Real Estate

Property, in the context of buildings and land, is under the heading of 'real estate'. Real estate is a legal term that encompasses land, improvements to the land, such as buildings, fences, wells and other site improvements that are immovable and fixed in location.

The ownership of 'real property’ in England and Wales is enshrined in common law, equity and statute. As a monarchy, ownership is based upon hierarchy. The 'Crown' has the right and duty to determine the legal owner of the land, and the duty is administered by Her Majesty's Land Registry, a government agency whose task is to keep title records. Property transactions are almost always in writing and the title deeds (records) include information about the owner, charges, restrictive covenants, and so on. 

The ultimate title is the freehold, which is ownership for an indefinite period of time. Below the freeholder is the leaseholder. Any number of leaseholders can be created but a leaseholder cannot grant an underlease for a longer period than the term of its own lease. 

There is no practical distinction between landlord, lessor and owner, assuming the owner is also the landlord, or between tenants, lessee and occupiers, assuming the tenant is not the owner-occupier: describing landlords as 'owners' and tenants as 'occupiers' reflects a desire to get away from feudalism. Similarly, it is open to discussion nowadays whether in the context of the landlord and tenant relationship a landlord ought to be considered the more dominant party, because many tenants regard landlords as suppliers.

The shop property market comprises freeholders and leaseholder owner-occupiers, landlords and 'tenants'. (I've put 'tenants' because here I am using the terminology loosely to include licences. There are important differences in law and practice between tenancies and licences.) Where there are intermediate interests between freeholder and occupational tenant, the in-between respective landlords would be defined as 'superior landlord' and landlord or lessor.

Landlord and Tenant

In the relationship between landlord and tenant, the landlord owns the building and the premises demised to the tenant is the whole or part of the building. The tenant leases the demised premises (or premises) and the legal relationship between landlord and tenant is based upon the terms and conditions of the lease. The terms and conditions are often described as provisions.

The terms and conditions of a tenancy are embodied in a document, known as a 'lease'. Although the word ‘lease’ is commonly used, actually the lease is the document, the type of occupancy either a tenancy or licence. I use the terminology ‘lease’ loosely, because the terms and conditions of a licence are also in a document, but calling a document a ‘licence’ does not make it one.

The landlord owns the building (the property): the granting of a lease does not give the landlord any share or control of the tenant’s business. The only thing a lease does is spell out the terms and conditions and the basis upon which the tenant can use the landlord’s property. Even where the rent is based on the turnover of the tenant’s business, how the tenant chooses to run its business at the premises is nothing to do with the landlord, except as regards compliance with the terms and conditions of the tenancy.

[The one time a landlord could be said to be buying the tenant’s business is when the landlord intends to occupy the premises on expiry of the lease for the same type of business, in which case any (residual) goodwill attaching to the premises by virtue of the tenant’s business or occupation of the premises would revert to the landlord. Even so, the actual business records, stock, tenant’s fixtures and fittings, plant and machinery, would not belong to the landlord unless the tenant were to leave such items behind on vacating the premises. If the tenancy would qualify for renewal rights under the Landlord and Tenant Act 1954, then a landlord can oppose the tenant’s application for renewal on ground of re-occupation provided the landlord has owned the property for at least 5 years. Unless the landlord can find a legitimate way to wriggle out of paying, the tenant would receive compensation based on Rateable Value.]

Frequently in leases, the landlord is described as 'lessor' or 'lessors' - the plural is sometimes used even though there may be only one party - and the tenant as 'lessee' or 'lessees'. Also, when the landlord is the officers of an administrative body, for example the "Mayor and Burgesses of..." the landlord could be described as the "council" ; and with railway leases, the landlord is often described as "the Board". Although for some aspects of a tenancy the correct description is necessary, in this section and unless otherwise stated, I shall stick to landlord, tenant, and tenancy.

The operation and enforcement of the legal relationship between landlord and tenant is subject to business tenancy law. Agricultural property law, which is in a field of its own (excuse the pun) is, in some respects, arguably more progressive: for example tenant's improvements are not limited to physical alterations to the property, but include the intangible. Although residential property law also differs, there are some overlapping areas. For example, with a shop with a residential flat above and where the shop and flat are let on a business tenancy, a rental valuation of the flat may be subject to business tenancy law. 

