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Nature and importance
T
he lease is a right to possess land for a certain maximum period – indeterminate peri-ods are the preserve of freehold estates. The attraction of a lease is fairly obvious.Not everybody can afford to buy land or wishes to take on the commitment involved in ownership: the opportunity to have a right to land for a fixed period is then really import-ant. Suppose Andrew is going abroad in a year’s time. Until then, he is looking for some-where to live. It makes no sense for him to purchase a house and then sell it a year later.
Alternatively, Brenda is setting up a business and needs office space. The business cannot afford to buy offices: a lease whereby an annual rent is payable is ideal for her. It also works well if her business expands and she needs to move to larger premises: a short-term lease involves limited commitment and can be sold, if necessary.
Chapter 14 considers many of the consequences of there being a lease: what obliga-tions are involved, how they are enforced and against whom they can be enforced. The present chapter considers the requirements for there to be a valid lease and the various types of leases. The most common form of lease is the ‘term of years’, an agreement whereby there is a lease for a specified period. Because this is by far the most common form of lease, most of this chapter is devoted to it. Mention might also be made of periodic tenancies.
These last for a year, month or week and automatically renew themselves unless either party serves notice to terminate them.
Unsurprisingly, leases are very common. They are also very flexible. As the examples above show, they can be used for residential and business purposes. Most shops and offices are leased rather than owner-occupied. This is particularly appropriate when there is a block of offices or a row of shops. The block or row can be developed by a person who then leases them out. The landlord can retain overall control so as to ensure that the premises remain in proper repair and, at the end of their useful life, are redeveloped in a coherent fashion. Leases of houses are also common. A hundred years ago, 90 per cent of houses were held under leases. Today, most people prefer to own their houses, but the numbers leased are still close to 30 per cent (most from local authorities or bodies such as housing associations).
We have been concentrating on the attractions of leases for tenants. They are also use-ful for landlords, who retain ultimate ownership and can use or redevelop the land in the
Main issues and rules
Leases: types and requirements
13
future. In addition, land subject to leases is easily sold. The purchaser will view it as a good investment, producing a safe income (rent). Many pension funds and insurance com-panies are substantial owners of offices, shops and factories, while many individuals buy houses as an investment to rent out.
The flexibility of leases is demonstrated by their length. They can last from a week (there is no minimum period) to thousands of years. Short leases (perhaps six months to three years) are ideal where no real commitment is desired, whereas long leases (perhaps 99 years or more) become almost indistinguishable from ownership. In the middle are leases which involve some commitment, but which are quite different from ownership.
For short leases, the value of the premises is reflected in the rent paid: typically around six per cent of the value of the premises. Long leases are more likely to be granted in return for a capital sum and a small or nominal rent. However, there can be whatever mixture of capital sum and rent the parties choose.
One particular use of long leases has been for blocks of flats, where each flat depends on the remainder of the block being properly maintained. It is difficult to enforce posi-tive obligations between adjoining freehold owners, which made it inappropriate to sell the freehold of flats. This led to long leases being used instead, as lease rules (described in the next chapter) ensure that obligations to repair (or to contribute to repair costs) can be enforced against a purchaser of the lease. With the recent advent of commonhold, freehold has become a more viable alternative for flats. Commonhold is dealt with in Chapter 3.
A final observation is that the lease is one of two legal estates recognised by the Law of Property Act 1925 (LPA), the other being the fee simple absolute in possession. The significance of this is that the lease can bind purchasers. In this respect it is quite differ-ent to a life interest, which is overreached on sale of the land so that it becomes a life interest in the proceeds of sale. There are two reasons for leases binding purchasers. The first is that leases are designed for use of the land over the specified period. It would be disastrous if a shopkeeper could be told to leave shop premises because they have been sold: that would hugely diminish the attraction of leases. The second is that the presence of leases has little effect on the willingness of people to buy the freehold: they are happy to have rental income from the land. By contrast, a life interest brings in no income to the owner of the land and is of unpredictable duration: nobody wants to buy land sub-ject to a life interest.
Main issues and rules
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Requirements of leasesBefore going into the rules, it should be remembered that many leases have to be created by deed (if over three years in duration) and registered (if over seven years). These require-ments are considered in Chapters 7 and 10. Failure to comply with them may be disastrous:
at best there may be an equitable lease.
Main issues and rules
Certainty requirements: rent, commencement and duration
That the principal terms of leases must be certain should cause little surprise: most agree-ments, including contracts and trusts, have to satisfy certainty rules.
Looking at rent first, an initial point is that there is no requirement that there be a rent,1 even though rent is nearly always payable. If no real rent is intended (usually because the tenant has paid a capital sum, or premium, for the lease), it is common to provide for a nominal rent (conventionally one peppercorn).
The certainty requirement for rent is no more demanding than for consideration in any contract. A formula for the calculation of rent is acceptable, which is very important as longer leases usually provide for the rent to be reviewed, typically every three years.
Certainty of commencement is slightly more complex. It might be noted that leases can start in the future: there can be a lease to start in up to 21 years’ time. This is more than an agreement for a future lease: it is an immediate legal lease, with possession post-poned. The future lease is obviously a trap for purchasers, though it is common to have leases commencing a few months in the future. We have seen that this trap has led to registration being required for leases taking effect more than three months in the future, whatever their length. Knowing the commencement date is important because the essence of a lease is a right to the land for a specified period. We cannot work this out if we don’t know when it is to start. Fortunately this is not normally a problem, as leases can be construed to take effect immediately if no date is specified.
However, certainty of duration of leases has caused the greatest difficulty. It is not surprising that the duration of the lease must be certain, as duration is a very significant aspect within any lease. However, the maximum duration of a lease must be specified in years (or other time measurement) at the beginning of the lease. The facts of Lace v Chantler2illustrate the point well. The parties agreed that the lease should last for the duration of the Second World War. This was struck down by the Court of Appeal because the maximum duration was not clear: nobody knew how long the war would last. It should be noted that the lease would have been valid if it had been for five years, but terminable on the ending of the war. This contrast shows that there is no problem in being able to work out the duration of the war. Rather, there is technical requirement for the maximum duration to be known at the outset.
The result was confirmed more recently by the House of Lords in Prudential Assurance Co Ltd v London Residuary Body.3 Some cases had regarded Lace as too technical and had attempted to circumvent it by employing a periodic tenancy, which they held could be made terminable only on the uncertain event. This form of the periodic tenancy was rejected by the House of Lords, which reinstated the Lace rule in its full vigour. Accord-ingly, a lease until land was required for road widening (which had not materialised 60 years later) was held void.
This is well justified in terms of the authorities, but does it serve any useful purpose?
In Prudential, Lord Browne-Wilkinson scathingly observed: ‘No one has produced any
1 LPA, s 205(1)(xxvii).
2 [1944] KB 368.
3 [1992] 2 AC 386.