13 Feb 2012Blog

Negotiating a residential lease

by Savitri St. John, Partner, Clarke Gittens Farmer

Clarke Gittens FarmerAt the outset of the Landlord and Tenant relationship, the parties usually have the same goal – that the relationship will run smoothly, without disputes, and that at the end both parties will go their way satisfied.

However, the devil is always in the details – one person’s idea of how things should work is often not the other’s, and unless parties address their minds to an issue beforehand, it often comes as a shock after the lease is signed to discover that the other party saw things working quite differently.

This article explores some of the issues that deserve consideration by the parties before the lease is completed, so that the parties will know how things will operate before they are committed.

General principles

A lease is a contract. So if the landlord or his agent deliberately misleads the tenant about the property when showing it, the tenant may have a right to claim damages for loss suffered as a result.

Both parties should review the lease to ensure they are not subject to any strict and unqualified obligations – neither will want to be responsible for events or people they cannot control or to expend unreasonable effort to achieve whatever they are obligated to do.

Both parties will also want to ensure that if the other’s consent is required to do anything, that consent will not be unreasonably withheld or delayed.

Formalities

Leases for longer than a year must be in writing.

Both parties should make sure that the person signing the lease on behalf of the other is authorized to do so – for example, a real estate agent signing for the landlord should have a power of attorney granting power to do so.

Possession prior to completion of the lease

A tenant who takes possession of the premises before the lease is completed is a “tenant at will”, and the arrangement may be terminated by either party at any time, without a notice or a reason.

If the tenant carries out work on the premises (like painting, outfitting etc) and the lease is not subsequently completed, he may not be able to recover what he has spent. The landlord, too, may find that if he permits the tenant to alter the premises to suit himself and the lease is not completed he may have to bear the cost of restoring the premises to their prior condition.

The situation is complicated where there is an “agreement for a lease” in existence when the tenant takes possession: this may give the tenant an immediate tenancy in law which might be on terms different from those in the proposed lease.

It is therefore in the best interests of both parties to wait until the lease is completed before the tenant moves in, or at least have a clear written arrangement about what work may be carried out and what is to happen if the lease is not completed.

Investigations before completion

The tenant should make sure the landlord actually owns the property he wishes to rent, and if the lease is for more than a year or so, find out whether the property is mortgaged, since a prior mortgagee can sell the property without regard to the lease. If there is a mortgage the tenant might want some assurance that the mortgage is in good standing.

Where a property is subject to restrictive covenants, these should be echoed in the lease, and the tenant should have a copy of them before the lease is completed, so that he will know whether he can use the property as intended.

A prospective landlord will naturally want to make sure that anyone he considers as a tenant is creditworthy, and where he cannot be certain, if the lease is long term or high value, he might consider asking for a surety or a substantial deposit paid in advance.

Description of the premises

This should be specific. A plan can be very useful. Where a part only of a building is leased it is important to define who has what rights to the walls, ceilings and floors that divide the premises from the other parts of the building.

The parties should consider how the tenant will access the premises, and if there are parts of the building used in common with others, the tenant’s rights to use these should be clear, along with who will be responsible for cleaning, maintaining and repairing them, and any rules for use.

Furniture and fittings

Leases of furnished premises should attach an inventory, which ideally, should state the condition of each item. In some cases parties have even included photographs. Prior to the tenant’s taking possession the tenant and landlord should review the inventory and establish that each item is present, and then both initial each page.

Unless the lease provides otherwise, the Property Act implies an obligation on the tenant to keep furniture leased with the premises in as good condition as it was at the commencement of the lease, fair wear and tear excepted, and to replace lost, destroyed or severely damaged articles with articles of equal value.

Tenants should examine all fixtures such as air-conditioning apparatus, swimming pool pumps, generators, plumbing apparatus etc. particularly if they are responsible for repairing them during the tenancy. All defects should be repaired before the lease is completed. If this is not practical, the lease should specifically deal with this.

Landlord’s rights of access

Because a lease grants the tenant a right to exclusive possession of the premises, the landlord should reserve the right to enter them when he needs to inspect their condition, do repairs or improvements, show the premises for sale or lease to a new tenant near the end of the term etc; and in cases of emergency. The landlord has an implied right at law to enter to inspect the premises, and to do repairs he has covenanted to do, but these may be too restrictive for convenience and parties should draft the lease to give the rights they actually need.

The tenant should make sure that any rights reserved are limited to what is truly necessary, and that the lease includes provisions for a reasonable period of notice, in writing, before the landlord can enter the premises, and that entry is limited to reasonable hours, save in cases of emergency.

The tenant might also want a covenant from the landlord to repair any damage he causes to the premises or the tenant’s property when he enters it, and to minimize the duration and extent of any inconvenience caused to the tenant in the process.

Rent and service charge

Both parties should make sure that the lease clearly states the rent, when, how and where payments should be made, and when the first payment is due.

