Lease agreements – Commercial Leases – A Brief Overview

There are many types of leases and ways of describing them.

Below is a brief overview of various types of leases.

Headleases and underleases

A headlease is a lease granted out of the freehold and an underlease is one granted out of another lease.

As a matter of law, there may be any number of underleases (sometimes described as sub-underleases, sub-sub-underleases and so on), but each underlease must expire before the one out of which it is granted. If it does not, then the grant operates as an assignment and not as an underlease.

Fixed term leases

A fixed term lease is one that is granted for a stated number of years. A whole number of years is not necessary. For example, a term of five years and six months is still a fixed term of years.

Periodic tenancies

A periodic tenancy is one that runs by reference to a stated period (for example, a week, a month, a year), until it is terminated by either party giving notice.

The express terms of the tenancy may set out the length of notice to be given. In the absence of express provisions, the common law provisions apply.

Tenancies at will

A tenancy at will:

• Exists where there is a tenancy on terms that either party may terminate the tenancy at any time.
• Can be terminated by the landlord demanding possession or by the tenant giving up possession.
• No time period for the demand for possession need be specified: the landlord may state that the tenancy is at an end and that possession is to be given back immediately. Even so, a tenant at will should be given a reasonable time to vacate the property after the termination. A notice by the tenant purporting to terminate a tenancy at will without it also giving up possession is not enough to terminate the tenancy.
• Is essentially a personal relationship between the landlord and tenant.
• Is determined by a transfer of the landlord’s interest or by the death of either party, if an individual. A tenancy at will cannot be assigned by the tenant.
• Is often used where the parties are negotiating for a lease to be granted for a fixed term.
• Is not a business tenancy within the Landlord and Tenant Act 1954 (LTA 1954).

Reversionary leases

A reversionary lease is, in strict technical terms, one that takes effect when an existing lease has expired. However, the expression “reversionary lease” is also used to mean any lease where possession is delayed to a future date.

Business tenancies and contracted-out leases

If a lease is a business tenancy, this has important implications for both the tenant, who has certain statutory rights to remain in the property, and for the landlord, who may not be able to recover possession of the property at the end of the contractual term.

If a tenancy is a business tenancy within the LTA 1954, then:

• The tenant need not vacate the property on the contractual expiry date of the lease. Instead, a continuation tenancy automatically arises under section 24 of the LTA 1954 (also known as the tenant holding over).
• The tenant has a right to renew the tenancy at the end of the contractual term, although the landlord may defeat this in certain circumstances. The tenant may be entitled to compensation if the landlord opposes the lease on a “no-fault” ground.
• If the tenant does not renew (assuming the tenant remains in occupation at the end of the contractual term), the lease can only be terminated in accordance with the statutory procedures. Until so terminated, the tenant may remain in occupation (holding over).
• The tenant has a right, in certain cases, to compensation for improvements it has carried out to the property if the landlord defeats the tenant’s renewal rights.
• If the tenant wants to enter into an agreement to surrender the lease, a statutory notice procedure must be followed for the agreement to be valid.

Certain leases cannot be within the LTA 1954. These include:

• Tenancies at will (as per the above).
• Tenancies for a term certain not exceeding six months (but there are some exceptions).

Institutional and Full Repairing and Insurance leases

An institutional lease is the expression commonly used to describe a lease that is acceptable to a landlord that is an institution, typically a pension fund or insurance company.

Institutional landlords own property for investment or business purposes and require that property to provide a secure and predictable income. To achieve this objective, an institutional landlord wants to make sure that all the costs associated with the property are paid by the tenant and that it does not have to pay for repairs or deduct business rates or any other expense from the rental income. The institutional landlord wants the rent it receives to be pure profit, often referred to as a clear rent.

Licences to occupy

A licence to occupy is by definition not a lease: it is a mere personal right or permission.

The essential distinguishing feature of a lease, as opposed to a licence, is that the tenant has exclusive possession of the let property. The label that the parties give to the relationship or document is not determinative in this context. If the licensee has exclusive possession, then labelling the document a licence does not prevent it from being a lease.

A licence usually provides that the licensor may move the licensee to another part of the building on notice, but if this does not actually happen, the inclusion of that provision may not be enough to prevent a lease arising