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Commercial Leases: Lecture 2 Today’s topics

This lecture provides an in-depth look at the processes involved in granting commercial leases, including VAT implications, Stamp Duty Land Tax, and the value-added tax. It covers preliminary steps, consents, drafting points, and considerations for both landlords and tenants. Additionally, it discusses the VAT options available to landlords and the Stamp Duty Land Tax calculations for lease transactions. Essential information for professionals in the real estate industry.

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Commercial Leases: Lecture 2 Today’s topics

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  1. Commercial Leases: Lecture 2Today’s topics • Procedure on grant of a commercial lease • Value Added Tax • Stamp Duty Land Tax on leases

  2. Commercial Leases: Lecture 2Procedure • Preliminary matters for landlord’s solicitor • Heads of terms • Consents • Check title • Commercial Lease Code 2007 • http://www.leasingbusinesspremises.co.uk/ • Model HOT’s, Occupier Guide and Landlord Code

  3. Commercial Leases: Lecture 2Procedure • Consider agreements for lease • Advantages for landlord • Certainty? • Note Standard Conditions • Conditionality • Distinguish: • Conditional contracts • Options • Pre-emption rights

  4. Commercial Leases: Lecture 2Procedure • Conditional agreement for lease, examples: • Premises to be built (by landlord/developer) • Licences to be obtained • Planning permission (e.g. tenant to obtain for works)

  5. Commercial Leases: Lecture 2Procedure • Example: agreement for lease conditional on tenant obtaining planning permission: “4.1 This agreement is conditional upon the grant of a planning permission; and 4.2 If a planning permission is granted the Landlord shall grant the Lease (in the form annexed hereto) to the Tenant”

  6. Commercial Leases: Lecture 2Procedure Amendments: • Define Planning Permission – for what? • Define Acceptable Planning Permission – to tenant (e.g. list unacceptable conditions) • Oblige tenant to use all reasonable endeavours, notify landlord, etc • Long stop date – terminate agreement if not obtained

  7. Commercial Leases: Lecture 2Procedure • Preliminary enquiries • The Commercial Property Standard Enquiries (CPSE’s) • Superior title • Easements • Defects • Drafting points • Landlord • control; • rent review; • marketability, investment

  8. Commercial Leases: Lecture 2Procedure • Drafting points • Tenant – • flexibility • marketability • FRI leases/Institutionally acceptable leases • Completion • Post-completion

  9. Commercial Leases: Lecture 2Value Added Tax • Supplies • Standard rated CURRENTLY 15% • Zero rated • Exempt • (Note “Customs & Excise” is now “Revenue and Customs” or “HMRC”) • Examples (see text) • The option to tax/election to waive the exemption • Converts exempt supply to standard rated • Option lasts 20 years (3 month cooling off period) • Commercial leases = exempt subject to option to tax • Why would landlord opt to tax? • Developer can recover VAT he paid developing, so lease rents carry VAT • Effect of s89 VATA 1994

  10. Commercial Leases: Lecture 2Stamp Duty Land Tax • Transactional tax • Grants of lease notifiable if • For 7+ years and consideration payable; or • For less than 7 years and there is SDLT payable • Assignments • SDLT on premium (unless original grant less than 7 years and no SDLT payable)

  11. Commercial Leases: Lecture 2Stamp Duty Land Tax • Grants of (commercial) lease: premium and rent • SDLT on premium element • No set off – rate applies to the whole premium

  12. Commercial Leases: Lecture 2Stamp Duty Land Tax • SDLT on rental element • Net Present Value calculation used • See example in handout • Set off does apply – deduct £150k

  13. Commercial Leases: Lecture 2Stamp Duty Land Tax • Example: • Lease for 5 years • £250,000 premium • SDLT on premium is 1% of whole = £2500 • Annual rent £100,000 • NPV £451,505 • SDLT on NPV = £3015 • £451,505-£150,000 = £301,505 @ 1% • Tax on transaction = £2500 + £3015 =£5515 • Here's one I made earlier!

  14. Commercial Leases: Lecture 2Stamp Duty Land Tax • SDLT to be paid <30 days from ‘Effective Date’ • Meaning of Effective Date • Earlier of the grant or date of ‘substantial performance’ • Substantial performance e.g. Tenant fit out works • Submission of Land Transaction Return • Subsequent LTR’s may be required if, e.g.: • Variation - leading to surrender and regrant • Uncertain rents – estimate and revised calculations

  15. Commercial Leases: Lecture 2Stamp Duty Land Tax • Rent review • Additional SDLT payable if rent review takes place in the first 5 years (i.e. rent review after 5 years is ignored) • Additional SDLT payable if an “abnormal increase” after 5 years • Breaks, options and surrenders • Short leases with option to renew now preferred to long leases with break • Note which way the surrender premium moves • If L pays T to surrender, then SDLT payable • If T pays to L to surrender, the SDLT NOT payable

  16. Commercial Leases: Lecture 2Stamp Duty Land Tax • SDLT and LTA 1954 • Leases protected by part II of LTA 1954 continue past their contractual expiry date till terminated in accordance with the Act – i.e. tenants can “hold over” or enjoy a “continuation tenancy” • For leases granted from 01.12.2003, the tenant has a “growing tenancy” – if tenant holds over, NPV recalculated on original term + 1 year (each year) • SDLT and VAT

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