MAKERERE UNIVERSITYCEDAT SCHOOL OF BUILT ENVIRONMENT, DEPARTMENT OF CEM

PROPERTY MANAGEMENTLEASE TERM, RENT, OUTGOINGS AND OTHER PAYMENTS

GROUP ONE Names reg. NO.• MUWONGE RAPHAEL 12/U/719• NANGENDO SANDRA

12/U/11835/PS• KASASIRA M. BELAYE 12/U/6328

/PSA• LUMU ALVIN 12/U/7857/PS• KALASI MOSES

12/U/22324/PSA• NAKIMPI REGINA 12/U/806• KIZITO MAJORINE EMILLY 12/U/7270/PSA• ACEN HARRIET 11/U/1314

COURSE OUTLINE

Introduction Lease term Rent Outgoings Other Payments

INTRODUCTION A lease refers to a proprietary interest in land granted by one person (lessor) to another (lessee) for certain duration. The older term that was used to mean a lease was a demise (Stewart, 2009).According to Wikipedia, a lease is a legal contract, and thus enforceable by all parties under the contract law of the applicable jurisdiction.In England and Wales by virtue of section 62 of the Law of Property Act 1925, the grant of a lease is deemed to include all rights and easements which the premises demised enjoy at the time of the grant, as well as all fixtures attached to the premises at that time (the premises demised enjoy at the time of the grant, as well as all fixtures attached to the premises at that time (Bannister, 2008).

LEASE TERM A lease term is one of the formal requirements for a lease determined by the law and custom of the jurisdiction in which real property is locatedAccording to the Business dictionary.com, a lease term refers to a fixed, non-cancelable period for which a lease agreement is in force.It can also be defined as the interval between the time a lease goes into effect and its expiration. It is the life of a lease including any renewal options, (Financial dictionary)According to Wikipedia, a lease term may be fixed, periodic or of a indefinite duration.A periodic lease is one that exists from year to year or month to month. A fixed term lease is one where the maximum duration is fixed from the very commencement of the lease e.g. a lease for ten years.

LEASE TERM IN WALES AND UK (HISTORICALLY)

Historically, commercial leases were granted usually for a lease term of 20 or 25 years, with rent reviews once in every fifth year of the lease term and with no right to terminate the lease before the expiry of the lease term (Bannister, 2008).

LEASE TERM IN UK AND WALES (RESEARCH BY BPF)

According to the research made by the British Property Federation (BPF) IPD Annual lease Review for 2007, on what the ‘average’ lease term in the current market is, the trend was generally downwards indicating are drop in the average length of all the recent leases taking breaks into account and weighted by the rent passing. In their report BPF indicated that less than 4% of the leases completed recently were for more than 15 years, and these leases accounted for 14.5% of passing rent. It also noted that 17.5% of leases in 2006-7 for 5years or less had break clauses.

LEASE TERM IN UK AND WALES (CURRENT SITUATION)

In the current market, leases are now usually granted with lease terms of not more than 10 or 15 years and sometimes include the tenants’ right to terminate the lease before the expiry of the lease term. Leases of more than seven years now need to be registered at the Land Registry so that plans used must be Land Registry compliant.The shorter the lease the more likely it is that the lease will be excluded from the security of tenure provisions which are automatically incorporated unless excluded.The shorter the lease i.e. around five years or less, tenants are more likely to be able to agree some form of cap on service charges and possibly, some limitation on their repairing liability for instance, by reference to a schedule of condition.A longer lease will almost invariably have a greater repair/dilapidations liability.

LEASE TERM IN UK AND WALES (BREAK CLAUSES)

A Break clause is a clause in the tenancy agreements that provides an opportunity for the tenant and/or the landlord to give notice during the fixed-term of the tenancy to end the tenancy early.Break clauses with any conditions are fraught with difficulties and, as a result, they may not be operable, legal and detailed surveying advice should be taken well in advance of any break date.Where a lease has a break clause, ensure that any sublease can be terminated in time to comply with that break clause and that it excludes any statutory renewal rights.

LEASE CODE’S ADVICE TO THE TENANTS

The Lease Code’s advice to the tenants is, “When granting any subleases and or in sharing possession with any suppliers or business partners, always make sure your agreement with them expires on the date before your right to break and that you have not given them any rights to stay in the property beyond the term of your agreement with them”.The Lease Code also advises the tenants to, “Be careful that it is only principal rent and not any other sums such as service charges, insurance premiums and even penalty interest etc. that must be paid in the cleared funds before the break date”.

LEASE CODE’S ADVICE TO THE LANDLORDS

The Lease Code urges landlords to be flexible in terms they offer tenants: “The only preconditions to tenants exercising any break clause should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases. Disputes about the state of the premises, or of what has been left behind or removed, should be settled later like the normal lease expiry.

LANDLORD’S BREAK RIGHT AND THE LANDLORD AND TENANT ACT 1954

The landlord still has to follow the statutory termination provisions of serving relevant notices in addition to any contractual procedure although he or she may have a contractual break right.This is true if the lease has not been excluded from the from the renewal rights under the 1954 Act.

