Leasehold real estate law and practice - Procedural steps fo...

Learning Outcomes

This article sets out the procedural steps for the grant of a lease in England and Wales, including:

• End-to-end workflow from initial instructions to completion and post-completion protection of the leasehold estate
• Identifying legal and equitable leasehold and related proprietary interests, and the formal and substantive requirements for validity
• Taking and confirming detailed client instructions (identity, objectives, finance, and proposed use) in compliance with regulatory obligations
• Deducing and verifying the landlord’s title for registered and unregistered land, and addressing superior titles and consents
• Drafting and negotiating heads of terms in line with RICS standards, commercial requirements, and risk management
• Preparing, negotiating, and finalising the lease and ancillary documents (guarantees, rent deposits, licences, schedules of condition)
• Executing the lease as a deed, meeting prescribed clauses, signing and witnessing rules, and understanding triggers for registration
• Practical arrangements for exchange, completion, undertakings, funds flow, and handover of possession and access
• Post-completion steps: SDLT/LTT filing, Land Registry applications, notices on superior titles, and statutory notifications
• Consequences of non-registration and defective formalities, including when only an equitable lease arises
• Enforcement, transfer, and termination after grant, focusing on covenants, continuing liabilities, and remedies
• Key risk points, procedural pitfalls, and strategies to preserve client interests

SQE2 Syllabus

For SQE2, you are required to understand the procedural steps for granting a lease, covering client instructions, title verification, drafting, execution, completion, and post-completion registration and compliance, with a focus on the following syllabus points:

• Taking instructions from landlord or tenant clients, correctly identifying the parties, verifying details, and assessing commercial objectives.
• Deducing, investigating, and verifying the landlord’s and any superior title, including practical steps for both registered and unregistered land, considering the requirements of third-party consents (e.g. lender or superior landlord).
• Drafting, negotiating, and agreeing both heads of terms and the lease (with supporting documentation as required by the parties and circumstances).
• Complying with legal formalities for creation of a legal leasehold interest, including the requirements for valid deeds, statutory prescribed clauses, and the parties’ proper execution and witnessing.
• Managing pre-completion and completion, including the exchange of documentation, finance and undertakings, agreeing practical arrangements for possession and occupation, and handling counterpart leases.
• Effecting and evidencing completion: attestation, dating, undertaking exchange of funds, and arranging physical handover (keys, access).
• Completing post-completion formalities, including submitting SDLT/LTT returns, paying tax, making applications at HM Land Registry for leases over seven years (with correct documentation), serving relevant notices, and ensuring compliance with other statutory or leasehold requirements (such as EPC, Asbestos reports, or planning).
• Understanding registration consequences, including the legal distinction between leases that are registered, noted, or merely overriding interests, the impact of non-registration, and how equitable leases arise if registration formalities are not met.
• Advising on the effect of covenants, assignment, underletting, and other disposals, and the practical and legal risks associated with defective execution, failed registration, or breach of statutory formalities.
• Engaging with remedies and enforcement options for both landlord and tenant, including those relating to leasehold covenants and costs, and understanding the practical steps available for disputes or rectification.

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. Why is it important for the grant of a lease to be made by deed?
2. What are ‘heads of terms’ and why are they used at the outset of negotiating a commercial lease?
3. What post-completion legal steps are required when a lease of more than 7 years is granted?
4. In practice, what is the consequence if a lease intended to be a legal lease is executed but not registered?

Introduction

Procedural accuracy in granting a lease underpins the creation of a legally effective leasehold interest, ensuring clarity of rights, obligations, and remedies available to both landlord and tenant. The process is shaped by both statutory requirements (such as those in the Law of Property Act 1925 and the Land Registration Act 2002) and practical estate management considerations. A systematic and reliable approach to gathering instructions, verifying title and consent, agreeing terms, and progressing through to valid execution and registration reduces risk for all parties and is essential for the diligent property practitioner.

Key Term: legal lease
A proprietary interest or estate in land, created for a fixed or periodic term, conferring exclusive possession on the tenant, compliant with statutory requirements for form and registration.