Generally, a shop investment is a shop property that is let on a tenancy (or some other occupancy where rent or equivalent is paid). What I am about to say may sound pedantic but, in my opinion, a vacant unlet property is not an investment until it is let. A property that is empty because the tenant is not in occupation is nevertheless let. I think a distinction is useful because whereas a vacant shop would upon letting be an investment, really there is no investment without a tenant. (A vacant unlet property may be considered an investment if the capital value of the property were to increase for some reason, but for purpose of Shop Investment the test is whether the property is producing any income.)

The relationship between landlord and tenant hinges upon the terms and conditions of the tenancy. A tenancy (or ‘lease’) is a contract for a certain term and has a date of document, a tenancy contractual start date and contractual expiry (end date). When a tenancy is for a business purpose, the lease is a commercial contract, and with a commercial contract the parties are in law deemed to know what they are doing.

Basically a lease contains terms and conditions for the operation, management and enforcement of the tenancy. The landlord and tenant, known as the parties, can agree whatever terms and conditions they like for the tenancy, but some requirements are governed by overriding legislation. 

Because different landlords and different tenants have different requirements and shops, in common with all commercial properties, are different, there is no standard form of lease in use generally. Whilst many landlords and tenants have their own standard wording for the documentation, also the Law Society, for example, has a standard document for use by landlords and tenants, you cannot buy a ready-made document and simply fill in the blanks and reasonably expect the tenant to sign without question, or at least not without changing some wording. Normally, what happens is that after outline terms have been agreed between the parties and 'heads of terms' agreed, the lawyers for the respective parties, sometimes with the help of respective surveyors, draft and approve the documentation from scratch. 

In England and Wales, any outline terms agreed in principle or “heads of terms” are “subject to contract”. It is important to state that all the terms are “subject to contract” - that is not implied by default. “Subject to contract” results in one of three possibilities: 1) the parties are immediately bound to the transaction, but they intend to restate the deal in a formalised contract that will not have a different effect; or 2) the parties have completely agreed the terms, but have made the execution of some terms in the contract conditional on the creation of a formalised contract; or 3) it is simply an agreement to agree and the transaction will not be concluded until the formalised contract has been drawn up, approved and completed.

Agreement may also be reached to subject to any other condition, such as subject to surveyor or subject to finance, but unless the agreement is also made subject to contract, it may not be possible for either one or both parties to withdraw from the agreement after the condition is satisfied, without having to pay damages for breach.

Generally, in commercial property transactions, the conveyancing for buying and selling is “subject to contract” and any other conditions specified alongside. Under the Law of Property Act 1925 (as amended), contracts for the sale or disposal of real estate have to be in writing to be enforceable, and in some instances by deed. Since a lease is the document, it follows a lease will automatically be in writing. A tenancy, however, may be in writing or verbal/oral. The advantage of a tenancy in writing is the existence of a documentary record of the agreement between the parties. Even when the wording of the agreement is ambiguous, the construction of the contract open to differing interpretations, it is nevertheless generally easier for the parties and others to grasp what has been agreed when the matter is in writing, rather than have to rely on memory or one party’s word over the other, as is the situation with a verbal or oral tenancy.

The onus is on the landlord's side to draft the document and on the tenant to approve. Because tenancies often last for years, and the wording of terms and conditions can be fashionable, the content of leases varies considerably. Also, although the terms and wording of a lease cannot be changed after completion, except by rectification or mutual agreement, leases are assets that can be bought, sold, transferred and mortgaged. During the life of a lease it is common for related or associated agreements to be entered into by the parties and/or their successors. Such agreements include deeds of variation, rent deposit deeds, licences to alter, change the use, assign, underlet, rent review memoranda, and side-letters.

Business Tenancy Law

The construction or framework of a lease, its content and wording, lays down the contractual responsibilities and obligations that the landlord and tenant have to one another as regards the premises. The operation, management and enforcement of the terms and provisions of a lease are subject to business tenancy law. A branch of property law, business tenancy law is a dynamic subject.

