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Landlords and tenants often agree to “extend” or “add on” some additional floor space to an existing lease during the term of an existing lease.
It is a common misconception that such changes might be achieved by varying the lease and documented in a deed of variation; however, this can result in undesirable consequences for both parties, and care must be taken to avoid the pitfalls. Our Commercial Property Experts explain how you can do this.
What Happens if I Vary My Lease To Extend The Term?
A variation of a lease that increases the length of the term will take effect as a surrender and regrant, meaning that the existing lease would be surrendered, and a new lease would be regranted on the same terms save for the expiry of the term.
While this may appear to be a straightforward means to extend the lease term, a surrender and regrant could prove to be problematic. The risks can include the loss of existing security, the tenant acquiring security of tenure (statutory right to renew a lease) and potentially a trigger for registration of the new lease.
Perhaps the most undesirable consequence is that SDLT may be payable for the new lease following a surrender and regrant. Overlap Relief may be available on the SDLT provided that the regranted lease is of the same or substantially the same premises, but this would not apply if the original lease were granted or treated as granted before 1 December 2003.
The best way to extend the term of a lease without triggering a surrender and regrant is through the grant of a reversionary lease with a term commencing immediately after the expiry of the existing lease.
It must be noted that a reversionary lease is compulsorily registrable at the Land Registry (regardless of the length of its term) if the term commencement date is more than three months after the date on which the lease is granted.
What Happens If I Vary My Lease To Include Additional Space?
A variation of a lease that increases the demised premises always results in a surrender and regrant, even if the parties expressly provide that it should not.
Similar to “extending the term,” the regranted lease of an increased demise may also trigger a charge to SDLT on the whole of the premises, both existing and new.
It must be noted, however, that Overlap Relief is not available to the tenant if the regranted lease is not of the same or substantially the same premises or if the original lease was granted or treated as granted before 1 December 2003.
To avoid a surrender and regrant when increasing the demise of an existing lease, the parties should enter into a supplemental lease of the additional premises on the same terms as the existing lease with appropriate modifications such as the rent and term.
What Happens If I Want To Change The Tenant Under The Lease?
A further misconception is that a lease can be varied to change the tenant.
This is not the case, and a lease must be assigned by way of a deed of assignment in order for the rights and obligations under an existing lease to be transferred to a new tenant.
When Might A Deed Of Variation Be Used For A Lease?
It is appropriate to use a deed of variation in circumstances where both the Landlord and Tenant are in agreement to vary terms such as the rent payable, the rights granted or perhaps the permitted use under the lease.