting a lease/underlease.

Completion and post-completion steps include execution of deed, payment of SDLT/LTT (on both rent and premium), registration at HM Land Registry (for leases over 7 years), notification of grant to the superior landlords, and compliance with the covenants of the lease.

Key Term: deduction of title
The process by which the landlord or grantor shows to the tenant (or undertenant) the legal right to grant the lease or underlease, by production of evidence of title to the relevant estate.

Security of Tenure and Termination

Many types of business tenancies attract statutory security of tenure under the Landlord and Tenant Act 1954. Key points include:

• Security applies to most business tenancies (not licences, tenancies at will, or tenancies for less than 6 months without a renewal right).
• A fixed-term lease will not end automatically if the tenant “holds over” or statutory protection applies; instead, it continues as a “continuation tenancy” on the same terms unless or until properly terminated.
• A periodic tenancy will also attract security, unless specifically excluded.

Contracting out of the 1954 Act protection requires strict statutory procedures: the landlord must serve a prescribed warning notice, and the tenant make a declaration, all before the tenancy is granted or the tenant is contractually bound.

Statutory termination methods differ from common law. S25 notices (by landlords) must be served 6–12 months before the desired end date. S26 notices (by tenants) request a new tenancy. S27 and S24 deal with notice to quit and continuation tenancies. The landlord must demonstrate one or more of seven statutory grounds (s30) to successfully oppose renewal.

Where a lease ends by expiry, break, or valid forfeiture, but the tenant remains in occupation with the landlord’s consent, a new periodic tenancy may arise, potentially with protection (unless terms are clear that occupation is “at will”).

Tenants must comply with procedures and consider the timing of applications to renew or terminate to protect their interests. In all security of tenure contexts, “the holding” is the part of the property occupied for business purposes, and only the property so occupied is protected.

Residential Leases: Distinctions and Special Rules

Most of the above legal concepts apply broadly, but residential tenancies are subject to further controls (such as the Housing Act 1988 for assured and assured shorthold tenancies), statutory repairing obligations, rent increase procedures, and mandatory forms of notice for termination.

Residential underleases (subtenancies) must be carefully managed to avoid creating unauthorized tenancies or giving rise to statutory security beyond the landlord’s intention, particularly in relation to notice periods and succession entitlements. Landlords must be aware of statutory restrictions on alteration and improvement covenants which may apply beyond the lease terms themselves.

Remedies for Breach of Leasehold Covenants

If the tenant breaches a lease covenant—for example, by unauthorised assignment/underletting or by making alterations in breach of covenant—the landlord’s remedies may include:

• Forfeiture (subject to service of s146 notice for breaches other than rent, and compliance with the Leasehold Property (Repairs) Act 1938 if relevant)
• Action for debt or damages
• Commercial Rent Arrears Recovery (CRAR, for rent arrears in commercial premises meeting statutory criteria)
• Pursuing current or previous tenants or their guarantors, subject to notice requirements
• Exercise of self-help, if the lease permits (Jervis v Harris), generally for breaches of repair
• Injunction or specific performance (rare for covenants requiring continuing action, more common for prohibitive user or alienation covenants)

A s146 notice must describe the breach, require remedy (if capable of remedy), and demand compensation. Failure to comply with statutory requirements may invalidate the right to forfeit. In the case of repairing covenants in longer leases with 3 or more years to run, tenants may serve a counter-notice, limiting the landlord’s remedies under the Leasehold Property (Repairs) Act 1938.

Undertenants may seek relief from forfeiture if their interests are threatened by action taken against the superior tenant.

Terminations may also occur by mutual surrender or merger, where the leasehold and reversion join in one person and estate.

VAT, SDLT/LTT and Tax on Leases

Taxes must be considered when structuring leases and underleases. Lease premiums and rent may both be chargeable to SDLT (in England) or LTT (in Wales), and the net present value of rent over the lease term is often used for calculation purposes. Commercial landlords may “opt to tax”, rendering rent and/or sale price subject to VAT, especially in non-residential cases or for new commercial property (within 3 years of construction).

Key Term: net present value
The discounted value of a series of cash flows—in this context, used to calculate the total rent payable under a lease for tax purposes.

If VAT is chargeable, SDLT/LTT is payable on the VAT-inclusive price or rent. The contract must clearly state whether prices are “inclusive” or “exclusive” of VAT.

Summary

Short legal leases (of seven years or less) are overriding interests per LRA 2002, and bind third parties. Equitable leases must be protected by registration/notice or risk being lost to a purchaser for value without notice.

Tenancies at will create no continuing security of tenure. Periodic and fixed term tenancies may be continued by holding over and, in the absence of clear contrary intention, attract statutory protection if within the relevant regime (e.g., LTA 1954).

Assignment, underletting, and alteration rights depend on the precise drafting of lease covenants and the application of statutory upgrading and modification rules.

Key Point Checklist

This article has covered the following key knowledge points:

• The main options for the term of a lease include fixed, periodic (including contractual periodic), and tenancy at will, each with distinct legal features.
• Break clauses, rent review and renewal mechanisms, and reversionary leases (subject to the 21-year rule in LPA 1925 s149(3)) may be used to structure fixed-term leases.
• Legal leases require a deed if for over three years, and in registered land, leases over seven years must be registered. Short leases may still be legal under the parol lease exception (s54(2) LPA 1925).
• Equitable leases arise where there is a valid written contract, but legal formality (deed, registration) is missing; to secure priority, they must be protected by notice (in registered land) or by land charge (Class C(iv)) in unregistered land.
• Short legal leases (seven years or less) override registered dispositions; leases for longer periods must be registered.
• Privity of contract and estate regulate responsibility for covenants after assignment. Under the Landlord and Tenant (Covenants) Act 1995, outgoing tenants are released for “new” leases unless subject to an AGA.
• AGAs bind outgoing tenants for their immediate successors only, and section 17 notices are essential to recover “fixed charges” from former tenants or their guarantors, offering the prospect of an overriding lease.
• Underleases must be strictly for a shorter term than the head lease; they require superior landlord consent if demanded by the headlease, often via a licence to underlet, and may create direct privity of contract with the superior landlord.
• Assignments must be by deed and, for registered leases, completed by registration. There is no automatic release for landlords on assignment of the reversion.
• Alteration and improvement covenants are classified as absolute, qualified or fully qualified, with LTA 1927 s19(2) upgrading consent to “not to be unreasonably withheld” in many cases. LTA 1988 applies to the process for consent.
• The security of tenure position depends on statutory regime, and correct procedures must be followed to contract out, renew, or terminate business tenancies.
• Compensation and authorisation regimes for improvements may apply in business tenancies under the Landlord and Tenant Act 1927.

Key Terms and Concepts

• fixed term lease
• periodic tenancy
• contractual periodic tenancy
• tenancy at will
• legal lease
• parol lease
• equitable lease
• privity of contract
• privity of estate
• Authorised Guarantee Agreement (AGA)
• section 17 notice
• overriding lease
• break clause
• reversionary lease
• underlease
• deduction of title
• absolute covenant
• qualified covenant
• fully qualified covenant
• improvement
• net present value