Bird & Bird has 34 offices in 24 countries around the world. As we have Real Estate experts across all our jurisdictions, we thought it was high time that we showcased this knowledge by looking at what makes leasing in different parts of the globe unique, and how our lawyers can help navigate some of the common pitfalls that can catch international entrants to the market unawares.
In this issue of Skyline, we will be looking at some of the features that make leasing premises in England and Wales unique. Look out on our website and LinkedIn page for upcoming articles covering some of the key issues to consider when leasing property in Belgium, Australia, Poland, Italy and Singapore.
Did you know that it is illegal in England and Wales to handle a salmon suspiciously?
The law comes from the Salmon Act 1986, which was enacted to crack down on the illegal fishing and poaching of salmon, and is just one of the quirky ways that English law can raise a smile.
1. Execution
To be valid, a lease must be executed as a deed. Where a UK company is entering into a lease, it must therefore execute the document in one of the following ways:
- By two directors;
- By a director and the company secretary; or
- By a director in the physical presence of a witness.
A non-UK company must execute the lease in accordance with the law of the jurisdiction in which it is incorporated.
Following completion and payment of any Stamp Duty Land Tax liability arising on the grant of the lease, any lease granted for a term of seven years or more must be registered at HM Land Registry. A well-advised tenant should also ensure that a lease granted for less than seven years is protected by noting its interest against the landlord’s title.
2. Security of Tenure
Under English law, there is a principle of security of tenure. This means that at the end of the lease term (subject to certain statutory exceptions), the landlord is legally obliged to offer the tenant a new lease on substantially the same terms as the existing lease.
It is possible, and very common in the market, particularly for leases of 10 years or less, to exclude these provisions through a process known as “contracting out”. Where a lease has been contracted out, the landlord is no longer obliged to offer a new lease at the end of the term, although there is, of course, nothing to prevent the parties from negotiating a new lease should they both wish to do so.
Client trap: The process of contracting out involves the tenant making a declaration before an independent lawyer. However, with the appropriate client authority, this is something that Bird & Bird can easily arrange on behalf of your business.
3. Security Deposits
Unlike in many other jurisdictions, bank guarantees are rarely acceptable to landlords in England and Wales. Instead, lease security is typically provided by way of a cash rent deposit.
4. Break Rights
Any right for either party to terminate a lease before its contractual expiry must be commercially agreed and expressly incorporated into the lease. Such a right is known as a break right, which is often subject to conditions that are strictly construed. Even a minor failure to comply with those conditions can invalidate the break right.
Break rights are commonly exercisable only on specific dates rather than on a rolling basis. Typical conditions include:
- Service of written notice on the other party. Six months’ notice is generally regarded as standard.
- Payment of all rent and other sums due under the lease. It is crucial that such sums are not apportioned to the break date and that the full amount that has fallen due (for example, the full quarter’s rent) is paid. While there is generally a mechanism to refund any overpayment, incorrectly apportioning sums due is an easy trap to fall into and could invalidate a tenant’s break right.
- The property being free from any tenant or third-party rights of occupation. From a tenant’s perspective, it is preferable to avoid a requirement to provide “vacant possession”, given the extensive body of case law surrounding what exactly constitutes vacant possession.
5. Reinstatement Obligations
Many leases in England and Wales are drafted as full repairing leases, requiring the tenant to keep the property in “good and substantial repair and condition”. In practice, this means that, regardless of the condition in which the property was acquired, the tenant may be required to return it in an effectively “as new” condition, taking into account the age, character and nature of the property.
A landlord’s ability to recover damages for disrepair is limited by statute to the diminution in value of the property. Where the landlord intends substantially to redevelop the property, that amount may even be nil.
Repairing obligations can be limited by attaching a photographic schedule of condition to the lease and requiring the tenant only to put the property into the condition evidenced by that schedule, thereby providing an additional level of protection.
Client trap: Reinstatement obligations are among the most contentious aspects of commercial leasing, and specific legal advice should always be sought from your local Bird & Bird counsel.
6. Fit-out Works
Landlords and tenants frequently agree that one or both parties will carry out works to the property, such as fit-out works. These arrangements are generally documented in either a Licence to Alter or an Agreement for Lease.
Because tenants are often responsible for repairing obligations throughout the term, issues such as risk allocation, insurance and liability for defects in the works require careful consideration from the outset.
For better or worse, none of the considerations highlighted above feature fish or fowl. However, we hope this article demonstrates that market norms and legislation can vary significantly between jurisdictions and should be carefully considered before embarking on any international expansion.
We look forward to highlighting similar issues throughout this series across the many jurisdictions in which Bird & Bird operates, helping to make your international ambitions a reality.
For further information, please contact:
Emma Brindley-Raynes, Bird & Bird
emma.brindley-raynes@twobirds.com
