UK Law Property Management Practice - Essay Example

? UK Law Property Management Practice Table of Contents Question Extent of traditional al lease being the optimal lease type for different kinds/types of commercial property leasing. Consideration of alternative market leases, general and specific situational advantages and disadvantages analysis of such alternative forms of leases in the market 3 Question 2: BigBucks Plc Case- Other things to consider and check. Alternative courses of action available in law contexts. Lease terms, other documents, position of management, practical situation the firm finds itself in. Advantages and disadvantages of different alternative courses of action 10 References 15 Question 1: Extent of traditional institutional lease being the optimal lease type for different kinds/types of commercial property leasing. Consideration of alternative market leases, general and specific situational advantages and disadvantages analysis of such alternative forms of leases in the market A lease in UK law pertains to the granting of exclusivity in land possession for a term that is well-defined and for a term that is shorter than that for which the grantor of the lease has himself or herself has legal land possession. As the definition implies, there are three aspects to the lease. The first has to do with the exclusivity of the possession. The second has to do with the fixed nature of the lease in terms of time. The third is that the term of the lease has to be shorter than the lawful time to which the grantor of the lease has possession of the land (In Brief 2013). Taking a step back, the Crown in theory has ownership of all land in the UK, and that other persons usually hold either a lease on the land, or else has a freehold relationship with the land, which is the strongest form of land ownership under UK law, outside of the Crown’s absolute ownership of all land (In Brief 2013b). The traditional institutional lease is a kind of lease that is suitable as an investment vehicle for institutions such as insurance firms and pension firms. In the traditional sense, these kinds of leases are classified as FRIs, meaning that they are insuring, as well as full-repairing. The reviews on the rent are classified as being upwards only (Practical Law Company n.d.). The leaseholder in this sense becomes a tenant too in the definition of the law, meaning that within the terms of a legally binding lease agreement, the tenant is the recognized land owner under the law. In this sense, as owner of the land, he is able to legally make use of the land as other owners of the land do, with the caveat that those uses for which the land is made use of by the owner is within the confines of the requirements set forth by statutes. On the other hand, rights extend only so far as the owner of the lease has the right to occupy the land absolutely, until the leaseholder does not fulfill the contractual obligations, such as in instances when the leaseholder fails to make good on rent payments. Outside of this, the grantor of the lease is unable to end the lease before the date of expiration or the end of the period of tenancy, except with the serving of a notice strictly ruled by fixed and specified conditions. On the other hand, the institutional lease is said to be the cornerstone of commercial property law and the market for such leases in the UK. This is characterized by long terms, usually a quarter of a century, and is, as specified above, FRI type leases, meaning that they are full repairing as well as full insuring. Due to the integrity and predictability of such leases, with the rent reviews being done predictably too, every five years for the lease duration, these have become investible from the point of view of institutions such as pension firms as discussed above. Here the returns are predictable and guaranteed to a certain extent, as long as the tenants make good on their rent payments and their other related contractual obligations to the land and property (Mleyshon n.d.). That the institutional lease has become the foundation of commercial property market dynamics is seen in the fact that present-day business leases are usually upward only as far as rent reviews go, and are also characterized as being FRI. On the other hand, there is the observed growing practice of making use of break clauses, which empower both tenants and landlords in some cases to dissolve or break the agreements for the lease at some time in the future, specified in the break clauses found in the lease contracts. Moreover, there are other aspects of the business leases, such as the aspects relating to rent reviews being upward only, that are being subjected to scrutiny and change in current markets (Mleyshon n.d.). However, it is clear that the traditional institutional lease as it is conceived does not allow for break clauses. Moreover, FRI means that the tenants pay for all of the insurance and repair costs for the land. This latter provision translates to incomes that