Pitfalls In Documenting An Extension To The Term Of A Lease Of Commercial Premises

You’ve managed to agree with your tenant that they will extend the term of their lease. Great news, and so easy to document – it’s just a quick Deed of Variation to change the expiry date, isn’t it?

No, it’s not so straightforward, and there are traps for the unwary.

It’s well-established law, which should be (but sometimes doesn’t appear to be) common knowledge among practitioners, that a variation to the term of a lease or the extent of the demise granted by a lease will be considered to be a deemed surrender and re-grant of the lease (see Friends Provident Life Office v British Railways Board 1996).

The consequences of this could be:

• New liability for SDLT – overlap relief may be available, but it’s not always straightforward: the Govt/HMRC website which gives an example of overlap relief ends with this comment on its own example – “The calculator will not cope with this calculation and it should be performed manually”.
• The deemed re-granted Lease is inside the 1954 Act, and thus has security of tenure.
• While it’s increasingly unlikely as time passes, if you had a pre-1996 lease, and therefore privity with the tenant, then you would lose that privity. This probably applies mostly now only in the arena of longish leases granted to local authorities, and consider the danger there of the covenant you could be losing after a couple of assignments.
• Quite terrifyingly for landlords – a charge over the surrendered leasehold interest surviving the surrender. The position here would be that the charge becomes enforceable over the freehold. This could clearly cause a large loss, and it’s a point often overlooked on straightforward (i.e. planned) surrenders. Rack rented leasehold interests aren’t often subject to fixed charges, but it’s not unheard of, and it’s certainly not unheard of for them to be subject to floating charges, and in those circumstances you need a certificate of non-crystallisation from the charge-holder, certifying that, as at the date of the surrender, the floating charge hasn’t crystallised against the lease.  

Can we just do a Deed of Rectification instead then, and say we’re rectifying a mistake in the demise or the term? No, you can’t. This will be construed as a deemed surrender and re-grant too.

So your options are either to:

1. effect a formal surrender and re-grant, or
2. grant a reversionary lease.

If you proceed with a reversionary lease (meaning a lease granted now, but taking effect “in reversion”, so that the term commences when the term of the current lease expires) then there are a few things to remember:

• Ensure that you “carry over” reinstatement requirements – look out all the old Licences for Alterations and reference them specifically if that’s feasible, but also use some “general” wording to make sure all previous alterations are covered off. Also carry over dilapidations requirements, so that the demise is assessed by reference to the date of the grant of the existing lease. On this latter point opinions differ as to what’s required, particularly where the lease is FRI, but it’s a point that needs some careful consideration where the existing lease commenced a good while ago.
• Make sure that assignment and subletting are covered off so that, while the current lease continues, you don’t end up with the leases vested in different entities, or with subleases to different entities.
• Align the forfeiture provisions, so that a forfeiting event allows forfeiture of both the current lease and the reversionary lease.
• Where the reversionary lease will be subject to open market review, consider whether alterations under the current lease (which will by then be the previous lease) ought to be disregarded.
• You will need an EPC!  
• You also need to effect some variations to the current Lease, so that the points above about aligning alienation and forfeiture are all covered off.    

Finally, what about the scenario where you’re adding extra premises/land to the demise since, according to the Friends Provident case mentioned above, that’s also a case where a ”variation” would result in a deemed surrender and re-grant. Here the solution is a straightforward supplemental lease of the additional area, and this supplemental lease would usually follow the form of the existing lease, but here gain you need to make sure that the two leases are interwoven, so that alienation and forfeiture are linked.    

To contact Neil, or read more about his practice, click here.