Skip to main content

Eversheds Global Estate Management

UK England & Wales

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - freehold ownership is unlimited in time. The freeholder may choose to occupy the property or may grant a lease enabling someone else to occupy it. After the lease expires (subject to statutory security of tenure (See section “Security of Tenure”)) the right to occupy will pass back to the freeholder. It is possible to sell freehold land with either no occupiers or subject to one or more leases.

Leasehold - leasehold ownership is for a limited period specified in the lease and known as the term. The term may be a long period (eg 999 years) or a shorter period (eg one to 25 years). If the term is long, the annual rent is usually a nominal amount (eg £100) and a premium (ie a one off payment ) close to the value of the freehold is paid on the grant of the lease. If the term is short the annual rent is usually the full market rate. Subject to the terms of the lease, the lease can be assigned (ie sold) to third parties or else a sublease with a term that is shorter than the lease can be created out of the lease.

Common hold/Usufruct - commonhold ownership is a type of freehold ownership that is intended for use in properties within a building or estate where owners will each have a share in a commonhold association which manages the common parts. It was introduced in 2004 but has not yet been used in any major developments.

Condominium ownership - not applicable.

Utilisation right - not applicable.

Joint/Co-ownership - it is possible to have co-ownership of freehold or leasehold property. It is also possible to hold freehold or leasehold property on trust for a third party.

Registration - freehold land and any lease with a term in excess of seven years must be registered at the Land Registry. Some land may not have been required to be registered at the time of its purchase, however, registration will now be triggered by the purchase or mortgage of the relevant land. The register is public, provides a guarantee that the person registered as proprietor owns the land, shows a description of the land, and lists any rights that the land has over adjoining land or any rights that third parties have over the land. There are different qualities of title that are applied to registered land but the title that a purchaser will expect to see is “title absolute”.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

There are no restrictions on foreign individuals or corporations buying, holding or selling UK property although if the title has to be registered at the Land Registry they will have to satisfy the Land Registry as to their corporate status.

 

Title to real estate

Title to real estate

Investigation of title - the buyer/tenant’s lawyer will investigate title, carry out searches of public registers, raise enquiries of the seller/landlord and review and where necessary negotiate the contract and any draft lease. The buyer/tenant meanwhile will commission a building survey, sometimes an environmental survey and will complete his financial arrangements. The buyer/tenant’s solicitor will produce a report on the title for the buyer/tenant.

Transfer of title - beneficial title passes immediately on transfer, but where the transaction is registrable, legal title passes only on registration.

Registration - freehold land and any lease with a term in excess of seven years must be registered at the Land Registry. Some land may not have been required to be registered at the time of its purchase, however, registration will now be triggered by the purchase or mortgage of the relevant land. The register is public, provides a guarantee that the person registered as proprietor owns the land, shows a description of the land, and lists any rights that the land has over adjoining land or any rights that third parties have over the land. There are different qualities of title that are applied to registered land but the title that a purchaser will expect to see is “title absolute”.

Information on register - it is a public register see "registration" above.

Commercial leases - any lease with a term in excess of seven years must be registered at the Land Registry. The rules that specify what land has to be registered have changed over time so a lease may not have been required to be registered when it was granted. However, the assignment (sale) of a lease with a term of more than seven years remaining will mean that the lease has to be registered at the Land Registry.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of terms/Agreement - commercial terms are usually negotiated between the estate agents/surveyors representing the seller/landlord and buyer/tenant and the agreed terms are then provided to the parties' lawyers.

Heads of terms – not applicable.

Investigation of title - the buyer/tenant’s lawyer will investigate title, carry out searches of public registers, raise enquiries of the seller/landlord and review and where necessary negotiate the contract and any draft lease. The buyer/tenant meanwhile will commission a building survey, sometimes an environmental survey and will complete his financial arrangements. The buyer/tenant’s solicitor will produce a report on the title for the buyer/tenant.

Purchase deed - the transfer of property must be by deed. For registered property the Land Registry have prescribed the form of deed that must bee used (either a TR1 for the whole or TP1 for part).

Contracts - once the parties sign and 'exchange' a formal contract they are committed to complete at a specified future date. Completion may sometimes be conditional on other events such as obtaining planning permission or completion of building works. Usually, if one or more of the conditions is or are not satisfied by a certain date then either party can withdraw from the transaction.

Completion/closing - takes place when the parties have executed and dated the transfer/lease and the balance of any monies due has been paid. At this point the buyer/tenant is entitled to take possession.