Taking Instructions and Confirming Main Terms

The process commences with clear, direct instructions from the client—whether landlord or tenant—covering their commercial aims and all relevant client-specific circumstances. It is essential to confirm:

• Full details and identities of each party, including verification steps for anti-money laundering compliance and ensuring legal capacity to transact (e.g. confirming company status for corporate landlords or tenants).
• The property’s precise identification, including boundaries, description, current and historic uses, and any fixtures to be included.
• The intended use by the tenant, and whether any changes to planning use class or alterations to the premises are proposed or required.
• Lease term, commencement date, and break options, assessing if a fixed, periodic, or at-will tenancy is sought, and if any options to renew or extend are to be incorporated.
• The financial terms: rent (including amount, frequency and annual or periodic reviews), deposit, premiums, service charges, VAT position, and apportionments.
• Repair, maintenance, and insurance obligations: particularly whether the arrangement is ‘full repairing and insuring’ (FRI), and responsibility for compliance with statutory obligations such as fire safety or energy efficiency.
• Alienation, assignment, and underletting provisions: the extent to which the tenant will have freedom to dispose of or share their interest, and associated restrictions or requirements for landlord consent.
• Requirements for third-party consents, including lender, head lessor, or planning authority approval.
• Any specific licensing, regulatory, or statutory requirements for the proposed use (including confirmation of an Energy Performance Certificate, Asbestos Register, fire risk assessments, and evidence of building regulation or planning consent).
• Preliminary due diligence on title (including checking the seller or prospective landlord’s capacity to grant a lease, and reviewing any headlease or restrictive covenants limiting the grant).
• Assessment of the ‘strength of covenant’ of the tenant, and whether guarantees or rental deposits are required to mitigate financial risk to the landlord.

At this stage, the key commercial terms are usually captured in a written document known as heads of terms.

Key Term: heads of terms
A non-binding summary of the fundamental lease terms that have been agreed in principle by both parties, designed to structure and expedite the drafting and negotiation of the lease.

The heads of terms should be as detailed as is commercially practicable, reflecting not only term, rent, and repairing obligations, but also break clauses, guarantor requirements, rent-free or incentive periods, and schedules of condition if applicable (particularly for older or unusual buildings).

Negotiation and Drafting of Lease Document

Once heads of terms are settled, the drafting phase begins. The landlord’s solicitor typically produces the first draft lease, based on an appropriate precedent and tailored to the heads of terms while conforming to professional standards (including, for commercial property, the RICS Code for Leasing Business Premises 2019). The draft should be carefully checked against requirements for prescribed clauses (in leases granted on or after 19 June 2006 where the landlord’s title is registered and the lease is substantively registrable) and ensure that all parties’ interests are properly reflected.

Key Term: draft lease
The initial written version of the proposed lease, reflecting and implementing agreed terms, which is the subject of negotiation and amendment between the parties’ solicitors.

During negotiation, both sides raise amendments to address concerns or clarify ambiguous drafting. Key issues often debated include:

• The operation, triggers, and consequences of break rights for landlord or tenant.
• The breadth of tenant repair/decoration responsibilities and the limitations to those liabilities, such as schedules of condition for older buildings or exclusions for damage by insured risks.
• Whether the premises are to be let with a service charge regime, and—if so—the terms for its calculation and enforcement.
• Inclusion of rent review provisions: open market, fixed increases, index-linked, or turnover-based reviews, with a clear mechanism for determination and any 'upwards only' limitations.
• Covenants restricting assignment, underletting, or sharing possession—including conditions on the landlord’s consent, and any need for Authorised Guarantee Agreements (AGAs) as a precondition for assignment (especially in post-1995 leases).
• Control of alterations and changes of use, including licensing mechanisms and the circumstances in which landlord’s consent is required (either qualified or absolute), and procedures for landlord’s refusal or delay in giving consent.
• Dealing with statutory compliance, including Health and Safety, Disability Discrimination, asbestos, and environmental law obligations, and identifying which party will bear the risk and responsibility for ongoing compliance.

It is also essential to address any funding or lender requirements (including representation warranties and form of title), and to ensure that all interested parties—such as a superior landlord or lender—receive draft copies for approval if their consent is needed.

Where required, the parties may choose to enter into an agreement for lease—a contract to enter a lease at a future date, usually contingent on completion of works, securing of planning approval, vacant possession, or satisfaction of other conditions precedent.

