In the world of law there are a surprising amount of circumstances which can arise unintentionally, where the parties inadvertently bring about the occurrence of one thing whilst intending something else. The accidental surrender of a lease and re-grant of a replacement is one such trap for the unwary.
Parties are free to vary a lease by mutual agreement at any point, by entering into a deed which expressly varies its terms. Two key types of variation will, however, change the legal estate created by the lease and so take effect as a surrender of this lease and re-grant of a new lease, rather than variation of the original terms. Those variations are:
- an increase in the length of the term; and
- an increase in the extent of the land let to the tenant.
A surrender and re-grant can have significant consequences:
Registration - the grant of a new lease for over 7 years will need to be registered at the Land Registry.
SDLT - Stamp Duty Land Tax may be due on the new lease, a particularly unwelcome issue if the tenant has only recently paid SDLT on the original grant. The tenant may be relieved of this additional tax bill but this will need to be checked in the circumstances and an SDLT return may still need to be submitted to HMRC.
Guarantees and AGAs - any guarantee agreement entered into in relation to the original lease will fall away and need to be entered into again, which could easily be missed if the surrender was unintentional and cause a headache for landlords later down the line.
Security of tenure - if the original lease was contracted out of the Landlord and Tenant Act 1954, the landlord will be likely to want any replacement lease to be and so the procedure of notice and declaration will need to be followed. If a landlord is unaware that a new lease has been granted, they could be in for an unwanted surprise at the expiry of the term when the tenant wishes to stay put and the landlord finds its hands are tied.
Ways to avoid these
To avoid these problems, the safer options which give greater certainty are:
- a reversionary lease, in the case of an increase in term; and
- a supplemental lease, in the case of an increase in the extent of the land let.
Reversionary lease - a reversionary lease is a lease granted at any point but to take effect at a future date, usually the day after the expiry of the original lease. It's important to remember, however, that SDLT on a reversionary lease is triggered on the date that it is granted rather than on the date that the new term commences. This may have cash-flow implications. Reversionary leases taking effect more than three months from the date of grant will need to be registered at the Land Registry. Parties should also be aware that any lease granted to take effect more than 21 years in the future will be void.
Supplemental lease - a supplemental lease is essentially an entirely separate lease of the additional premises to be demised. Although this will prevent a surrender and re-grant, if the two independent leases are intended to enable the entire premises to be used as one the rights granted and reserved will need to be adequate, rent review and break dates during the term should be aligned, the two leases should expire concurrently and the parties may want to ensure that one lease cannot be assigned or sublet without the other.
For the benefit of the Ashfords Real Estate Team's experience in leasehold transactions, please contact Ashley Davies.