are clear and can be forecasted on the part of the grantor of the lease. Moreover, the provisions relating to upwards only rent reviews done in predictable fashion, once every five years, remain in place for such traditional institutional leases (Philip Marsh Collins Deung 2013). The preceding discussion already touched on aspects of alienation with respect to leased land. Alienation relates to the powers given under the law to leaseholders as far as disposing the land that they have leased goes. The possibilities in this regard include the sharing in the way the property is possessed and occupied; the way it can be held in trust for another party; parting with the property; charging for the property; assigning the property; and underletting of the property. In general, as discussed above, leaseholders have the same rights as property owners during the duration of the lease, as long as they satisfy their contractual obligations. On the other hand, the practice prescription has been for the lease contracts to contain provisions that prohibit any and all such dealings by the leaseholders with the land, except for those kinds of dealings that are expressly given the green light in the contract. On the other hand, the common practice with leases is that most forms of dealings are allowed to, with the consent of the grantor of the lease. This applies for such actions as assigning the property, as well as underletting the property. On the other hand, as far as alterations are concerned, the rule of thumb in UK law is that where alterations are subject to more intense scrutiny and negotiations with the grantor of the lease, in the case of improvements leaseholders have more flexibility, to the extent that recourse to improvements under the law allows for leaseholders to essentially circumvent more restrictive alterations provisions in the law. The flexibility is afforded by provisions in the law giving the discretion for what can be considered as such to the tenants (Practical Conveyancing 2005; Practical Conveyancing 2005b). On the other hand, the general observation as far as the flexibility of alienation and alteration possibilities in institutional leases is that restrictions are more severe by law in such leases, owing to the fact that the provisions of the law are stacked in the favor of the grantors of the lease. This owes partly to the fact that such leases are used as vehicles for investing by institutional investors, necessitating that such leases be reliable enough and be restricted enough to merit such distinction. Moreover, the predictability in the income derived from property leases is seen as allowing for the blossoming of towns and cities in the UK, providing further impetus for the law to be more restrictive with regard to what leaseholders are able to do with the property that they lease. On the other hand, the restrictions in law means that leaseholders have reduced flexibility in alienating and altering their leased property. (True Legal 2013; Henderson Global Investors 2013). That said, there is legal precedent with regard to the right of tenants to alienation, including subletting, where the law recognizes and protects such rights given to tenants, to protect them against the sometimes arbitrary and difficult conditions that landlords impose for tenants to be able to sublet their units, for instance (Webber 2013). Legal precedents on the fixing of rent amounts during rent reviews, meanwhile, favor strict legal compliance with the terms of the lease in such cases, indicating the seriousness of the laws relating to the enforcement of lease agreements in such cases (Denning et al. 1978). The precedents also seem to favor the strict interpretation of the terms of lease agreements, especially with regard to the compliance of tenants to the terms of the agreements when invoking the right to exercise its break options. In one case, a landlord was ruled in the right when it did not honor the break clause invocation by Britannia Life because of a minor breach in the terms of the contract regarding the application of paint within the property (Lemon Solicitors 2013). Zarvos v Pradhan, concerning the granting of business tenancy to another, likewise reinforces the notion of the intense legal focus on leases and the strict interpretation of the laws relating to leases (Wilmington Publishing 2013). Going into the alternatives, the general observation is that over the past decade, new forms of leases have emerged to serve as alternatives to institutional leases and the restrictive covenants, statutes, and regulations that are attached to traditional institutional leases. The general observation, moreover, is that where institutional leases are designed by law so that leaseholders are unable to break free of them without a lot of difficulty, there are other emergent forms of leases that favor greater freedom of use and disposition on the part of the leaseholders (True Legal 2013). Alternative forms of lease arrangements that favor tenants are usually