Sales of Properties Subject to Leases | Commercial Property

What is a property subject to a lease?

A property subject to a lease will include a lease confirming the premises are used for specific, usually business, activities. Buying a property subject to a lease involves the investor obtaining a capital asset, which is expected to produce both income (in the form of rent) and capital growth (in the form of enhanced capital value increasing during your ownership).

Many investors and purchasers will invest in a property subject to a lease, based on an institutionally acceptable lease, which would safeguard the income stream. We describe the income return as a ‘yield’ which is supposed to increase in line with the economy over time. Yields are constantly changing in line with the current market, and soften when they increase on a percentage basis, meaning you will obtain more for your money as the index proceeds in this direction.

Solicitor involvement in the sale of a property subject to a lease

Many of the tasks involving a leasehold property are the same as when acting in a freehold transfer; for example, the same searches must be carried out, and the same title checks are completed. However, additional tasks are mandatory, such as reviewing the freehold title and reviewing any existing lease. We would highlight to you anything inconsistent with an institutionally acceptable lease.

In relation to a commercial property lease, replies to CPSEs (Commercial Property Standard Enquiries) will need to be obtained and reviewed. We would also need to consider additional contract provisions in the sale contract, and these include, but are not limited to, apportionments of rent and service charge, any rent arrears, any rent deposits and insurance and management considerations.

If a taxpayer sells their business, which includes a property subject to a lease, then the sale will amount to a transfer of a going concern. Specific VAT rules will then apply and will be dealt with before completion. A transfer of a property subject to a lease will then be treated as a transfer of a property rental business for VAT purposes and will be a transfer of a going concern.

Forfeited leases

A lease that has been forfeited is a lease that no longer exists. A lease may be forfeited for many reasons, including by court proceedings or by re-entry. A tenant is able to apply for relief from forfeiture, and if successful, the lease will be reinstated. If the relief is granted to a third party, such as a new tenant, then the new lease will generally be granted on the same terms as the forfeited lease, and the same will be dealt with in the contract provisions during the sale.

Employment issues with the sale of a property subject to a lease

Under (TUPE), Transfer of Undertakings (Protection of Employment) Regulations 2006, the buyer will take on all the rights, liabilities and responsibilities for anything done by the seller which arises before the transfer. The CPSEs do not contain wording that deals with the consequences of TUPE, although CPSE 1 does contain enquiries relating to any employees to whom TUPE may apply, and the same will be reviewed during a Commercial Property transaction. Wording in the sale contract to reflect the employees transferring with the property may be appropriate.

Rights of residential tenants

Where you buy a property that is wholly residential, or mixed-use, you will need to be aware of the rights of the tenants that occupy the leasehold sub-properties. Attention will be directed to the tenants’ collective right of first refusal and the tenants’ right to acquire the freehold of their building. A tenant may also have an individual right to be granted a new lease of an individual flat and a right to take over the management of a specific part of the building that is used for residential purposes. The above is particularly important when purchasing a freehold block of flats, where the freehold is likely to be subject to many leases.

Frequently Asked Questions

What does it mean to buy a property ‘subject to a lease’?

Buying a property subject to a lease means the buyer acquires the property with an existing tenant in place, inheriting the terms, rights and obligations of the current lease.

What legal checks are required when purchasing a property subject to a lease?

Your solicitor will review the freehold title, the existing lease, responses to CPSEs, rent and service charge information, insurance provisions, and any rent arrears or deposits held.

What happens if the lease has been forfeited?

A forfeited lease no longer exists, but a tenant may apply for relief from forfeiture. If granted, the lease can be reinstated or re‑granted to a third party, and this will affect the sale.

What is TUPE and how can it affect a property sale?

If employees work at the property and the business transfers, TUPE regulations may automatically transfer those employees to the buyer along with their existing rights and obligations.

What rights do residential tenants have when a property is sold?

Residential tenants may have rights such as first refusal over the freehold, collective enfranchisement, individual lease extension rights and rights to take over management of the building.

Example A

What rights do residential tenants have when a property is sold?

Residential tenants may have rights such as first refusal over the freehold, collective enfranchisement, individual lease extension rights and rights to take over management of the building.

Example B

Rent deposit complications

A landlord holds a £15,000 rent deposit from a commercial tenant. When selling the property, the solicitor ensures the rent deposit is formally transferred to the buyer. Without the correct deed of assignment, the tenant could demand its return from the seller after completion.