It’s almost that time of year where things go bump in the night. Ashfords' energy team has been experiencing something quite scary for all parties and it’s nothing to do with spooky season.
If you’re an agent negotiating terms for a variation of a landowner client’s lease or a developer looking to vary the length of the term or the demise - our article provides information on the process, the consequences and how developers can avoid unintentionally entering into a deemed surrender and regrant.
But beware, what awaits is not for the faint hearted! Deemed surrender and regrant – a trick or a treat?
Due to a quirk of the law relating to leases, when a landlord and a tenant vary a lease to either increase the term or the demise, this results in a ‘deemed surrender and regrant’. In other words, this brings the existing lease to an end and a new lease is put in place on the date of the variation. This is very rarely the intention of the parties and the impact often only comes to light years later.
Whilst this affects leases across all sectors, we're seeing this regularly when carrying out due diligence on existing energy projects. There are a variety of reasons why a variation is required, but the ones we see most frequently are where the infrastructure is constructed in a different place than initially envisaged, i.e. when the lease was granted and the demise is varied to accommodate that, and where the planning permission is extended and the lease term is then extended to be coterminous with expiry of the permission.
Registration – where the new lease is for a term of more than seven years, it will be compulsorily registrable at the Land Registry. Failure to register within two months of the date of grant, i.e. the date of the variation, will mean the lease becomes void and will take effect as an agreement for lease. This is a beneficial interest only and is a contractual relationship with the original landlord. If the original landlord passes away or sells the land, a subsequent owner will not be bound by the new lease.
Stamp Duty Land Tax (SDLT) – SDLT may be due in respect of the new lease. Reliefs are available but if the existence of the new lease is not picked up until some time after, there will be a late filing penalty. Interest will also be payable on any SDLT that was due as at the date of the variation that created the new lease.
Breach of funding or other commercial agreements – any funding secured against a lease will usually prevent the tenant from doing anything to bring that lease to an end. Therefore a voluntarily surrender will likely be a breach of the terms of the funding.
Landlord and Tenant Act 1954 – unless the necessary procedure was followed at the point of surrender, the new lease will have the benefit of the protections provided to tenants under the Landlord and Tenant Act 1954 including security of tenure. In the energy sector, this is unlikely to reflect the intentions of the parties.
Underleases – the freeholder will become the direct landlord of any undertenant. For example, a substation sub-lease. Although the new lease will be treated as an intervening lease, should the developer exercise any break in that new lease, the direct relationship of undertenant to freeholder is preserved and the underlease will continue beyond the break/other termination of the new lease.
Be wary of the fact that a variation does not always do what it says on the tin.
We would also encourage agents to be aware of these consequences when negotiating a change in lease terms on behalf of a landowner or a developer tenant.
There are some relatively simple alternatives that can avoid the pitfalls of a deemed surrender and regrant:
Reversionary lease – this is an additional lease that takes effect at a future date, which would usually be expiry of the existing lease. This is a way of extending the term of the lease without a deemed surrender and regrant.
Supplemental lease – this is a lase on the same terms as the existing lease but includes an additional area. This is a way of extending the demise without a deemed surrender and regrant.
Each of these have their pros and cons but the right approach will depend on the facts of each case. It's therefore essential to engage your legal team as early in the process as possible when considering a variation to a project lease.
Whilst it can take time and cost to unravel these types of issues, the majority of situations are remediable. The energy and resource management team at Ashfords has a wealth of knowledge and expertise in this area and can provide advice and support should you encounter a deemed surrender and regrant.
Please contact our energy and resource management team for further information or advice.