With business premises, there is no standard form of lease, so the terms and conditions of each and every tenancy will vary depending upon the requirements and experience of the first landlord and first tenant and their respective advisers. Since a tenancy is often granted for a number of years, the terms and conditions, together with the wording and phrasing of those terms and conditions, will remain unchanged for the duration of the contractual term of tenancy, and sometimes beyond. The only ways any of the terms, conditions, the wording and phrasing can be changed at any time during the term is either by rectification of a mistake (if the original parties are still involved) or by mutual agreement.

Although a tenancy can last for years, there are two relationships that can and do change. The first is the relationship between the landlord and tenant: that relationship is changeable because the superior landlord’s interest may be bought and sold or transferred and (subject to the provisions of the tenancy) the same for any intermediate landlord, and (subject to the provisions of the tenancy) the tenant’s interest may be assignable or the premises underlet.

The second is the relationship between the premises and the (open) market: that relationship is continually changing because, whereas the property (the building) is a fixed structure, the relationship between the location and position of the building and its surroundings can be affected by changes in those surroundings, and of which the landlord and/or tenant is likely to have no control.

The reason business tenancy law is a dynamic subject is that the operation and enforcement of the terms and provisions of the tenancy will depend upon the actual wording in the documentation, regardless of what might or might not be happening in the open market. The wording and phrasing in leases is also fashionable. So, for example, if the premises were let for 25 years from 1990 with rent reviews at 5 yearly intervals, then the wording and phrasing would have been based on lease-draftsmen thinking in 1990 or before, whereas the effect of that wording and phrasing might have a different consequence at first rent review in 1995, but the consequence could be different again in 2000, and different again in 2005, and 2010. Although words are neutral, positive and negative conniptions can be attached to their meanings and whether a word or phrase should be interpreted literally or by reference to what is known as “presumption in favour of reality” would depend upon the business tenancy law case-precedent and valuation practice at the appropriate time.

Some business tenancy law is legislation, acts of parliament, statutes, orders and regulation, but much is based on case-law: a court decision and interpretation arising out of disputes. You will find more information about dispute resolution procedure in section 2.26 (Disputes). Generally, the courts are loathe to interfere in the wording of a commercial contract, regardless of how unfair the consequences of the agreement, and tend to confine to the interpretation of the wording. A general principle of construction that applies to all documents is that a lease must be construed as a whole and an individual clause in a lease should never be read in isolation from the rest of the lease. The interpretation of construction (wording and phrasing in documents) can be fashionable, but nowadays there is a presumption in favour of reality and commercial common/good sense.

Since the 1970s, the explosive growth of case-law has reflected the monetary effect of different interpretations by surveyors, lawyers and courts on the covenants in the lease. (In one case, the difference in opinion equated to £500,000 a year.) In 1984, in my booklet published then, I said that the variation in business leases was extensive. Then were the old ground leases from the 1880s/1890s for a term of 99 years at a fixed low ground rent, the medium to long-term leases granted during the 1920s to reflect difficulties in attracting tenants at that time, the familiar 21 year term originating in the 1950s/1960s often incorporating pre-fixed rental increases at 7 yearly intervals; and from the 1960s to 1980s, a mixture of 3, 5, 7, 9,10,12,14, 15, 20, 21 and 25 years which, to cover for inflation, incorporate rent reviews at 2, 3, 4 or 5 yearly intervals. Some leases even exist that incorporate a clause enabling the frequency of reviews to be revIewed. In 2012, new lettings in better trading position are commonly 10-15 years with 5 yearly rent reviews, and for local trader positions 2-5 years, often with break-clauses, but the unexpired duration of existing tenancies remains unchanged depending upon when the leases were granted. The consequences of the diversity is relevant when drawing comparison between what a tenant would reasonably expect in the market today compared with terms of the actual tenancy

In principle, there is nothing to prevent the parties to a lease from agreeing whatever they like but any wording or phrasing that would be contrary to law is normally subject to overriding legislation.

