Do-It-Yourself Leases – what could go wrong?

Whilst a template lease is a good starting point, a lease is a technical document creating a legal estate in land which must be tailored to the parties’ needs and the particular property. To the inexperienced, a lease can be a minefield of complex legal expressions and often causes non-property lawyers to think “what on earth does that mean?”. Even simple points that can easily be overlooked include:

• Defining the parties – we have often seen references to a trading name, subsidiary or parent company that are not in fact the legal landlord or tenant. The correct legal name listed on the property title register and verified at Companies House must be the party to the lease. If not, it is questionable whether the lease is valid.
• Execution – where a lease term is over 3 years it must be executed by deed as opposed to a simple contract. A deed requires specific execution formalities including signatures by individual landlords or tenants to be witnessed if there is only one director of the landlord or tenant entity or the landlord or tenant is an individual.

Although these errors may seem trivial and even go unnoticed for some time, they could end up rendering your lease unenforceable. This creates uncertainty over the status of any tenant or whether there is an implied periodic tenancy instead of your intended lease (which can cause many headaches to a landlord where they to want to get a tenant out of their property).

For that reason, there could be significant harm in attempting to prepare your own lease.

Landlord’s perspective: what is the risk?

For the landlord, some crucial clauses requiring careful drafting, include:

• Contracting out of security of tenure under the Landlord and Tenant Act 1954 – this requires service of notice by the landlord and for the tenant to make a declaration in response which signs away their rights under the Landlord and Tenant Act 1954 (the main one being a right to stay in occupation of (hold over) the property at the end of the term and a statutory right to a new lease, subject to some exceptions). Mistakes can be made by either party, risking the tenant acquiring full statutory rights – a lengthy and expensive complication and a nightmare for any sale based on vacant possession!
• Rent review – drafted correctly, this allows landlords to amend the rent at specified intervals during the lease. Omit this provision and rent will remain fixed throughout the term. If market rents significantly increase, a landlord is left out of pocket and unable to recoup any losses (potentially for a very long time depending on the length of the term of the lease).

Tenant’s perspective: what about me?

The risk is all too prevalent for the tenant too:

• Assignment – if selling your leasehold interest, any issues with the lease will be identified by the buyer’s investigations causing delay and additional expense. This may deter buyers where a defective lease is unacceptable to the buyer or its lender. Alternatively, the tenant would need to get their landlord to agree to vary the lease which they are not obliged to do (and if they agree to do so would most likely seek recompense or, at the very least, their legal fees covered)).
• Post-completion – even if the lease is up to scratch, registration at the Land Registry and payment of Stamp Duty Land Tax to HMRC are often overlooked by the tenant leaving your lease vulnerable, causing costly delays on any assignment, and risking exposure to financial penalties.

The legal process of a tenant acquiring a lease is very similar to a freehold purchase. Investigation of the landlord’s title, analysing searches and replies to enquiries are vital elements ensuring any leasehold property does not come with unexpected liabilities. Ultimately, the drafting and negotiation of a lease is only one part of a wider process.

How do I avoid the risks?

Whether you are a landlord or tenant, by instructing a property lawyer experienced in landlord and tenant matters to negotiate the lease in your favour and deal with pre-completion and post-completion matters, you can avoid any stress and additional expense rectifying future problems with your lease.  Contact the expert team here at Greenwoods Legal LLP if you are considering letting your property or taking a lease.