Key Term: agreement for lease
A binding contract between landlord and tenant obliging each party, subject to any conditions precedent, to enter the lease on the agreed terms at a specified future date.

Worked Example 1.1

A landlord instructs you to grant a 15-year business lease over its retail premises to an incoming tenant. The heads of terms provide for a 10-year break option, full repairing obligations, rent reviews every 5 years, and tenant fit-out works. What documents and information must you prepare, and what will you need from the tenant’s solicitor before completion?

Answer:
You must prepare a detailed draft lease incorporating all heads of terms, ensure all prescribed clauses are included, and address the 10-year break, FRI provisions, and rent review mechanism. Draft or arrange for required ancillary documents: a rent deposit deed (if required), any guarantee or AGA, and licences for fit-out works, alterations, or assignment. Require confirmation of tenant identity and covenant strength (referencing company accounts or references as needed), all necessary third-party consents, and up-to-date statutory certificates (EPC, asbestos). The tenant’s solicitor will negotiate and seek clarification or amendments, check title and statutory compliance, obtain client funds, and ensure any lender approves the arrangements before signing.

Execution and Formalities

For the grant of a legal lease, deed execution is required for any lease exceeding three years or not taking immediate effect in possession (s. 52 Law of Property Act 1925). The deed must be clearly stated as such, properly signed by the parties and, for individuals, witnessed in accordance with statutory requirements. Execution by companies must comply with s. 44 Companies Act 2006 (either two authorised signatories or one in the presence of a witness).

Key Term: execution as a deed
The process of validating a legal document through correct signature, witnessing, and (where relevant) sealing, so as to comply with statutory formalities and effect a binding legal instrument.

Where conditions precedent remain to be fulfilled, the parties may at this stage enter into an agreement to grant the lease at a future date, conditional on those requirements.

If superior landlord or lender consent is needed, this must be procured (and evidenced in writing) before execution. Where relevant, deeds of guarantee, rent deposits, or side letters concerning rent concessions must also be signed and engrossed as deeds.

Key Term: completion
The moment at which all required documents are correctly executed, funds are accounted for, consents obtained, and—if applicable—the tenant is given physical access to the premises. This may involve simultaneous or sequential exchange and completion steps.

Once all documents are properly executed and dated, and preconditions met, solicitors typically exchange counterparts—each side retains an original signed lease. The completion statement should set out all sums due (including advance rent, deposit, and apportionments) and receipts delivered and received. The handover must also include practical arrangements for giving keys, codes, and other required access.

On completion, practitioners must ensure compliance with any undertakings—particularly for redemption of pre-existing charges, notification to superior landlord, or transfer of operational services (e.g. power or alarm monitoring).

Occupation should not begin until completion has been effected (and, where an agreement for lease existed, until all conditions have been satisfied).

Key Term: counterpart lease
A duplicate original of the lease executed by or on behalf of each party, enabling each side to retain an original, fully executed deed.

Completion and Handover

On the day of completion, the following must occur:

• The lease and all ancillary agreements are fully executed as deeds (including counterpart execution).
• The lease is dated and funds are transferred (including payment of rent in advance, deposits, and VAT where applicable).
• Keys or other means of access are released to the tenant.
• The tenant inspects and takes possession, confirming the property’s compliance with agreed standards, any schedules of condition, or tenant fit-out arrangements.
• The landlord’s solicitor provides a completion statement confirming all sums paid and retained.
• Statutory and regulatory documentation (such as Energy Performance Certificate, Asbestos Register, planning consents, building regulation certificates, and insurance details) are supplied where required.
• Where an agreement for lease was used, completion only occurs when all conditions precedent (such as grant of planning, completion of works, or vacant possession) have been fulfilled, as certified by both parties’ solicitors.

If either party is a company, or the lease involves complex title structures or subordinate tenancies (e.g. underleases), practitioners must ensure compliance with all relevant company law, headlease, and superior landlord requirements, including the provision and registration of any notices, restrictions, or consents.

Key Term: engrossment
The final, agreed, and ‘clean’ version of a deed or instrument, fully incorporating all negotiated amendments, to be executed and dated at completion.

