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

Learning Outcomes

By the end of this article, you will be able to outline the core procedural steps required to grant a lease of real estate in England and Wales. You will understand how instructions are taken, heads of terms agreed, draft documentation negotiated, completion is effected, and registration made. You will be able to identify key legal formalities, key terms, and practical checkpoints essential for advising or documenting a new lease in legal practice.

SQE2 Syllabus

For SQE2, you are required to understand the practical steps and key legal requirements involved in the grant of a lease. In your revision, focus on:

• Taking instructions from client landlords or tenants and gathering information for a proposed lease
• Preparation and negotiation of draft heads of terms
• Drafting and agreeing the lease contract and any necessary ancillary documents
• Ensuring compliance with legal formalities for valid grant and execution
• Arranging for completion and effective handover
• Post-completion, including registration and statutory compliance

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 is essential to create a valid, legally enforceable leasehold interest and to ensure both parties’ rights are protected. A well-structured approach minimises disputes and helps the leaseholder secure occupancy from the intended start date. For solicitors, demonstrating command of these steps is required in SQE2 written and practical skills assessments.

Taking Instructions and Confirming Main Terms

The initial stage is to understand the parties’ commercial intentions and fact-find. Clear instructions provide the basis for a transaction progressing smoothly.

Key Term: heads of terms
A non-binding summary of the principal points agreed between the parties for a proposed lease, usually in written form.

At this stage, you must clarify:

• the identity of the landlord and tenant,
• property address and description,
• intended use by the tenant,
• proposed lease length (“term”),
• rent and any rent-free periods,
• alterations or repair obligations,
• provisions for assignment and subletting,
• any premiums, deposits, VAT, or service charges,
• requirements for statutory compliance (e.g., Energy Performance Certificate, planning permission).

Negotiation and Drafting of Lease Document

Once heads of terms are agreed, the next step is to prepare the draft lease (often the landlord’s solicitor leads), alongside any necessary ancillary documents (such as rent deposit deeds or licences to alter).

Key Term: draft lease
The initial written document—often based on a precedent or template—reflecting negotiated deal terms, sent for review, negotiation, and amendment.

Negotiations between the parties’ legal representatives refine the draft lease and resolve issues such as break clauses, repair liability, and insurance obligations. Keep a record of agreed changes and consider including an agreed final draft in the contract, if formal contract exchange is required.

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 draft lease and seek the incoming tenant’s details (company information if a company, financial references), and agreement to heads of terms. Also prepare a template rent deposit deed if required, and outline fit-out and statutory compliance requirements and likely necessary licences (planning, landlord’s consent). You should expect the tenant’s solicitor to raise comments on the draft, negotiate special conditions (such as works, VAT, alterations), and provide proof of identity and funds.

Execution and Formalities

The lease must be executed as a deed to be capable of creating a legal estate. This requires witnessing of the parties’ signatures and satisfies Law of Property Act formalities.

Key Term: execution as a deed
The completion of a document (such as a lease) with the required signing and witnessing to make it legally valid and enforceable.

Tenancy for a fixed term over three years requires a deed. Any ancillary deeds (such as an agreement to grant a lease where conditions precedent remain) must also comply with deed formalities.

Key Term: completion
The point in the transaction where parties sign the lease, any money is paid, and—assuming pre-conditions are met—occupation passes to the tenant.

Completion and Handover

At completion:

• the executed lease is dated,
• any required sums (such as rent in advance or deposit) are paid,
• counterpart leases are often exchanged (each side holds a signed original or duplicate copy),
• keys or access codes are handed to the tenant,
• the landlord’s solicitor typically issues a completion statement recording monies paid and outstanding.

Occupation by the tenant should only begin once completion has formally occurred. If a pre-lease agreement (e.g., agreement for lease) was necessary—commonly where works or third-party consents are needed—completion of the lease is usually conditional on satisfaction of the agreed pre-conditions.

Post-completion Steps: Registration and Compliance

If the lease term is over 7 years, legal registration is mandatory. Failure to register the lease at HM Land Registry means the tenant only holds an equitable lease and may risk losing protection to a bona fide purchaser.

Key Term: registration
Formal step of submitting a prescribed application, with a certified copy of the executed lease, to HM Land Registry for entry of the leasehold title.

Other required steps may include:

• payment of Stamp Duty Land Tax or Land Transaction Tax (with submission of the appropriate return),
• notification or consent of any superior landlord or mortgagee,
• service of any required statutory notice,
• entry of any notices or restrictions for equitable interests (such as sub-leases or rights of way benefiting the leased premises).

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 if the lease exceeds 7 years and is unregistered, the tenant only holds an equitable interest; this would not bind a third party unless registered. You must submit an application for registration with the lease, SDLT certificate, and necessary consents; until the application is completed, the tenant cannot validly assign as legal titleholder.

Statutory Notices and Licences

Depending on circumstances, you may need to obtain planning consents, comply with licensing for the premises’ use, or ensure that landlord’s certificates (such as Energy Performance Certificates or Asbestos Reports) are provided. Document all consents and licences on completion.

Key Term: landlord’s consent
A formal written approval of a specific tenant request (e.g., assignment, alteration, works) required under the lease terms, often evidenced by a licence deed.

Exam Warning

For SQE2, ensure you understand the risk if a purported legal lease is not registered: legal title does not pass and only an equitable lease arises. This may prejudice the tenant’s protection in case of future unregistered disposition.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The requirement for heads of terms and accurate instructions at the outset of a lease grant.
• Drafting, negotiation, and execution of the lease and any ancillary agreements.
• Mandatory use of a deed for creation of a legal lease (other than short-term parol leases).
• Completion: exchange of executed leases, payment of monies, handover of possession.
• Immediate post-completion steps: registration (where required), payment of SDLT, notification to other interested parties, and compliance with licensing or statutory obligations.

Key Terms and Concepts

• heads of terms
• draft lease
• execution as a deed
• completion
• registration
• landlord’s consent