defined by the shorter terms of the agreements in comparison to the institutional leases as described above. Moreover, they offer more flexibility in terms of alienation as well as alteration, and offer such provisions as break clauses too, as described above. Common alternatives to institutional leases include commercial lease agreements, licenses to occupy, and tenancy at will arrangements. Periodic tenancy agreements also fall within this class of lease agreements, known collectively as short-term agreements in property. Commercial lease agreements have durations of anywhere from half a year to seven years, with agreements longer than three years usually necessitating more detailed agreements put under the review of solicitors. Commercial lease agreements, like all leases, carry with them substantial rights given to leaseholders, including broader rights to alienation and alteration in comparison to institutional leases. Such broader rights include the ability to sublease property. Of shorter duration, meanwhile, is the license to occupy agreement, which is a property agreement that grants broader powers to the grantor of the agreement, with regard to the greater ability to enter the property at various times. This owes to the fact that such agreements do not include the creation of interest in property. This kind of agreement can also include provisions for the landlord being able to make use of the land simultaneously with the one renting. This arrangement is ideal for deals where the duration is at most six months. In contrast, the tenancy at will brings forth the creation of an interest in property, meaning that the one occupying the property gains sole ownership for the duration of the agreement, and the landlord may not come in without the consent of the one renting. This is an arrangement that offers more teeth to renters over licenses to occupy, even as the arrangement is open-ended, and either party can terminate the agreement with a notice of anywhere from a month to six months. It is open-ended, but the tenancy comes to an end by the death of either of the parties in the agreement, by a transfer of ownership of the property, or the granting of a new tenancy. The periodic tenancy agreement, on the other hand, is timed to be renewed as regularly as the timing of the rent payments, though this latter type of agreement is more in line with residential rather than commercial property letting agreements. In essence, such alternative, shorter-term letting arrangements offer more flexibility and fewer constraints on leaseholders in comparison to institutional leases, which are more restrictive and are of longer-term duration, with fewer ways out (Legal Centre UK 2013; True Legal 2013; Henderson Global Investors 2013; Practical Conveyancing 2005; Practical Conveyancing 2005b). It is clear from the above discussion that there are alternative forms of commercial leases and rents that surpass the institutional leases in terms of flexibility as well as in the powers that are given to those who are renting or entering into the agreements as leaseholders. This greater flexibility offers many advantages to the renting or leasing parties. Those advantages include the ability to maneuver out of lease and rent agreements that no cease to serve the interests of the leaseholders. In institutional leases, as discussed earlier, people are constrained by law with regard to alienation as well as with regard to alteration. They are also constrained by law with regard to negotiating for lower rent onwards with the leases, as the law designed institutional leases to be such that they are long term, and are reviewed only upwards in terms of rent payments and rent dues, over five-year periods. This means that not only are leaseholders tied to the property, but are also tied to the property in terms of not being able to negotiate for lower rents in the main, with some exceptions. On the other hand, such arrangements also confer on the leaseholders tremendous powers by way of being treated under the law as owners of the property for the duration of the lease. With alternative lease arrangements, such as licenses to occupy arrangements, tenants have fewer rights over their property, in proportion to the greater rights of landlords with regard to entry rights, and with regard to rights of co-use of the property with the tenants. In general it can be said that the greater flexibility of the alternative leasing arrangements come with some caveats, even as they offer options that are more suited to the needs of some people in terms of shorter and less restrictive arrangements with the landowners and with the law (Legal Centre UK 2013; True Legal 2013; Henderson Global Investors 2013; Practical Conveyancing 2005; Practical Conveyancing 2005b). Other important pieces of academic literature confirm a growing trend towards lease terms that are shorter, more options to break the agreement as one of the key features and clauses of the lease agreements, and the ability of tenants