REPAIR COVENANTS

Covenants in a lease are the terms of the contract between the landlord and the tenant and they specify responsibility for matters arising out of the lease.

Normally, a lease will make express provision for one party to repair and maintain the whole or part of the demised premises and for the other party to repair and maintain the remainder.

In short leases the landlord will often be directly responsible, while in long leases the tenant will usually take on the obligation for repair and maintenance.

For leases held in respect of premises that form part of a larger building, it is frequently the practice to require the tenant to keep the interior repaired, while the landlord is responsible for the exterior and common parts and the structure of the overall building.   The landlord will often seek to recover the cost of fulfilling this liability by way of a service charge.  

SCHEDULE OF DILAPIDATIONS

This is a list of outstanding repair and maintenance items, that a landlord has assessed have accrued under the terms of a tenant's repair and maintenance obligations.

It is often served by the landlord at the end of the lease in the form of a "Terminal" Schedule of Dilapidations.  The tenant is obliged to carry out the outstanding works listed in the schedule or pay damages which represent the cost to the landlord of doing the works.

The items in a Schedule of Dilapidations are often the source of dispute between the landlord and the tenant and a court will ultimately decide upon the relevance or otherwise of the contents of the Schedule.

In certain situations the tenant is entitled to relief from the obligations set out in a "Terminal" Schedule of Dilapidations, as provided for by Section 18(1) of the Landlord and Tenant Act 1927.

An "Interim" Schedule of Dilapidations can be served by a Landlord during the course of a tenancy, specifying outstanding works of disrepair that need to be attended to whilst the tenant is in occupation.  Relief from complying with the obligations of an "Interim" Schedule may also be available in accordance with the provisions of the Leasehold Property (Repairs) Act 1938.

SERVICE CHARGE

This is a sum of money payable by a tenant on account of services provided by the landlord and is often collected quarterly in advance at the same time as the rent.

A service charge usually arises when a property is in multiple occupation, such as an office block or shopping centre.

Typical service charge items include the repair and maintenance of the external or structural parts of a building. Also, costs arising from repair and upkeep of common parts, together with managing agent's fees and a sinking fund.

A service charge payment can be capped in order to limit the amount of a tenant's financial liability.  In addition some service charge costs have a limit to the amount of increase that applies during the term of a lease.  For example, the charge cannot rise in excess of the movement in the Retail Price Index.  This provision enables the tenant to restrict future service charge liabilities.

STAMP DUTY

This is a Government fixed tax, chargeable on the execution of documents, pertaining to transactions such as Leases, Agreements for Leases and Conveyances. 

The duty is payable by the purchaser or lessee, and the disposal document can not be adduced as evidence of the transaction unless adequately stamped.

The rate applicable is set by Central Government and varies depending upon the value of the transaction.

Current rates are as follows:

  • Up to £60 000 - nil
  • Over £60 000, up to £250 000 - 1%
  • Over £250 000, up to £500 000 - 3%
  • Over £500 000 - 4%

SUB-LETTING

A sub-letting takes place when a tenant grants a new lease for their property, or part thereof, to an alternative occupier, for a period less than the residue of the tenant's lease.

The  period of the sub-letting must be at least one day less than the unexpired period of the superior lease.

If a tenant attempts to sub let the property for a period equal to, or more than, the unexpired period of their own lease; this operates as an assignment of the term and not as a sub-letting.

TENANT'S IMPROVEMENTS

The expression Tenant's Improvements is used to describe a wide range of works, that are usually carried out by a tenant, at their own cost, and usually require the landlord's prior approval.  Tenant's improvements may not necessarily increase the value of the demised premises, but can have an impact upon the future rent payable by a tenant.

Section 19 (2) of the Landlord & Tenant Act 1927 provides that a covenant in a lease against the making of improvements, without the consent of the landlord, is deemed to be subject to a proviso that consent will not be unreasonably withheld.

As a condition of consent however, the landlord will often require:-

  • The payment of a reasonable sum in respect of any damage to or diminution in the value of the premises or of any neighbouring premises also in the landlord's ownership.
  • The payment of the landlord's legal and other proper expenses incurred in connection with the granting of consent, usually by way of a Licence.
  • In cases where the improvement does not add to the value of the demised premises, a covenant from the tenant to re-instate at the end of the lease.

Most rent review clauses will include a provision whereby Tenant's Improvements are ignored for the purposes of assessing the revised rental value.

USER CLAUSE

This is a contractual provision within a lease, that specifies the use, or uses to which a property may be put and the uses which are prohibited.

The formal classification of "Uses" are set out in the Town and Country Planning (Use Classes) Order 1987 as amended, which is a statutory instrument defining various use classes.

The terminology of a user clause contained within a lease is critical in determining whether the use specified is restrictive or open.  This aspect can be very important when considering the open market rental value of a property.

VAT

Value Added Tax is a tax that is charged on the supply, actual or notional, of certain goods and services in the United Kingdom.

In cases where the landlord has elected to charge VAT on their property, this tax will be payable by the tenant in addition to the rent paid for the demised premises.

Currently levied at a rate of 20%, if the tenant is VAT registered, in most cases they will be able to recover the amount charged from Customs & Excise.  This tax should therefore be comparatively neutral for most parties, except for the ultimate consumer.

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