LEASE TERM UNDER COMMON LAW

The lease term must be determinable, however this does not mean that it must be fixed.According to the case of Lace Vs Chantler (1944) ALLER305, at common law the duration of the lease must be certain or its end has to be ascertainable from its beginning. In his ruling Lord Greene MR quoted that “A term created by a leasehold tenancy…must be expressed with certainty…at the time when the lease takes effect”.

LEASE TERM UNDER THE LAND ACT 1998

The Ugandan position on this point is set out in the Land Act Cap 227 S.3 (5) (c) which is to the effect that the duration of the lease is usually but not necessarily defined. This means that it is not mandatory to have the duration of the lease defined. On the other hand, the practice more often than not is that the duration of the lease is usually defined. This is because of the fear of land owners to create interests in their land whose termination time is uncertain.

THE EFFECT OF THE STAMP DUTY LAND TAX (SDLT)

The introduction of the SDLT in December 2003 in place of the Stamp Duty, introduced another influence on lease terms, namely that the longer the lease the higher the tax. It is now that case that a short lease with an option to renew is better from a tax position than a long lease with a break clause.

RENT Income from property is called RENT.Rent is a requirement of leases in some common law jurisdictions, but not in civil law jurisdictionsRent is an annual or periodic payment for the use of land or land and buildings.According to the Merriam-Webster Dictionary, rent refers to the usually fixed periodical return made by the tenant or occupant of the property to the owner for the possession and use there of.It is also said to be an agreed sum paid at fixed intervals by a tenant to the land lord.

TYPES OF RENT Ground rentThis rent paid in building leases for the bare site alone. It excludes payments for improvements on the site. Head rent This is the rent paid by the superior tenant or the head lessee. Profit rent This is the difference between rent received, or potentially receivable, by a tenant and the rent paid to the tenant’s superior landlord. Premium This is the lump sum of money paid by a lessor for the granting of a lease in consideration for the reduction in the rent payable under the lease. Virtual or Sitting Rent This is the actual rent paid plus the annual equivalent of the premium or any capital expenditure incurred by the tenant in additions and alterations to the premises.

MAXIMUM RENT Maximum Rent for which a property could be let in the open market on a given set of letting terms is called FULL RENTAL VALUE. The letting terms can be for instance: Full Repairing and Insuring Costs (F.R.I)Where a property is let on FRI terms, it means that the tenant is obliged to meet full repairing and insuring costs in addition to rent he will be paying to the lessor. Rent received will therefore be net income. Internal Repairing (I.R)Under here the tenant contracts to meet internal repairing only and the lessor is responsible for external repairs and insurance. The lessor receives gross rent.

RENT AND VAT IN UK AND WALES The rent will normally be expressed as being payable in advance and, if the landlord has exercised its option to tax in respect of the property, will attract VAT. The tenant will be able to recover the VAT paid under the lease in accordance with its usual VAT status.The lease will usually specify that the rent is payable on ‘the usual quarter days’ which are 25 December, 25 March, 24 June and 29 September in any one year, although it is becoming more common that the quarter days are 1 January, 1 March, 1 June and 1 September usually referred to as the ‘modern quarter days’.There is also pressure from retailers for rent to be payable monthly in advance instead of quarterly. The advantage of this to tenants is that it helps them to manage cash flow and bring rental payments into line with other outgoings. Landlords would lose out on the interest they earn on quarterly payments

“NO DEDUCTION OR SET OFF” PRINCIPLE

The lease will usually contain an express statement to the effect that ‘no deduction or set off’ can be made from the rent.If properly drafted, this should prevent the tenant, say in a service charge dispute, from deducting the disputed service charge payment from the rental payment. If the clause just refers ‘no deduction or abatement’ then this will not be enough to prevent set off, there must be a specific mention of and exclusion of ‘set off’.Some leases do specifically allow the tenant to deduct tax, if required, usually by adding the words ‘save to the extent required by the statute/law.

TAX DEDUCTION AS PER HM REVENUE AND CUSTOMS (HMRC)

If the landlord’s usual place of abode is outside the UK, the tenant or letting agent should ensure that the landlord obtains approval from the HM Revenue and Customs (HMRC) for the landlord to receive rents gross, with no tax deducted. This is known as ‘The Non-Resident Landlords Scheme’. The scheme requires letting agents to deduct basic rate tax from any rent collected on behalf of the non-resident landlords and pay the tax deducted to HMRC quarterly. If the non-resident landlord does not have an agent, then the tenant himself has to make the deduction and payment to HMRC.

OUTGOINGS Outgoings are “periodic costs incidental to the ownership of property”. They are costs and expenses incurred by the owner or occupier of the property in connection with its ownership, occupation, use, management and maintenance.In other words outgoings are taken to be primary issues related to the paying of rent and other amounts payable like electricity and water bills etc.