to negotiate for rent amounts that are at par with market rent amounts during rent reviews, as opposed to rent reviews that only fix the rent upwards each time (Hamilton et al. 1983). More recent studies point to a confirmed trend towards ever shortening lease time lengths, with figures reported in 2012 being that average commercial leases in the UK had fallen to about 4.8 years in length for about three quarters of all leases, considering a population of 100,000 leases for offices, retail shops, and industrial leases. This is a sharp drop from the 6.7 years average length of such leases recorded in 2007 in Britain, with leases to small and medium enterprises or SME’s falling even sharper, to just 4.1 years average length. For this group of enterprises, moreover, the percentage of leases granted that were fewer at most five years in length was larger than the general population, at 78.3 percent, with just a small percentage falling under the category of leases greater than 10 years. Moreover there is a tilt in the balance of power in recent years towards the side of the renters, to the point where the shorter leases have come to be associated with the detriment in the growth of investments in the property market, and with the growing clout of the renters in terms of negotiating for better terms, such as periods when the rent is waived. The market has shifted towards becoming a renter’s market in other words. The shorter lease periods are circumventing the need for rent reviews, for one, and in general has jeopardized the viability of commercial property leases as good investment and business propositions. This necessitates the need for landlords and property owners to try and tilt the balance of power over to their side, through better management (Turney 2010; Norman 2012). Question 2: BigBucks Plc Case- Other things to consider and check. Alternative courses of action available in law contexts. Lease terms, other documents, position of management, practical situation the firm finds itself in. Advantages and disadvantages of different alternative courses of action In the case at hand, the UK subsidiary of a limited liability company from Austria has informed BigBucks Plc, through the management surveyor, that the lease to the property they are leasing is to be surrendered that day, effective immediately. The original lease agreement is for seven years, and all rents have been paid, except for a dispute regarding an item in the unit that is in disrepair, even as that item is not related to the structure of the unit. There is a potential taker for the unit, occupying the same facility, but that has to be further qualified. Von Trappe’s business has essentially tanked and they are unilaterally ending the lease agreement, with just that day’s notice. The implication is that they are bankrupt, and the firm would not be able to pay the rent and satisfy the terms of the lease agreement at any rate (Case Facts 2013). There are several aspects of the case that are relevant for the ensuing discussion and analysis. One is that the operations of Von Trappe are to cease because of the distress that the company has found itself in. Two is that, from the next day onwards, the company would be essentially abandoning the site, and that BigBucks in essence would have no one to talk to to pursue any legal remedies that they may have versus Von Trappe. This does not of course preclude BigBucks going after the parent company in Austria for any legal remedies. Three, the original signatory to the lease agreement is an entity that is an on-going concern, a thriving retailer in the fashion industry, named Next-but-one. The terms of that lease agreement are essentially standard, except that there is no provision for a rent review. From these case facts there are several lines of action that are clearly open for pursuit. One is to check on the legal obligations of the original signatory to the lease agreement, Next-but-one. Two is to pursue any legal actions that BigBucks may act on versus Von Trappe, including pursuing items related to the disrepair items that have been itemized in some mail exchanges. Three is to check whether or not it is feasible to assign the unit to the tenant at unit 7, either by transfer or by extension. Fourth is to further explore this latter scenario, and explore what will happen to unit 7 in case the potential leaseholder transfers to Unit 22 and abandons Unit 7, rather than occupying both units (Case Facts 2013). The practical course of action is the first consideration. From a business standpoint, and regardless of any future legal action to be taken against Von Trappe and Next-but-one, there is the immediate matter of the loss of income from Von Trappe abandoning Unit 22 and failing to pay rent for that unit moving forward. The tenant at Unit 7 is potentially able to take the place of Von Trappe, but that has to be confirmed first. At any rate, if the Unit 7 tenant is really experiencing a boom in its business, then with or without Unit 22 being