Interests in Property (Leases)
Interest in property is essential to how property exists in our current economy. Oxford dictionary defines interest as "a right or claim to something" which means that interest in property determines how a property is claimed and the rights granted to a person. Property is held freehold or leasehold. In commercial property, leasehold properties are held with a suite of documents depending on the circumstances such as leases, licences, and tenancy at will documents etc.
What is a lease?
A lease stands apart from a licence because it confers an interest in the property whilst licences grant temporary permission to use the property. Property is a unique asset class as it is both vividly tangible and intangible, it can be an asset or a liability to a business and what determines that is the drafting of the lease.
A lease is a (sometimes very long) document that confer interest in property but also clears up the obligations for all the parties to the agreement. The lease agreement often seeks to strike the balance between the property owner and tenant (and any other interested parties).
The balance between property owner and tenant is a fine one. The interests can sometimes be opposed but many times do overlap. Terms such as “quiet enjoyment” which codifies the tenants right to "peaceably hold and enjoy" the property and not be interrupted by the Landlord are an example of this.
Other typical terms you see in leases are:
The interplay between the terms of the lease and rent is subtle but varies due to circumstances of the agreement and also subject to convention. For example, in healthcare leases, adjustments of 5% - 7.5% are applied to FRI leases when compared to a TIR lease. These adjustments account for the obligation on the tenant to repair and insure the entire property in FRI leases. Whilst in TIR leases the tenant is only responsible for repairs to the internal parts of the property and not responsible for insuring the building. FRI leases are considered more onerous on the tenant than TIR leases and the rents are analysed to reflect that.
The process of agreeing a lease can be arduous depending on how well or poorly both party’s interests overlap. Leases seem complicated but advice is important and the RICS recommends in the “code for leasing business premises” that both parties instruct property professionals and solicitors to help navigate the web of terms.
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The best way to avoid disputes is always a well drafted lease but when disputes occur there are safeguards such as notices under the Acts (Landlord and Tenant, Law for Property Act etc) and alternate dispute resolution provisions. If those fail, then courts tend to settle disputes with logical settlements that consider whether a new precedent is being set such as the recent Frances V Cavendish 2018 case. Courts typically employ presumption of reality; consider the spirit of the agreement which explores the original intention of the parties, but the key facts of the case also play a part.
How have leases changed in the 21st century?
In business there is a current trend towards innovation of business contracts and commercial property leases have been impacted to certain degree. The three loci of change are:
Digitisation which is defined as "the process of converting information from a physical format into a digital one" - This process is widespread in the property industry because a good proportion of leases are viewed on digital platforms like adobe reader. Typically, physical leases are scanned into computers, stored, and viewed digitally. The physical printing of counterpart leases (copy for property owner and tenant) and physical signing of leases is still a common occurrence and solicitors tend to have varying approaches to this. Whilst there has been a rise of DocuSigned leases, this is not yet ubiquitous in the industry.
Digitalisation defined as "the process of leveraging digitisation to improve business processes" - this is still in its infancy in the property industry. There are platforms provided by various Property companies and solicitors such a lease wizards which provide an end to end process for entering key terms, then generate a lease with standard terms, an example of this is Law Depot's free commercial lease offering. These systems typically do not work well with complex leases with non-standard terms and still requires a manual review by solicitors and property professionals.
These services have only reduced the time cost of the drafting of the documents, it still requires input from solicitors and property professionals and sometimes completely fails in encapsulating the intention of both parties which causes a reversion to traditional means. The presence of these services reveals that there is an interest adopting innovation into lease agreements.
Digital transformation is the sum of process of digitisation and digitalisation and its total impact on business & the industry. This can be made possible by the wholesale implementation of technology into the process of lease agreements, where the process starts digitally and ends digitally with no physical intermediary required. Research into whether this can be supported on the blockchain has popularly been explored but a lot of intermediary steps such as digital twins have been linked to making this a reality. This is still a distance away but the issues I foresee being paramount to widespread adoption are:
Thanks for reading.