Despite a working system for the management of tenancies, the relationship between landlord and tenant often creates hostility, borne of mutual suspicion. Basically, the interests of landlords and tenants are diametrically opposed: invariably, the landlord wants more, the tenants less. The notion that the partIes should work together to achieve profIt, the landlord from rent, the tenant from retailing, is not prevalent In this country, so the parties seem to be at constant odds with one another. Any change in ownership of the landlord’s interest often brings new problems and a purchase during an era of high prices or interest rates adds Its own pressure by fuelling the need for full compliance and maximum rent to enhance capItal value. At rent review, the relationship between personalities is not improved by a principle in business tenancy law whereby neither the specIfIc requirements of the landlord nor the tenant’s ability to afford the market rental are relevant; in recessionary times or when the tenant’s business is not doing as well as the tenant would like, the difference in opinion or interpretation between landlord and tenant as to how a particular term or condition of the tenancy should be applied, or what the market rent should be at rent review or on lease renewal will often lead to conflict and triggering of the dispute resolution procedure.

For both lenders, landlords and investors, the effect of change on the relationship between the property and its surroundings is challenging. A shop let at for example £30,000 a year for 15 years with upward-only rent reviews at 5 yearly intervals for which the investor pays £420,000 on mortgage 65% of purchase price will (all other factors remaining constant) only maintain the same value and same loan-to-value (“LTV”) if £30,000 a year would fetch £420,000 (7% yield) for the entire period of mortgage. Amongst possibilities that could arise are 1) that the market rent could fall at any time even if the rental actually payable were protected by the ‘upward-only’ cushion at rent review, thereby resulting in an over-rented investment and a downward adjustment in capital value; 2) the closer the remaining term of tenancy to its contractual expiry date the investment market might want a higher yield to offset possibility of the tenant not renewing, unwanted vacant possession, and 3) the possibility of a lesser covenant upon reletting in the market. Even if the rent were to increase at one or more reviews, it does not follow that the rent payable would be the market rent for purpose of capital value because the capital value at any point in time has regard to the estimated market rent and how that rent would be arrived at would either be as laid down in the lease (for purpose of rent review) or if the tenancy would qualify for renewal rights then by reference to section 34 and 35 Landlord and Tenant Act 1954 Part II.

Although rental and capital valuation is a matter of opinion, for value (of commercial property) to have efficacy it must have regard to business tenancy law. Business tenancy composes legislation and precedent, but that does not mean that the opinion of value has to agree with either the law or a precedent. A precedent may be useful but does not have to be followed slavishly. Business tenancy law is rarely concerned with wider consequences so in practice things may not work like that, because every lease and every shop property is different. Valuation is not about applying the law or a precedent literally as if the law or a precedent were indisputable, but using the law or precedent in conjunction with the art and science of the opinion. In other words, never mind the theory, a question a valuer would ask is what is the practical effect of that law on this particular set of circumstances. For example, an estimate of market rent could be provided for purpose of forthcoming lease renewal negotiations, but in practice the existing tenant might not want to pay the market rent so only if the tenant would want to renew would the dispute procedure be pursued. Even if the landlord were successful in obtaining the market rent by order of the court, the tenant would not be obliged to proceed, but could give notice to end the tenancy.

Rent

Rent is the monetary consideration or payment by the tenant for the temporary use of the property owned by the landlord.

The duration of the period of the temporary use is the term of the tenancy, from the contractual start until the contractual expiry, and depending upon the wording of the lease, for the period following the contractual expiry if the tenancy would qualify for renewal rights under Landlord and Tenant Act 1954. If the tenancy would not qualify for renewal rights or the tenant has not protected its rights then for the period of occupation following the end of the contractual term the payment is known as ‘mesne profits’. Please note that explanation is for general information only: the payment and acceptance of money for occupation at any time when the tenant has no lawful right to remain in occupation of the premises is complicated, so please do not rely on the generalisation for your particular situation but instead obtain my advice or consult your solicitor.

When the occupancy is on licence the payment is call a fee. Generally, in business tenancy law, the word ‘rent’ denotes the existence of a tenancy.

Rent is the product of the terms and conditions of the tenancy upon which the premises are let. Rent does not exist in isolation: one cannot state “this is the rent for the premises” without also stating, defining or knowing all other terms and conditions upon which the premises are let or would be let. Therefore, because different landlords, different tenants have differing requirements, and all shops are different, the terms and conditions of tenancies vary, with no standard form of lease, the only way to evaluate a shop investment is to read the lease and any associated documents, and the only way to make a proper comparison between one shop investment and another is to compare the wording of all documentation.

