Leases and underleases - Structure and content of a lease

Learning Outcomes

After reading this article, you will be able to identify the essential elements of a lease and underlease, explain the main operative terms and covenants, distinguish between types of leasehold covenants, and apply the rules on rent review, assignment, and forfeiture. You will also understand the statutory controls affecting lease terms and be able to advise on the practical drafting and interpretation of leases for SQE1.

SQE1 Syllabus

For SQE1, you are required to understand the structure and content of leases and underleases, including the main operative terms, covenants, and statutory controls. Focus your revision on:

• The essential elements and structure of a lease and underlease
• The main operative terms: parties, property, term, rent, and covenants
• Types of leasehold covenants (absolute, qualified, fully qualified)
• Repair, insurance, user, alterations, and alienation covenants
• Rent review provisions and the concept of open market rent review
• Statutory controls on lease terms (e.g., Landlord and Tenant Acts)
• The distinction between leases and underleases
• The requirements for a valid underlease and compliance with the headlease

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 minimum essential elements required for a valid lease?
2. What is the difference between an absolute, qualified, and fully qualified covenant in a lease?
3. Which statutory provision implies that landlord’s consent to assignment or underletting must not be unreasonably withheld?
4. What is the effect if an underlease is granted for a term equal to or longer than the headlease?

Introduction

A lease is a legal estate granting exclusive possession of land for a defined period, subject to agreed terms. Underleases (subleases) are leases granted out of an existing lease, creating a further layer of landlord and tenant relationships. For SQE1, you must be able to identify the structure and content of leases and underleases, the main operative terms, and the key covenants and statutory controls that affect their drafting and enforceability.

Structure of a Lease

A typical lease is structured to set out the relationship between landlord and tenant, the property demised, the term, the rent, and the rights and obligations of both parties. Understanding the structure is essential for both drafting and interpreting leases in practice.

Parties and Property

The lease must clearly identify the landlord (lessor) and tenant (lessee), including their full legal names and addresses. The property demised should be described precisely, often by reference to a plan, to avoid disputes about the extent of the premises.

Key Term: lease
A legal estate granting exclusive possession of land for a fixed or periodic term, subject to agreed terms and covenants.

Term

The lease must specify the commencement date and the duration of the term. This may be a fixed term (e.g., 10 years) or a periodic tenancy (e.g., month-to-month). The term is fundamental, as it determines when the lease will expire and whether statutory protections may apply.

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

Rent

The lease will set out the rent payable, the frequency of payment (e.g., monthly, quarterly), and any provisions for review or increase. Rent is usually payable in advance, and the lease may also reserve other sums as rent (such as insurance rent or service charge).

Covenants

Covenants are promises made by the landlord or tenant. They are central to the lease and regulate the use, repair, and enjoyment of the property.

Types of Leasehold Covenants

Key Term: absolute covenant
A covenant that absolutely prohibits the tenant from doing a specified act, with no exceptions.

Key Term: qualified covenant
A covenant that prohibits the tenant from doing a specified act without the landlord’s prior consent.

Key Term: fully qualified covenant
A covenant that prohibits the tenant from doing a specified act without the landlord’s prior consent, and provides that consent must not be unreasonably withheld.

Common Tenant Covenants

• Repair: The tenant may be required to keep the premises in repair, sometimes limited by a schedule of condition.
• Insurance: The tenant may covenant to pay the insurance rent or, in some cases, to insure the premises directly.
• User: The lease will specify the permitted use of the premises and may prohibit changes of use.
• Alterations: The lease may restrict alterations, often by an absolute or qualified covenant.
• Alienation: The lease may restrict assignment or underletting, usually by a qualified or fully qualified covenant.

Common Landlord Covenants

• Quiet enjoyment: The landlord covenants not to interfere with the tenant’s lawful use of the premises.
• Insurance and repair: In multi-let buildings, the landlord may covenant to insure and repair the structure and recover costs via a service charge.

