It is not uncommon for the terms of a Lease to be varied by a Deed of Variation; however, both Landlords and Tenants should beware that the legal effect of such variation can in fact end the existing lease and create a new one (i.e. Surrender & Re-Grant) which in itself can have unexpected and far-reaching consequences.
How does this impact upon a Tenant?
Well, the main issue is that any new lease created could trigger a new Stamp Duty Land Tax (SDLT) payment. Depending on factors such as level of rent, unexpired term etc., the SDLT on the newly created lease could be considerable.
How does this impact upon a Landlord?
Potentially it could impact guarantee provisions, security of tenure (statutory rights to renew) and possible even original tenant liability.
Any new lease created will be between the current landlord and the current tenant, but any guarantor of the current tenant would be released, and any previous tenants and guarantors will similarly be off the hook so to speak.
If the existing lease is contracted out of the protection of the Landlord and Tenant Act 1954 (to exclude a Tenant’s statutory right to renew), the new lease will attract full security of tenure and renewal rights for the tenant.
If the existing lease pre-dates the Landlord and Tenant (Covenants) Act 1995, the landlord may find that a ‘new tenancy’ replaces what is commonly referred to as an ‘old tenancy’ that had the full original tenant liability, and such liability would simply fall away..
So, how does a Surrender and Re-Grant occur?
A Surrender and Re-Grant occurs where variations to a lease are so inconsistent with the continuation of the existing relationship and can often occur without the parties intending it, or even realising that this has happened. Typical variations that would trigger this are variations that alter either the length of the term or the physical extent of the premises
Ok, I understand the above, but how can I avoid a Surrender and Re-Grant?
It depends what the parties are trying to achieve at the outset. If, for example, they are looking to extend the lease term, then rather than a Deed of Variation, the parties could instead look to enter into a reversionary lease (i.e. a lease that only commences on the expiry of the existing lease). If, on the other hand, the parties wanted to alter the extent of the demise, then they could either have a Surrender of Part (if the demise is decreasing) or a Supplemental Lease of the additional area (if the demise is increasing).
But the main thing is to take legal advice, right?
Yes, it is imperative that bother Landlords and Tenants seek independent legal advice. An unintentional Surrender and Re-Grant could be catastrophic, but equally there are times when it may be beneficial. Our Legal 500 recognised Commercial Property Team has a wealth of experience advising both Landlords and Tenants on precisely these matters.
Contact a member of the team on 0800 800 6004