Post-completion Steps: Registration and Compliance

Following completion, the next phase is critical for ensuring the leasehold interest is properly protected, registrable, and enforceable. The landlord or tenant’s solicitor (according to the terms of the deal) is responsible for:

• Calculating and settling SDLT or, in Wales, LTT, including filing the return and submitting payment within the statutory deadline (currently 14 days post-completion for SDLT).
• Making or arranging the application for registration of the lease at HM Land Registry (if over seven years, or if the lease is for between three and seven years but contains one or more provision requiring registration, e.g. a right to renew or is a reversionary lease).
  • The application must include the certified copy of the lease, appropriate prescribed forms (usually AP1), consent to registration where appropriate, the SDLT5 or LTT certificate, proof of discharge of any charges (if applicable), and company authorisations as necessary.
  • Any accompanying deeds (e.g., AGAs, rent deposit deeds, or licences to assign/underlet) should also be registered as required.
  • For registered land, prescribed clauses must precede the lease text if registration is required.
• Notifying the superior landlord or head lessor and—if relevant—applying for a notice to be entered on their title to identify the existence of the lease (for example, the grant of an underlease will typically need to be noted on the head lease title).
• Ensuring any new or continuing restrictions are noted on the leasehold title where appropriate (such as Form A restrictions to protect co-ownership of equitable interests).
• Notifying and serving copies of the completed lease to all relevant parties in accordance with the lease covenants (such as lenders or superior freeholders).

Key Term: registration
The process of making a leasehold interest effective against the world by registering it as a title at HM Land Registry, or by entering a notice (or—where required—restriction) on the superior title, in the correct form and within the statutory timeframe.

For leases of 7 years or less, which do not have to be registered and instead operate as overriding interests, the lease should be either retained by the landlord and tenant or, if required, noted by way of notice on the register of the superior title.

Key Term: equitable lease
A lease granted by an agreement or arrangement that does not fulfil all the requirements for the creation of a legal lease, but which equity will regard as enforceable, for example, because there is a valid contract for lease but a deficiency in deed formality or registration.

If registration is required but is not achieved within the statutory period, the lease will only take effect as an equitable lease. This can expose the tenant to risk from subsequent registered dispositions and may affect their ability to assign or underlet.

• Notices of assignment, underletting, or other disposals should be served or registered as specified in the lease, and appropriate consents should be obtained for any intended future transfer or subletting.
• Where post-completion defect or error is discovered (such as a misdescription of boundaries or parties), an application for rectification may be needed, alongside any supplemental or confirmatory deeds.

In addition, ensure all relevant regulatory and licensing obligations are complied with (planning, building regulations, statutory safety checks, disability compliance), and retain and hand over all warranties, guarantees, and indemnities affecting the premises.

Key Term: notice (in property law)
An entry made on the register to protect a third-party interest (such as a lease or restrictive covenant), ensuring it is binding on future purchasers.

Worked Example 1.2

You act for a tenant who is now in possession after signing a 10-year lease. The tenant discovers that no application was made to the Land Registry and is about to assign the lease. What advice should you give about registration?

Answer:
Advise that for a lease exceeding 7 years, registration at HM Land Registry is compulsory to confer legal status. As the lease is not yet registered, the tenant holds only an equitable lease, which cannot be legally assigned; any purported assignment would not be effective at law and would risk being unenforceable against a third party. Immediate steps must be taken to submit a registration application with the original lease, SDLT receipt, requisite forms, and any necessary consents. The assignment cannot validly complete until the lease is registered and the tenant is the legal owner.

Statutory Notices and Licences

Depending on the facts, additional statutory consents or ancillary licences may be required:

• Planning or building regulation consent for alterations, changes of use, or occupation (failure to secure these can result in enforcement action, invalidate the lease, or entitle the landlord to forfeit).
• Landlord’s consent, where required under the lease, for alterations, underletting, or assignment. This must be in writing, and may take the form of a formal licence depending on the lease’s terms. Consent must not be unreasonably withheld or delayed where a fully qualified covenant applies.
• Energy Performance Certificates, Asbestos Reports, and Gas or Electrical Safety Certificates, must be provided in accordance with applicable legislation and lease terms, particularly for commercial premises.
• Notices to mortgagees or head landlords.
• Service of notice where required by the lease or by statute (e.g. Landlord and Tenant Act 1954 notices in relation to business tenancies, or under the Leasehold Property (Repairs) Act 1938).