The rent may include a service charge to cover the cost of upkeep of common areas. If there is a service charge the tenant should make sure there is a corresponding covenant from the landlord to provide the services, to a specified standard. The service charge is generally set as a formula based on a pro rata sharing of the cost of the services by the tenants, as expenses vary. Tenants will undoubtedly want an account from the landlord so that they can see how the money is spent.

If the rent is to be reviewed after a period of time, the period should be clearly stated and a formula for review of the rent included. The tenant may want to tie this formula to the cost of living index or market rental as determined by some particular body. If the lease provides for increase of rent only, then he may want to have the option to terminate the lease after an upward review.

Deposits

Leases often require the tenant to pay a deposit in advance, usually one or two months’ rent, to be held by the Landlord during the lease as security against non-payment of rent or damage to the premises during the tenancy.

The amount of the deposit requires careful consideration – the landlord will want it to be sufficient to a) deter a tenant from abandoning the lease and b) cover his losses if this does happen and the property is left in bad condition and/or with rent in arrears. On the other hand, the deposit cannot be so high that it makes renting the property unattractive. The duration of the tenancy also has an impact on what size deposit a tenant will agree to pay.

The tenant should ensure that the lease clearly says the deposit is to be held on account separate from the landlord’s own funds, what it may be applied towards and when it should be repaid. Where it is to be held for a long period or is for a significant sum or both, the tenant may consider asking for interest on it at a specified rate.

Payment for outgoings

Both parties should see that the lease is clear on who will pay the land taxes, water rates, electricity and telephone bills etc. for the premises. If it is silent, the Property Act says these fall on the landlord.

In a short term lease, the landlord generally pays all of these expenses which are built into the rent. The danger in doing so is that the cost of consumables such as telephone, water and electricity is variable, but there is little sense in changing accounts each time there is a new tenant, and if the accounts are in the landlord’s name the service provider considers the bill his responsibility.

For longer term leases the consumables are usually the tenant’s responsibility, and accounts should be in his name. Alternatively, the landlord may pay the bill, and the tenant re-imburse him. The landlord should bear in mind, however, that water rates are a first charge on land and that if the tenant does not pay them ultimately he may have to, to keep the title to his land clear.

Where there are multiple tenants in a building the account may remain in the landlord’s name and the bill is pro-rated among the tenants. Tenants should be wary of this as they may end up subsidizing the cost of services consumed by other tenants. Separate meters are preferable if possible.

Repair and maintenance clauses

If repair is not dealt with in the lease, the Property Act implies a covenant by the landlord to repair the roof, main walls and main drains and the common passageways and installations, and on the tenant to repair the interior, reasonable wear and tear accepted.

Parties should not leave it to the Property Act, which is vague, but clearly say what parts of the building are to be repaired by whom, and to what standard. Generic terms such as “interior” or “external” should be avoided as disputes can arise over what they mean.

The issue is complicated because terms like “repair”, “keep in good condition” and “renew” have been given specific meanings by the courts over the years – parties should get legal advice on the meaning of the words they use.

The age of the building has a bearing on what each party should agree to do – an old building is going to need more work than a new one, but if the building is brand new, the tenant might want to make sure that post-construction defects are dealt with by the landlord, even where the tenant has covenanted to repair. This is only fair since the landlord’s builder is probably liable to repair these defects under the construction contract. In any event, parties must be careful not to negotiate a lease under which neither of them is responsible for essential works. The length of the lease is also directly relevant – a short term tenant may not want to do much to a property he will only occupy for a couple of years.

Where a building is in multiple occupation, the landlord should be responsible for repairs. Landlords often prefer to do the repairs themselves, to be certain they are up to standard, and charge the cost of doing them to the tenant. The tenant will then need to ensure that the lease does not impose on him an open-ended liability to pay for repairs that only the landlord wants.

In a longer term lease where the tenant is responsible for carrying out repairs, the landlord may want the right to do them himself if the tenant does not do them after appropriate notice, and to charge the tenant for them. This ensures the repairs get done and the property does not diminish in value.

Both parties should also bear in mind that they may be liable for damage caused by their workmen when the repairs are being carried out, both to each other and to third parties at the premises.

Alterations and improvements to the premises

The general rule is that things permanently fixed to the premises become part of them and belong to the landlord. The law does say that if the item is installed by the tenant for his ornamental or domestic use, he may remove it if it will not irreparably damage the premises to do so but there may be dispute about this in the case of things like shelving, cabinetry etc. Tenants should therefore make sure the lease deals with ownership of anything they plan to install in the premises that may fall into this category.

If a landlord permits alterations, the lease should clearly say his prior consent must be obtained, and plans must be submitted with the request so that he can make an informed decision. Further, the lease should deal specifically with removal of alterations on request by the landlord and impose a responsibility on the tenant to fix damage caused in the process. The landlord can secure his position somewhat by including provisions allowing the deposit to be used to pay for removal and reinstation of the premises if the tenant does not do it.