available it would be on the market for a bigger space. That Unit 22 is now available means that BigBucks can now offer the space to the tenant at Unit 7, without potentially missing a beat on payments and income coming from the abandonment of Unit 22 by Von Trappe. The implication here is that the tenant at Unit 7 can simply take over the lease agreement that Von Trappe has with Big Bucks or with next-but-one, as the case may be. This can be arranged by Big Bucks either talking to Next-but-one, or letting the unit 7 tenant talk to next-but-one through facilitation. This would solve the immediate problem of replacing the revenue lost from Von Trappe abandoning Unit 22 on such short notice. Again, this discussion does not preclude Big Bucks pursuing legal action against Von Trappe and against next-but-one as the case may be (Case Facts 2013). A course of action on the legal side that Big Bucks can also enforce in order to cover for any outstanding legal obligations that Von Trappe may have of course is seizing the goods of Von Trappe within Unit 22 and in the premises of the property, including vehicles and other equipment. There is a large number of legal precedents in favor of Big Bucks being able to seize those goods, for instance, to cover for any remaining rent obligations under the current lease agreement, as well as to cover for the costs of repairing those items in the correspondence that were identified as being in disrepair and being non-related to the unit structure. Given the lack of time to assess any arrears in this regard, it becomes prudent on the part of Big Bucks and the manager to seize the goods of Von Trappe, pending any appropriate determination of all existing arrears that the company may have relating to rent, fees, and other obligations arising out of the lease agreement and the abrupt abandonment of Unit 22. This and the discussion above on disrepair, to be clear, assumes that it is up to the tenant to pay for any such bills relating to disrepair in the lease agreement (Insolvency Direct 2008; LandlordZone 2007; Fisher Meredith LLP 2012). On the other hand, such a course of action may bring about an effective pursuit of forfeit proceedings on the part of the landlord. This may be a good thing if the objective is to try and seize control of the unit, and if the assets to be seized are substantial enough to cover for any outstanding arrears. On the other hand, forfeiture also brings about a termination of the lease agreement under the law, which may mean that Big Bucks foregoes the option to use the lease agreement in any legal action moving forward. That said, moreover, for forfeiture to be an option the general rule is that such a clause should be made part of the original lease agreement (Hardwicke 2013). The crux of the matter relating to disrepair, an item of consideration in the case, is that the burden of paying to repair the items in disrepair either falls on the landlord, Big Bucks, or Von Trappe, depending on what is stated in the lease agreement. If the commercial agreement hews to the standard set in institutional leases, with the inclusion of FRI provisions, then the tenant Von Trappe is liable to pay for those. On the other hand, in cases where there are no explicit provisions in the agreement, then the issue of who pays for the repairs can be subject to mediation for disputes related to disrepair (Wilson 2013). Another legal tact that can be pursued, of course, is to check whether the lease agreement with either next-but-one contains provisions that include the presence of a guarantor to the lease agreement, that can be sued together with Von Trappe in order to collect on any arrears arising out of the abandonment of the facility and the ceasing of any future payments on rent tied to the lease agreement (LandLordZone 2013). On the other hand, there are bounds to what landlords can claim in this regard, as typified by legislation such as the Leasehold Property Act of 1938, regardless of whether disrepair costs accrue to tenant or landlord (Practical Conveyancing n.d.). On the other hand, the legal obligations of next-but-one, for one, may have ended with the assigning of the lease to Von Trappe, under the Landlord and Tenant Act of 1995 (Pitmans 2011) References Case Facts 2013. Denning, MR et al. 1978. Plinth Property Investments Ltd. Mott, Hay & Anderson. Estates Gazette. [Online] Available at: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CDEQFjAA&url=http%3A%2F%2Fwww.property.org.nz%2FFolder%3FAction%3DDownload%26Folder_id%3D81%26File%3DPlinthPropertyInvestmentsLtdvMottHayandAnderson.pdf&ei=wKJdUbiqLOWoiAex_YGYBw&usg=AFQjCNEePjh-Ny1IlodWU_I8k3DKYqoANQ&sig2=WbQtWsMuMc2rq0_PDQbyUQ&bvm=bv.44770516,d.aGc [Accessed 2 April 2013] In Brief 2013. Basic requirements for a lease. 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Anthony Gold Solicitors [Online] Available at: http://www.anthonygold.co.uk/site/ang_articles/ang_articles_housing/ang_articles_disrepair_disputes.html [Accessed 2 April 2013] Read More