MAIN CATEGORIES OF OUTGOINGS Repairs The allowance for repairs will generally depend on the age of the property, extent and the type of construction.Capital expenditures for example heavy repairs on accrued dilapidations are not an outgoing. Insurance This is generally borne by the tenant. Sometimes for example where a property is let on a monthly tenancy or where blocks of offices or flats are let in suites to numerous tenants, the cost of insurance is borne by the landlord. Management The main management costs are rent collection, supervision of repairs, issuing out payments, answering tenant and Local Authority queries. Management costs are normally estimated as a percentage of rent received (5%-10%).

MAIN CATEGORIES OF OUTGOINGS(Continuation)

General Rates Rates are payments to the Local Authority for communal services e.g. road surfacing, street lighting, refuse collection, central sewage disposal and so on. VoidsVoids refer to loss in rent due to the property being unoccupied. It is common practice for Valuers to make an allowance for voids. The amount of allowance for voids will depend on tenant turnover and demand for that type of property. The Cost of Provision of Services These costs occur when the property, mainly blocks of flats and offices are let in suites to multiple tenants and the services can only be provided through a central pool.

MAIN CATEGORIES OF OUTGOINGS(Continuation)

These are sometimes referred to as running costs. They include;• Cleaning and lighting of common parts e.g. the central hall,

staircases, toilets, corridors, parking lots etc.• Running and maintenance of lifts.• Central cooling or heating.• Employment of watchmen, porters etc.• Provision of furniture in the entrance hall and other common parts.In practice the charge for these services is levied separately from rent as a service charge and is assessed each year based on the actual cost of providing such services.NB; The property types and locations can also affect the size of the outgoings.

OTHER PAYMENTS Aside from outgoings, they are also other payments incurred by the property managers in the management of commercial, residential, retail and public real estate. Outgoings are more or less compulsory expenses that are occasionally incurred by the property managers whereas the other payments are optional expenses that may be snubbed by different property managers.Other payments are extra expenses incurred other than outgoings. Some of these other payments include; Reserve or Sinking fundsThis is an arrangement where uniform or equal deposits must be contributed within fixed periods at a given rate of compound interest in order to have a specified sum available at some given future time period. In other words, rather than putting aside a single lump sum of cash into an account as reserve to cover a future expense, one could opt instead to meet that objective with a sinking fund that incorporates periodic payments. For instance could create a sinking fund as a reserve to cover the future cost of some capital expenditure like a roof refurbishment, replacement of windows that he/she has scheduled for their rental property.

OTHER PAYMENTS (Continuation)

Professional body subscriptionProperty management Associations are bodies statutorily registered for the purpose of bringing together knowledgeable, ethical and innovative property managers in the country to provide a platform for discussion, serve as a collective voice and driving force for issues pertaining to the property management industry.As a pre-requisite, members are required to fulfill the payment of a periodic membership subscription fee that may either be annual or monthly depending on the stipulated terms and conditions of the particular association. Legal feesThese include legal payments that may be unexpected in case of breach of contract by some tenants, it may necessitate court action, the property manager will therefore have to incur expenses in the form of legal fees. Another instance may be in case of a disagreement between the property manager and government enforcement body such as NEMA that may lead to settlement in the courts of law will also lead to the unplanned expenditure on legal fees.

OUTGOINGS AND OTHER PAYMENTS IN UK AND WALES

Penalty interest; this is a charge interest at a specified rate of around 4% above the bank base lending rate from the due date until the date of payment usually paid by the tenant if he or she is late in paying any sums due under the lease.

Rates; these are considerable expenses to the tenant which are paid to the local rating authority and not to the landlord. In some circumstances the rating liability can be reduced or relief claimed. The levels of rating relief were reduced to 6 months for empty industrial property and to 3 months for empty office and retail property, this was 01/04/08.

Dilapidations; in cases where the landlord serves a schedule of dilapidations or takes on proceedings to terminate the lease or enforce the lease terms, the costs incurred in doing so can usually be recovered from the tenant.

Costs; the landlord is entitled to charge the tenant for any costs incurred in relation to considering any application and these charges can extend to lawyers’, accountants’ and surveyors’ fees, depending upon the nature of the application.

REFERENCES • Analyzing of outgoings in income generating properties in Lagos

Metrolis_UKABAM, Titilayo; Department of Estate Management, Yaba College of Technology.

• Bannister Edward (2008), Commercial Leases 2009; Surveyor’s Guide, Royal Institute of Chartered Surveyors, Surveyor Court: Westwood Business Park, Coventry CV4 8JE: United Kingdom.

• Dr. Medard Lucas Geho, (June 2002). Principles, Techniques and Methods of Valuation; A Technical Manual

• https://www.gov.uk/government/publications/facility-management • https://en.Wikipedia.org/wiki/lease• www.businessdictionary.com/definition/lease-term.html• www.financial-dictionary.thefreedictionary.com/leaseterm• http://www.collinsdictionary.com/dictionary/english/outgoings&source=s

&q=examples+of+outgoings+in+uganda• http://www.findlaw.com.au/articles/4595/outgoings-and-commercial-leas

e.aspx&source=s&q=example+of+outgoings+in+uganda• http://www.tamesidegov.uk/welfarerights/taxcredits/outgoings&hl=en&e

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