 Procedure on grant of a commercial lease  Value Added Tax  Stamp Duty Land Tax on leases

 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

   Consider agreements for lease  Advantages for landlord ▪ Certainty?

Note Standard Conditions Conditionality  Distinguish: ▪ Conditional contracts ▪ Options ▪ Pre-emption rights

 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)

 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”

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

   Preliminary enquiries  The Commercial Property Standard Enquiries (CPSE’s) Superior title  Easements  Defects Drafting points  Landlord ▪ control; ▪ rent review; ▪ marketability, investment

 Drafting points  Tenant – ▪ flexibility ▪ marketability  FRI leases/Institutionally acceptable leases   Completion Post-completion

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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

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Transactional tax

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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)

  Grants of (commercial) lease: premium and rent SDLT on premium element

Premium threshold

£0-£150,000 where the annual rent is less than £1000 £0 - £150,000 where the annual rent is £1000 or more +£150,000 - £250,000 +£250,000 - £500,000 Over £500,000

Rate of SDLT

Zero 1% 1% 3% 4%  No set off – rate applies to the whole premium

 SDLT on rental element  Net Present Value calculation used ▪ See example in handout

Net Present Value

£0 - £150,000 +£150,000

Rate of SDLT

Zero 1%  Set off does apply – deduct £150k

 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!

 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

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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

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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