A common ruse when selling shop investments is to cite the Zone A rent that has been obtained for premises nearby. I explain ‘Zone A rent’ later but for now the snag with multiplying the valuation area (of the proposition you are considering) by the Zone A rent nearby so as to get an idea of what you might reasonably expect is that is a rough indication can often be misleading because of the likely differences when comparing premises and documentation. Even so, that snag does not seem to deter many chartered surveyors from relying on such approximations for their opinions for mortgage and other valuations, despite the potential for over-valuation. It only needs one word or turn of phrase for the rent of one shop to differ substantially from another, even though in most if not all other respects the shops are virtually identical.

Rent is payable whether or not formally demanded, although most landlords send out rent demands and most tenants expect to receive a rent demand before paying. The modern tendency is to avoid payment by cheque and instead for rent to be paid either by standing order or for the tenant to pay direct into the landlord’s or managing agent’s bank account.

The rent payment date is not the date the tenant pays, but the date the landlord receives cleared funds. For example, if the rent were due on 25 December, the tenant would be paying late if the tenant’s payment cheque is dated 25 December or if the Banker’s standing order is set up to pay on 25 December but the money does not actually reach the landlord’s bank account until a few days later.

With some property, the quarterly rent is payable in arrears and not advance. Also, there is often a period of grace at each quarter day, perhaps 14-21 days, often interest free.

In recent years, following a campaign orchestrated by leading multiple retailers (some of which one could surmise as in financial difficulty), it has become the norm for rent to be paid monthly in advance, notwithstanding the quarterly requirement. As a relatively novel idea, many new leases contain requirement for monthly payments but whilst that would presumably suit the first tenant, an assignee might find it difficult. To pay rent monthly requires certainty of cash-flow so monthly payment may not be possible for those retailers that tend to save up for the quarterly rent over each period of three months.

From a landlord’s perspective, it could be considered sensible to agree to accept rent monthly because at least you will know sooner than later whether payment is forthcoming, but if the investment is on mortgage then what you would have to weigh up is whether you can afford to accept rent monthly when your mortgage instalment to the bank is probably three monthly. However, since as far as the mortgage loan agreement is concerned your ability to pay the mortgage would not normally be dependent upon receiving the rent from the tenant, you may take the view that it would be best to not treat the payments as interdependent. Any failure by the tenant to pay the rent monthly can trigger action on your part to recover the rent - the usual first step is to instruct bailiffs. Where a monthly payment is contractual per the lease then it could prove more difficult to enforce payment than if the arrangement were recorded in a side-letter specifying conditions to apply in the event of non-payment.

Rent Deposit

A rent deposit is a sum of money that is provided by the tenant to the landlord as security for payment of the rent and other moneys per the covenants in the lease. The rent deposit deed records the circumstances in which the landlord can draw against this money and the conditions that must be satisfied for the deposit to be repaid to the tenant. The rent deposit deed is generally made between landlord and tenant only. Occasionally a guarantor may join in the deed

A rent deposit is attractive to landlords because it is an immediately accessible source of money that can be withdrawn as soon as the tenant is in breach of a relevant covenant in the lease. There is no need to take legal proceedings to recover the debt or secure performance of the obligation.

The amount of deposit can vary depending upon the circumstances, but is commonly equivalent to at least 3 months or 6 months rent. There are three types of structure for rent deposits:

1) the charge - a deposit is held in a separate account and is charged by the tenant to the landlord, and the account is usually administered by the landlord or its agent. Provided the charge has been registered at Companies House within 21 days of its creation, the landlord has security the landlord has security upon the tenant's insolvency, but the landlord cannot withdraw from the account without leave of the court if the tenant is in administration. The tenant is protected from the landlord's insolvency as the money remains the tenant’s property.

2) the trust - the deposit is paid to the landlord who agrees to hold the deposit on trust for the tenant. The tenant is usually protected if the landlord becomes insolvent, but the deposit must be paid into a separate identifiable account.

3) landlord's property - the deposit is paid over to the landlord and becomes the landlord's property to be held in an account with other monies, typically to be used for certain purposes and expressed to be repayable in certain circumstances. A rent deposit does not belong to the landlord, but remains the property of the tenant and can only be used by the landlord in the event of tenant’s default per the terms of the rent deposit deed. (Consequently, well-advised tenants will want to avoid this kind of deposit arrangement because it is vulnerable to landlord insolvency so could be used to pay the landlord’s other creditors.)

