16.1 Lease Structure and Granting a Lease

Why this topic matters on SQE1

Functioning Legal Knowledge 2 (FLK2) Property Law and Practice, in the SRA Assessment Specification applying from September 2026, tests the structure and content of a lease and the procedural steps for the grant of a lease or underlease. A typical item will not ask you to recite a textbook lease. It will ask what a repairing covenant actually requires, whether a proposed shop use needs planning consent as well as landlord consent, or whether the parties should exchange an agreement for lease before the deed is dated. Independent OpenExamPrep materials teach those working rules so you can advise a landlord or tenant client, not so you can copy a precedent blindly.

A lease is a legal estate: a term of years absolute. To take effect at law it must be created by deed (section 52 of the Law of Property Act 1925), unless it is a short legal lease taking effect in possession at the best rent without a fine (section 54(2)). On the exam, commercial office, shop, and industrial lettings are almost always deeds. Once granted, the document is both a conveyance of an estate and a contract of covenants. That dual character drives later topics: assignment, authorised guarantee agreements, and Landlord and Tenant Act 1954 security of tenure.

Repair

Repair is the clause that most often generates disputes and dilapidations claims. Identify three common models:

A covenant to "keep in repair" includes an obligation to put into repair if the premises are already out of repair at the start of the term. That is why a tenant taking a short term of a tired building should press for a schedule of condition or a qualified FRI. The RICS Code says a landlord should not require a tenant to put premises into a better condition than they were in at the start, unless the landlord is carrying out a refurbishment for that tenant.

Damages for disrepair are capped by section 18(1) of the Landlord and Tenant Act 1927: they cannot exceed the diminution in the value of the reversion. If the landlord intends to demolish or structurally alter so that the repairs would be valueless, damages may be nil. That statutory cap is why many modern leases also contain a self-help clause (taught with remedies in the next section).

Insurance

In a typical FRI commercial lease the landlord insures the building against insured risks (fire, flood, explosion, and the other risks listed in the lease) and the tenant pays an insurance rent. The lease should say what happens after damage: rent suspension while the premises are unfit, landlord's duty to reinstate using the proceeds, and what occurs if reinstatement is impossible (often a right for either party to terminate). Uninsured risks and terrorism excesses are negotiation points. The tenant should check that its own contents, fit-out, and public liability are covered separately. For a solicitor acting on grant, the insurance clause must match the landlord's actual policy, including any requirement to notify the insurer of tenant alterations.

Alterations

Alterations covenants are usually absolute (no alterations), qualified (no alterations without consent), or fully qualified (consent not to be unreasonably withheld). Structural and exterior works are often absolute or tightly qualified; internal non-structural works may be permitted with notice. Section 19(2) of the Landlord and Tenant Act 1927 implies into a qualified covenant against improvements that consent will not be unreasonably withheld. "Improvements" is a term of art: works that improve the premises from the tenant's perspective can still be improvements even if the landlord dislikes them. Parties frequently add a requirement to reinstate at the end of the term. The Code recommends that tenants should be allowed internal non-structural alterations that do not affect other occupiers without consent, and that structural alterations should be subject to consent not unreasonably withheld.

User and planning

The user clause controls what the tenant may do in the premises (for example, Class E retail, offices, or a named trade). An absolute user clause gives the landlord control and can suppress rent on review if the hypothetical tenant is assumed to be stuck with a narrow use. A qualified user clause (change of use with consent not unreasonably withheld) is more flexible. User is not a substitute for public law. Even if the lease allows a restaurant, a material change of use may still need planning permission. The lease should require the tenant to comply with planning law and not to apply for permission without landlord consent where the application could burden the reversion. On grant, search the planning history and any section 106 obligations that will bind the occupier.

Rent and rent review

Principal rent is usually reserved yearly and paid quarterly in advance. Modern leases also reserve insurance rent, service charge, and sometimes turnover rent. Open market rent review is still common on longer terms: at each review date the rent becomes the open market rent for a hypothetical letting of the premises on the review assumptions and disregards. Typical assumptions include a willing landlord and willing tenant, vacant possession, and a hypothetical term. Typical disregards include the tenant's occupation, goodwill, and tenant's improvements (other than those the tenant was obliged to carry out). Many reviews are upward-only. The Code requires the parties to be told if review is upward-only and to state assumptions and disregards clearly. Index-linked (for example Retail Prices Index) and fixed-step increases are alternatives that avoid valuation argument.