Post completion - after completion any stamp duty land tax must be paid and the buyer/ tenant's interest registered at the Land Registry within a specific period.

Leases - the tenant’s lawyer will investigate title, carry out searches of public registers, raise enquiries of the landlord and review and where necessary negotiate the agreement for lease and any draft lease. The tenant meanwhile will commission a building survey, sometimes an environmental survey and will complete his financial arrangements. The tenant’s solicitor will produce a report on the title for the tenant. Once the parties sign and 'exchange' a formal agreement for lease they are committed to complete at a specified future date. Completion may sometimes be conditional on other events such as obtaining of a landlord's consent, obtaining of planning permission or completion of building works. Usually, if one or more of the conditions is or are not satisfied by a certain date then either party can withdraw from the transaction.

Transfer of ownership of leased property (alienation) - as below:

  1. (a) Holding on trust/dealing with part - this is usually prohibited.
  2. (b) Assignment of whole - this is usually permitted with the landlord’s consent as long as certain conditions are met to safeguard the value of the landlord’s investment. Pre-1996, the tenant will remain liable even following assignment until the end of the term. Post-1996, it is common for the tenant to be required to guarantee any incoming assignee until the assignee further assigns.
  3. (c) Underlettings of whole - this is commonly permitted with landlord’s consent subject to conditions.
  4. (d) Underlettings of part - this is less common and usually only permitted where the design of the building allows a floor plate to be conveniently divided.
  5. (e) Sharing with group companies - this is usually permitted without consent.
  6. (f) Charging of whole - this is usually permitted without consent.

Language requirement – not applicable.

Governance of lease signature/administration – not applicable.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - broadly speaking, there are two main lease types being long leases where a one off payment is paid on the grant of the lease and only a nominal annual rent is payable and shorter leases where the annual rent is at full market value. See section “Leasehold” for further details.

Alterations/modifications - alterations are usually permitted with the landlord's consent with no consent being required for installation of internal removable partitioning.

Assignment and sub/under letting - see section “Transfer of ownership of leased property (alienation) within "Structure of a real estate transaction".

Destruction/reinstatement - see section “Insurance” below for the position where the property is destroyed by an insured risk or uninsured risk. Commonly the tenant must reinstate any alterations at the end of the term and return the premises to the landlord in accordance with the repairing covenants. The tenant is not normally compensated for improvements.

Duration of lease - the duration of the lease is for the parties to agree. There are no limitations on this other than that it is not possible to grant a lease that starts more than 21 years in the future.

Forfeiture/irritancy - leases will usually provide that the landlord can forfeit the lease for non payment of rent and breach of covenant by the tenant. Short leases (see section “Leasehold“ for further detail) will also include an ability for the landlord to forfeit if the tenant is insolvent, enters into administration or there are other specified indications of financial difficulties. Forfeiture is a very complicated area. In simple terms, if the landlord intends to forfeit the lease for breach of covenant it must comply with a statutory procedure before it can forfeit. For all other cases (except administration) a landlord can forfeit a lease by re-entering the premises and changing the locks. However, if the landlord wants to forfeit and the tenant is in administration it must seek the consent of the court. The tenant can, in all cases, apply to the court for relief from forfeiture.

Insurance - a landlord usually insures the building and recovers a contribution of the cost of insurance from the tenants. Rent is usually suspended if the premises are destroyed by an insured risk until expiry of the period of loss of rent insurance. It is normally the landlord's responsibility to reinstate following damage by an insured risk and often there may be rights to break if reinstatement is not carried out within a specified period. If the property is damaged by an uninsured risk then the landlord usually elects, within a certain period, whether or not it wants to reinstate the premises. If it elects not to reinstate the premises then the lease will terminate. If it elects to reinstate then the rent will be suspended. Provided the landlord does reinstate the premises with a specified period the tenant will then be obliged to take occupation of the reinstated building and to resume paying rent.

Rent review - rent is commonly reviewed upwards on a five year cycle to match the market rate.

Repair/decoration/furnishing - Lease of whole building - Repair and decoration are usually the tenant's responsibility. Lease of part of a building – The tenant is usually responsible for internal repairs and decoration. The landlord normally carries out structural repairs of the whole building and repair and decoration of the common parts, recovering the cost from the tenant through the operation of a service charge.