Key Term: landlord’s consent
Written permission issued by a landlord, typically as a formal licence, authorising a tenant to undertake an act that would otherwise breach a covenant, such as assignment, subletting, or making alterations.

Further, where licences are necessary (to alter, sublet, assign, or change use), these are usually executed as deeds and tailored to the precise transaction. They often impose conditions and may require undertakings, guarantees, or rent deposits.

Worked Example 1.3

A tenant occupying a ground floor retail unit wants to create a new opening in the structural wall, requiring significant building work. The lease requires landlord’s written consent for alterations. What steps should be taken?

Answer:
The tenant should make a formal written application to the landlord, providing all necessary details, plans, and specifications. The landlord is obliged to deal with the request within a reasonable time and, in the case of a qualified covenant, not to withhold consent unreasonably. The landlord may grant a licence to alter, specifying required works, permissions, and procedures for execution. If the lease requires, the landlord can set conditions (for example, requiring reinstatement at lease end, insurance, or payment of the landlord’s costs).

Key Term: licence to alter
A formal deed conferring the landlord’s consent for the tenant to alter the premises, usually detailed and conditional.

Ongoing Obligations and Enforcement

After grant and completion, parties must continue to observe all obligations under the lease—including repair, payment, insurance, user covenants, and all statutory duties. Tenants should closely monitor time-based obligations such as rent and review dates, periodic statutory or insurance-related obligations, and notifying the landlord of any issues or events relevant to the tenancy.

Both landlords and tenants must be mindful of potential future assignments, underlettings, or other dispositions, ensuring compliance with the lease covenants and relevant statutes (e.g., Landlord and Tenant (Covenants) Act 1995) as to privity of contract, AGAs, and liability for future breaches.

The parties must maintain complete records of all documents, consents, notices, warranties, and correspondence.

Potential Pitfalls and Remedies

If statutory or contractual formalities are not followed, significant risks arise. An unregistered lease over 7 years exposes the tenant to loss of legal rights; the landlord risks enforcement difficulty and defective title. A lease not made by deed (where required) is ineffective as a legal lease, and only equity may intervene. Failure to obtain necessary consents or comply with licences can lead to claims of breach or forfeiture.

If rent or other sums are not paid, or there is a breach of covenants (such as repairing, user, or alienation covenants), the landlord may take steps to forfeit the lease or use remedies such as Commercial Rent Arrears Recovery (CRAR), debt proceedings, self-help (e.g., Jervis v Harris style repairs and cost recovery), or claims against a guarantor or under a rent deposit.

Key Term: forfeiture
The landlord’s right, under a properly reserved clause, to re-enter and terminate the lease for tenant default (such as non-payment or breach), subject to statutory restrictions and the tenant’s potential right to relief.

If a tenant seeks relief from forfeiture or seeks to transfer or assign the lease after a breach or with a defect, legal advice should be sought to ensure statutory procedures and any additional requirements for consent, notices, and remedial steps are fully addressed.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The importance of accurately taking instructions and confirming all commercial, financial, and statutory particulars at the outset.
• The preparation, negotiation, and agreement of heads of terms as the basis for effective lease negotiation and drafting.
• The main content and structure of lease documentation, management of ancillary documents, and key terms such as break options, repair, insurance, alienation, and guarantees.
• The necessity for compliance with deed formalities for the creation of legal estates, including correct execution, witnessing, and any prescribed clauses.
• The procedures for successful completion, including exchange and handover, physical access, and confirmation of all monetary and documentary obligations.
• Post-completion formalities, including payment of SDLT or LTT, application for registration at HM Land Registry (for leases over seven years), and notification of relevant parties.
• Statutory requirements for valid leases, including planning permission, building regulation approval, EPC provision, and discharge of all further regulatory obligations.
• Registration requirements, implications of non-registration, and practical consequences, including the creation of merely equitable interests where formalities are not met.
• The continuing obligations on both parties for compliance with lease covenants and statutory duties, and potential remedies in case of breach or non-compliance.

Key Terms and Concepts

• legal lease
• heads of terms
• draft lease
• agreement for lease
• execution as a deed
• completion
• counterpart lease
• engrossment
• registration
• equitable lease
• notice (in property law)
• landlord’s consent
• licence to alter
• forfeiture