Alienation

Alienation means assignment, underletting, charging, sharing occupation, and parting with possession. An absolute bar on assignment of the whole is commercially harsh and is discouraged by the Code for assignment of the whole. A qualified covenant (no assignment without consent) is read with section 19(1) of the Landlord and Tenant Act 1927, which implies that consent is not to be unreasonably withheld, and with the Landlord and Tenant Act 1988, which imposes a statutory duty on the landlord to give a written decision within a reasonable time. Underletting of part is often prohibited or tightly controlled. Sharing with group companies is frequently allowed. Charging to a bank may be permitted with notice. Alienation is the hinge between this section and the next: the form of the covenant decides whether an authorised guarantee agreement (AGA) can be required.

Term, breaks, and the Code

The term may be a fixed number of years from a stated commencement date, which can pre-date completion if the parties backdate rent. A break clause lets one or both parties end the lease on a specified date or on rolling notice. Break conditions are construed strictly. A condition of vacant possession can fail if the tenant leaves substantial chattels or an occupying subtenant. A condition that all rents are paid will usually require the principal rent to be paid up to the break date; whether other sums must be paid depends on the wording. The Code says break conditions should be limited to those that are essential: paying principal rent, giving up occupation, and leaving no continuing subtenants. Contracting out of the 1954 Act, if intended, must be completed before the tenant becomes bound; that procedure is taught in section 16.3.

The Code for Leasing Business Premises is an RICS professional statement, not an Act of Parliament. From 1 September 2020, RICS members must approach negotiations constructively and collaboratively and must issue written heads of terms covering the prescribed minimum items (premises, term, rent, deposit, break, repairing basis, alienation, whether the lease will be contracted out, and related points). Recommended practice uses "should" and covers schedules of condition, fairer alteration and alienation provisions, and clear rent-review machinery. Once the lease is executed, the heads of terms fall away; the deed governs.

Granting a lease or underlease: steps

Treat the grant as a transaction with a completion date, not as a signature exercise.

1. Heads of terms — record the bargain, including 1954 Act status and who pays costs.
2. Draft the lease — the landlord's solicitor usually produces the draft and a Land Registry-compliant plan if the term will be registrable.
3. Agreement for lease — use this where grant is delayed by landlord's works, tenant's fit-out that must start under licence, planning, vacant possession of a previous occupier, or board approval. The agreement is the contract; it attaches the agreed form of lease, sets conditions, and provides for completion of the deed when conditions are met. Without an agreement, a party who has spent money on works before grant has weaker protection if the other walks away.
4. Deduce and investigate title — official copies of the landlord's freehold or superior leasehold title, the lease plan, charges, and any restrictions. For an underlease, also investigate the headlease: does it allow underletting, and will the underlease term be shorter than the headlease?
5. Pre-contract searches and enquiries — local search, drainage, optional environmental and chancel (where still relevant), company search if a corporate landlord or tenant, and Commercial Property Standard Enquiries (CPSEs) or equivalent. The tenant's solicitor raises enquiries; the landlord's solicitor answers and manages third-party replies.
6. Report to the client — unusual covenants, 1954 Act position, repairing liability, break conditions, and any title defect that needs insurance or a special condition.
7. Pre-completion — execute the lease and counterpart as deeds (including correct attestation for companies), arrange any licence from a superior landlord, and calculate the premium, first rent, and apportionments.
8. Completion — date the deeds, hand over keys or access, and pay sums due.
9. Post-completion — file Stamp Duty Land Tax (England) or Land Transaction Tax (Wales) if the grant is notifiable, register a lease of more than seven years at HM Land Registry, and serve any notice of underlease required by the headlease.

An underlease follows the same path with extra headlease control. The underlease covenants are often as onerous as, or more onerous than, the headlease so the tenant is not left with a gap. The underlease must not purport to grant a longer term than the tenant has. Superior landlord's licence to underlet is frequently a condition of the agreement for underlease.

Exam trap: do not confuse an agreement for lease with the lease. The agreement is a contract (often exchanged) that may be protected as an estate contract. The lease is the deed that creates the estate. Conditions such as practical completion of a developer's works belong in the agreement, not as vague recitals in an already dated lease.