The deposit amount may be free of interest so not necessarily held in an interest-bearing account. Where interest is paid, the amount of interest would accrue to the principal and (depending upon what is agreed) either not repaid to the tenant until ending of the deposit arrangement or whenever the amount of interest that is accumulated exceeds an administrative realistic sum.

The terms and conditions for the deposit are normally recorded in a separate deed, the costs of which would be borne by the tenant, the costs should include administration of the deed. Generally, the deposit would be refundable either after a period of time, perhaps 3 years, or assignment or termination of the tenancy.

Since the object of a rent deposit is to protect the landlord in the event of tenant non-payment of rent and other monies properly payable under the lease, there is often a condition in the deposit deed that in the event the landlord needs to use the deposit the tenant would top-up the deposit to its full (original) amount. Similarly, since the amount of deposit at the onset would normally be related to the initial or passing rent payable, (such as 3 or 6 months’ rent) there is often a requirement for the tenant to top up the amount of deposit within a specified period to take account of any increase in rent at review so as to maintain that rental relationship.

Whether the amount of deposit would be topped up following increase in rent at review depends upon the landlord’s memory and the tenant’s conscientiousness. Often the requirement is overlooked: in any event since tenants normally only part with capital when required to, and may not have the money to spare later, it may be too much to expect voluntary compliance with the terms of the deposit deed.

A rent deposit may be obtained either on a new letting or from the (proposed) assignee on assignment of an existing tenancy. Interestingly, where the outgoing tenant, on assignment, completes an Authorised Guarantee Agreement (AGA), rarely is there any requirement in the terms of the AGA for the outgoing tenant to deposit any funds in connection with the AGA. (You will find more information about Authorised Guarantee Agreement in section 2.19 Privity of Contract.)

Lease

Although the terms and conditions of the completed agreement are commonly referred to as the lease, in fact the lease is just the document itself. The document is a written record of the terms and conditions that comprise the agreement between landlord and tenant for the premises.

Although I used to refer to a situation using the word ‘lease’ generally, I find that using the correct description, such as tenancy or licence, avoids confusion, so nowadays in all my writings I use the correct word depending on the circumstances.

Confusion can arise when, in the drafting of a lease, the draftsman uses the word ‘lease’ when referring to commencement dates for purpose of term, rent, and rent reviews. In modern leases, each expression or phrase will usually be defined in the lease so as to leave no scope for different interpretation, but where the draftsman does not, or phrasing or expression definitions are incomplete, and instead refers casually to the date of the lease, an ambiguity can arise where the lease states that rent reviews are at stated intervals during the term but the review dates themselves are calculated from commencement of the lease.

For some reason, best known to the world of lawyer-draftsmen, the wording and phrasing in leases, especially in the realm of rent review, is often unbelievably convoluted. Commonly, rent review dates are not specified, such as 25 December 2006, 25 December 2011, but referred to as intervals such as 5th and 10th anniversaries, which is all very well provided it clear from the wording of the lease from which each particular anniversary is computed.

Generally, any and all other documents related to the lease may be loosely included in the definition of lease. Usually, other documents, such as licences to alter, vary the user, deed of variation, deed of rent deposit, memoranda, and side-letters, are likely to mention the lease itself, so the wording and content of associated and related documents could affect the rental and.or capital value.

Side-letters are informal agreements by landlords to alter provisions in leases by exchange of correspondence with the tenant and are usually entered into when the parties want to agree some concession or arrangement personal to one or both of the parties. For example, a rent deduction for a period of time, arrangements re building insurance, Usually, a side-letter issued concurrently with the lease and given to the tenant at the outset is part of entire package and is binding on new landlords, even if new landlord had no knowledge of its existence. [In System Floors Ltd v Ruralpride Ltd [1994], the Court of Appeal decided that a side letter passing from a landlord to a tenant, the benefit being expressed to be "personal to the tenant" but not "personal to the landlord" was binding on a buyer of the landlord's interest, even though the buyer knew nothing of the letter.]