Rent Review

Many commercial leases include a rent review clause, allowing the rent to be adjusted at intervals (typically every 3–5 years). The most common method is open market rent review.

Key Term: open market rent review
A mechanism for adjusting rent to the current market value for similar premises, based on specified assumptions and disregards.

Key Term: assumptions and disregards
Provisions in a rent review clause that direct the valuer to assume or disregard certain facts when determining the open market rent.

Assignment and Underletting

The lease will set out whether and how the tenant may assign (transfer) the lease or grant an underlease. Statutory controls may apply.

Key Term: alienation
The process by which a tenant disposes of their leasehold interest, by assignment or underletting.

Statutory Controls

Section 19(1)(a) of the Landlord and Tenant Act 1927 upgrades qualified covenants against assignment or underletting to fully qualified covenants, so that landlord’s consent must not be unreasonably withheld. The Landlord and Tenant Act 1988 imposes further duties on landlords to respond to applications for consent within a reasonable time and to give reasons for refusal.

Forfeiture

A forfeiture clause allows the landlord to terminate the lease early if the tenant breaches certain covenants (e.g., non-payment of rent). Statutory procedures must be followed, and tenants may apply for relief from forfeiture.

Key Term: forfeiture
The landlord’s right to terminate the lease early due to tenant default, subject to statutory procedures and possible relief for the tenant.

Underleases

An underlease is a lease granted by a tenant out of their own leasehold interest. The underlease must be for a term less than the residue of the headlease and must comply with the terms of the headlease. The tenant remains liable to the head landlord for performance of the headlease covenants.

Requirements for a Valid Underlease

• The underlease must be for a term less than the residue of the headlease.
• The underlease must not conflict with the terms of the headlease.
• The tenant must usually obtain the head landlord’s consent before granting an underlease, if required by the headlease.

Worked Example 1.1

A tenant holds a 15-year lease and wishes to grant a 10-year underlease of the whole premises. The headlease prohibits underletting without landlord’s consent, and the tenant does not seek consent.

Question: What is the legal position?

Answer: The underlease is valid only if it is for a term less than the residue of the headlease. However, granting the underlease without landlord’s consent is a breach of covenant, and the landlord may seek to forfeit the headlease or claim damages.

Worked Example 1.2

A lease contains a qualified covenant against assignment. The tenant applies for consent to assign, but the landlord refuses without giving reasons.

Question: Is the landlord’s refusal lawful?

Answer: No. By statute, the landlord must not unreasonably withhold consent to assignment. The landlord must give reasons for refusal, and failure to do so may entitle the tenant to damages.

Worked Example 1.3

A commercial lease includes an open market rent review every five years, with assumptions that the premises are in good repair and disregards for tenant’s improvements.

Question: Why are assumptions and disregards included?

Answer: Assumptions and disregards ensure the rent review reflects the true market value, unaffected by the tenant’s breaches or improvements, and avoids unfairly increasing or decreasing the rent.

Exam Warning

When drafting or interpreting lease covenants, always check for statutory modifications. Many qualified covenants are upgraded by statute, and landlords must act reasonably and promptly when considering applications for consent.

Revision Tip

For SQE1, be able to identify the difference between absolute, qualified, and fully qualified covenants, and know which statutory provisions apply to leasehold covenants.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The essential structure and content of leases and underleases
• The main operative terms: parties, property, term, rent, and covenants
• Types of leasehold covenants and their statutory modification
• The function and drafting of repair, insurance, user, alterations, and alienation covenants
• Rent review provisions, including open market rent review and the use of assumptions and disregards
• Statutory controls on assignment and underletting
• The requirements for a valid underlease and compliance with the headlease
• The purpose and operation of forfeiture clauses

Key Terms and Concepts

• lease
• underlease
• absolute covenant
• qualified covenant
• fully qualified covenant
• open market rent review
• assumptions and disregards
• alienation
• forfeiture