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Commercial Leases: Lecture 2 Today’s topics

Commercial Leases: Lecture 2 Today’s topics. Procedure on grant of a commercial lease Value Added Tax Stamp Duty Land Tax on leases. Commercial Leases: Lecture 2 Procedure. Preliminary matters for landlord’s solicitor Heads of terms Consents Check title Commercial Lease Code 2007

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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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