New Requirements for Commercial Leases

by Tony Lake

Landlords, tenants and their advisers must take note of important changes affecting commercial leases granted after 18 June 2006.  New rules have introduced “prescribed clauses leases”.  These clauses are a set of standard clauses containing certain key information about the lease and must be set out at the front of the document.

Which leases are affected?

There are very limited exceptions but generally commercial and residential leases granted for a term of more than seven years are now subject to compulsory registration and the requirement to contain the prescribed clauses.

Time Scale and Rejection of non-prescribed clauses leases

Until 2003 many leases did not need to be registered at the Land Registry.  The Land Registration Act 2002 changed that by requiring the compulsory registration of many more leases.  This has resulted in the Land Registry having to deal with a considerable number of new applications.  Land Registry staff must locate particular information from each lease to complete the registers and this information needs to be extracted from the lease itself.  An average lease can run up to 80 pages in length.  Extracting the relevant information can be fairly time-consuming bearing in mind that the location of that information will vary from one lease to another.  The prescribed clauses will therefore contain the information that the Land Registry needs to complete registration efficiently. 

With effect from 19 June 2006 the Land Registry will simply reject a lease dated after 18 June if it is presented for registration without the prescribed clauses at the front of the document.  The Land Registry will not read the main body of the lease and will instead rely upon the information given in the prescribed clauses.  Therefore, it will be crucial that the information given in the prescribed clauses does not conflict with the main body of the lease itself and that the information given is accurate.

The Prescribed Clauses

Information (as applicable) to be included in the prescribed clauses is as follows:

* Date of lease

* Names and addresses of all the parties to the lease.

* Description of the property.   If the lease relates to part only of a registered title (which is often the case) then a plan must be produced that complies with Land Registry rules.  This usually involves the need to have the plan professionally drawn.

* Statements required by certain statutes, for example in the case of leases by or to charities.

* Length of the term granted by the lease.

* The amount of any premium paid for the grant of the lease including details of the amount of any VAT paid.

* Restrictions upon the sale, transfer, assignment, underletting or other dealings with the property.

* Tenant’s option to renew the lease or acquire the landlord’s interest. 

* Landlord’s right to acquire the tenant’s interest in the lease, for example where the tenant must offer the lease back before assignment or transfer. 

* Restrictive covenants given by the landlord in respect of land other than the property itself.

* Rights granted, for example rights of way over other land in favour of the property, or rights of way over the property in favour of other land.

* All relevant title numbers.  These are the unique numbers issued by the Land Registry in respect of every property that is registered.

* Details relating to any joint ownership of the lease

* Restrictions for entry onto the Land Registry title of the property, for example to protect certain third party interests.

* Details of any estate rentcharge, something that should not be confused with rent in the ordinary sense.  An estate rentcharge is relatively rare.

Missing Information?

Not all the information that a landlord or a tenant is likely to want is included in the new prescribed clauses.  That said the key information contained in the prescribed clauses could not only be useful to the Land Registry but also all others involved in reviewing commercial leases.  That being the case, it may surprise some that other basic and useful information is not to be included.  For example, there is no mention of the amount of rent payable, whether the rent is subject to review, the rent payment dates or whether there is an option in favour of either the landlord or the tenant to terminate the lease early.

The Land Registry’s original proposal was for a prescribed form and lay out of the entire lease (a Prescribed Lease).  Leases are however complex documents, tailored to fit the circumstances of each individual transaction.  The result is that leases come in many varying forms. The industry opposed the Prescribed Lease idea for the reason that it would be impractical to produce a standard form that would not also restrict landlords and tenants freedom to negotiate their own terms.

The idea of standard leases was therefore dropped in favour of prescribed clauses.  Prescribed clauses could help landlords and tenants interpret complex leases by flagging up, at the front of the lease the main provisions.  So why not include additional information?  After consultation with the industry, the conclusion was that to summarise further information not only involves duplication but could also lead to misinterpretation of the lease.  It would therefore be dangerous to rely solely on those prescribed clauses without referring to the more detailed content contained in the lease.  The prescribed clauses will only contain the information that the Land Registry needs to create the new leasehold title.

E-conveyancing

The Land Registration Act 2002 was introduced with the future of electronic conveyancing in mind.  The success of e-conveyancing depends upon all properties being registered at the Land Registry and comprehensive information about the property being held at the Land Registry.  It is therefore for this reason that many more leases (and other interests) are registerable, and as a consequence the reason for the prescribed clauses.

For further information about commercial leases or property law, contact Tony Lake  01228 552222. Tony Lake is a partner at Burnetts Solicitors and specialises in commercial property law.

Feb 2006