Service charge - if a landlord repairs the structure and common parts or provides any services to the tenants, the lease usually includes a service charge regime under which certain costs can be recovered by the landlord from the tenants. The proportion of service charge payable by each tenant is usually calculated by reference to the area occupied by the tenant compared to the building/estate as a whole.

Tenant’s duties - the tenant has numerous obligations in the lease (such as keeping the premises repaired and decorated, complying will all statues affecting the property etc).

Termination/break clauses - it is possible to negotiate early termination rights in favour of either the landlord or the tenant. Tenant’s break clauses are more common and are usually conditional on the rent being paid and the premises being returned to the landlord without any occupiers.

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - rent deposits are the most common form of security and usually involve placing a sum equal to six months' rent in an interest-bearing account which is charged to the landlord and which can be drawn against by the landlord in the event of default. The deposit is usually released on assignment or on the determination of the term. Some rent deposits also provide that the deposit is released once the tenant satisfies a specified financial test.

Surety - accompany or individual may be required to guarantee the tenant's performance of its covenants and also be required to take a lease on identical terms in lieu of the tenant in the event of the tenant's insolvency. On assignment where the lease was granted after 1996 (see section “Assignment of whole” for further details) the surety may be required to guarantee the performance of the assignee until the lease is further assigned.

Warranty - not applicable.

Rent deposit/bank guarantee - rent deposits are the most common form of security and usually involve placing a sum equal to six months' rent in an interest-bearing account which is charged to the landlord and which can be drawn against by the landlord in the event of default. The deposit is usually released on assignment or on the determination of the term. Some rent deposits also provide that the deposit is released once the tenant satisfies a specified financial test. Bank guarantees are not common.

 

Security of tenure

Security of tenure

A business tenant has a statutory right to remain in occupation even after his lease has expired unless he follows a statutory procedure to give up his statutory rights and to “contract out” his lease. The tenant is also entitled to request and be granted a new lease of the premises on broadly the same terms as his old lease.

The tenant will usually agree the terms of the new lease with the landlord but failing agreement the terms of the lease are fixed by the court at an open market rent and for a maximum duration of 15 years.

A landlord can only oppose a tenant’s application for a new lease or terminate the tenancy on certain statutory grounds. The most commonly ground used is the landlord's intention to redevelop the property. This requires compensation to be paid to the tenant.

It is common for leases of short terms (up to ten years) to be “contracted-out”. This is achieved by a warning notice being served on the tenant in a prescribed form and the tenant making a statutory declaration confirming that it understands and accepts that it is giving up its right to renew the lease.

The notice must be served, and the statutory declaration made, before the tenant is contractually obliged to enter into the lease.

 

Taxes

Taxes

On sale/acquisition of real estate - stamp duty land tax is a one off payment made by the buyer/tenant to HM Revenue & Customs within 30 days of completion or substantial performance of the contract failing which penalties and interest become payable. The amount of stamp duty land tax is determined by reference to the purchase price or, in the case of a lease, by the term, level of rent and any capital sum paid.

If Value Added Tax (VAT) is payable on the purchase of the property then stamp duty land tax is payable on the purchase price or annual rent plus VAT. (See section “Value Added Tax” for further details).

Sales by investors resident outside the UK are usually free of tax on the profit made from selling the property but traders may not escape liability.

Immovable property tax - see section "On sale/acquisition of real estate".

Income tax - income tax is payable on rental income. However, a landlord can claim expenses against the tax based on the cost of maintenance of the building and, in certain cases the interest on associated loans. Allowances may also be made for depreciation on plant, equipment and other elements of the building.

Land tax - see section “On sale/acquisition of real estate”.

Lease tax - see section “On sale/acquisition of real estate”.

Local tax - business rates are payable by the occupant of a building to the local authority in proportion to the value the building might realise if it were let on a yearly lease. This value is reassessed every five years.

Mortgage - not applicable.

Other taxes - see section “On sale/acquisition of real estate”.

Property lease tax - see section “On sale/acquisition of real estate”.

Value added tax - most commercial property is made subject to Value Added Tax (VAT) by the owner opting to pay VAT. This option is made so that the owner can recover any VAT on sums it has paid on the property. VAT is usually paid by the buyer to the seller who then passes it to HM Revenue and Customs. It is usually recoverable by the buyer. It is possible, where the property is let to a third party and certain conditions are met, for the buyer not to have to pay VAT on the purchase. This is known as a transfer of a going concern and saves the buyer from paying stamp duty land tax on the VAT element of the purchase price/rent.