Sub-leases or assignments

For long term leases, the tenant should consider whether he will ever need to sub-let or assign the lease to someone else. Landlords are often wary of these provisions and may want to reserve the right to withhold consent to a particular tenant, to call for whatever information is reasonably required to make an informed decision about the sub-tenant or assignee, and to withhold the decision until it is provided and he has had a reasonable time to consider it.

Insurance of the premises

Short term tenants generally have no responsibility for insurance beyond their own contents. In a longer term lease the landlord will usually insure the building but the tenant may be asked to pay at least a portion of the cost of doing so.

Where the premises are insured and the tenant has covenanted to repair them, he should ensure that he does not have to repair damage caused by an insured risk, and carefully review the policy, since accidental damage falls within the ambit of the usual repairing covenant, and he will have to absorb deficiencies in the insurance. In such a case he should insist on having his name on the policy or at least have his interest noted on the policy, so that he will know if it lapses, and have some claim to the proceeds if there is damage.

Parties should consider who will be responsible for excess liability under the policy. Generally, the party bearing the cost of the premiums should take this liability as well, as he has the benefit of the lower premium.

Catastrophic damage

The lease should deal with cases of damage so serious the premises are no longer habitable. These clauses should be linked to the insurance clauses and should address:

• Whether the rent (and service charge) will cease to be payable while the landlord tries to reinstate the premises
• How long the landlord will have to do so
• What happens if the building is not ready at the end of the period
• Whether either party can terminate the lease in the event of major damage
• What happens if the insurance does not cover or fully cover the repair
• What (if any) part of the insurance proceeds is the tenant entitled to if the premises are not repaired

Landlords should note that if they do not address these issues in the lease the law implies a covenant on their part to repair the premises in the case of destruction by fire, earthquake, hurricaine flood or riot.

The end of the lease: expiry of the term and termination

A lease may have a “break clause” that allows either or both parties end it after a specified period of notice has elapsed, or in certain circumstances such as catastrophic loss (discussed above).

Most leases allow the landlord to re-take possession of the premises for breach of covenant. Landlords should seek legal advice before exercising this right as they may be liable in damages to the tenant if they do so when they are not entitled to. Tenants should examine this clause carefully to make sure it does not allow the landlord to end the lease for minor breaches of covenant, and that the tenant has a grace period to remedy any breaches if possible.

If the tenant remains in possession of the premises after the lease has ended he will be a tenant at will. If the landlord accepts rent at this point the tenancy may become a periodic tenancy, for example a monthly or yearly tenancy, with all the other terms of the old lease continuing to be applicable. The consequence for the landlord is that he will then have to serve notice according to the type of tenancy created (in the case of yearly tenancies, 6 months) before he can regain possession of the premises.

Options to renew

An option to renew should specify the renewal rent, or it may not be effective in practice for either or both parties. If the option to renew is subject to the tenant’s compliance with all the terms of the lease, the tenant may be unable to renew for some trifling breach. Tenants should push for language that requires only reasonable performance of the terms of the lease.

Leases and tax

If the Landlord is VAT registered he must charge VAT on the rent and service charge, since these are taxable supplies. The lease should clearly say that VAT is payable and how much it is, and whether the figure quoted as the rent includes the VAT.

Rental and service charge income attract income tax. Landlords are required by the Landlord and Tenant (Registration of Tenancies) Act to register leases with the Commissioner of Inland Revenue. Landlords often ignore this requirement, but not only is that a breach of the law, for which there are sanctions, but they will be unable to get an order for possession from the court if they are not registered.

Tenants may be able to get an income tax credit if the landlord registered the tenancy with the Commissioner of Inland Revenue. The advice of an accountant should be obtained to determine if this is the case.

Property Transfer Tax, Stamp Duty and registration requirements

All leases required to be in writing have to be registered or recorded at the Land Registry within three months of their execution or they will have no legal effect. There is no cure provision if this deadline is not met.

Property Transfer Tax at 2.5% is only payable on leases over 25 years. If the lease is a renewal that takes the total continuous letting over 25 years, the tax is payable even if the renewal lease is not itself for 25 years. The lease will not be recorded or registered until any property transfer tax that is due is paid.

Leases and renewals of leases attract stamp duty at the rate of 1% of the annual rent. This must also be paid before registration or recording. There is also a fee for the recording or registration, probably not exceeding $200.00.

Clarke Gittens Farmer is a commercial law firm, providing legal services for both domestic and international corporate and private clients. The firm has a reputation for high quality work in property, banking, corporate, commercial and business law areas. The firm is the Barbados member of Lex Mundi, the world’s leading association of independent law firms.
The information provided in this article is not comprehensive and is not intended to constitute professional legal advice.
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