We have a tenant whose five year lease comes to an end in 2022. We have agreed with the tenant to extend its occupation at the premises for a further two years. We want to document this extension in as simple a way as possible. Can we vary the lease to extend it?
Extending a lease seems simple but it can have a few traps for the unwary. The biggest one is that the effect of entering into a deed of variation of the tenant’s current lease to extend the term would be an implied surrender of the current lease and a grant of a new lease.
There are several disadvantages for both the landlord and the tenant if this happens. The tenant will have to pay Stamp Duty Land Tax (SDLT) again on the rent due under the existing lease as a new lease will have been created. It may have to register the new lease at the Land Registry. The problem for the landlord is that if it has inadvertently granted a new lease, it will not have followed the procedure to contract that tenancy out of the security of tenure provisions of the Landlord and Tenant Act 1954. This means that the tenant could have obtained security of tenure, whether or not that was the intention of the parties.
One way to deal with the extension is for the parties to enter into an agreement for lease, with the lease being granted in the future. However, it is most common for extensions to be dealt with by way of the grant of a ‘reversionary lease’.
A reversionary lease is a lease with a term that commences in the future. The term will start the day after the last day of the existing lease, so although the lease is dated and completed now, the term doesn’t overlap with the current lease; it slots on at the end of the current lease.
There are several points to remember when dealing with a reversionary lease. One quirk is that SDLT becomes payable by the tenant at the date that the reversionary lease is granted and not the date on which the term commences. Of course, SDLT rates may have gone up in the future so paying it today may turn out to have been advantageous.
Another peculiarity is that if the term starts more than three months after the date that the lease was granted, it will be compulsorily registrable at the Land Registry. This is notwithstanding the usual position that a lease is only registrable if it is for seven years or more. This can cause problems if it has been overlooked and/or if the existing lease was not itself registrable. The reversionary lease will need Land Registry prescribed clauses and a Land Registry compliant plan. The original plan may not be adequate to re-use. Without these, the application to register the reversionary lease will be rejected by the Land Registry.
There are several points for landlords that sometimes get missed. The reversionary lease needs to automatically terminate if the existing lease is terminated, whether under the right for re-entry and forfeiture in the existing lease, if any break clause in the existing lease is exercised or it comes to an end in any other way.
The two leases need to ‘travel together’. If the existing lease is assigned then there should be a requirement that the reversionary lease is assigned to the same third party. To make this happen, provisions are required in both the reversionary lease and in the existing lease. This means that the existing lease has to be varied by the insertion of new wording. This requires a deed of variation to be entered into simultaneously with the grant of the reversionary lease.
Finally, the landlord needs to be careful that dilapidations liability of the tenant under the existing lease rolls forward into the reversionary lease. The tenant should be obliged to remove and reinstate alterations that it has undertaken not just during the term of the reversionary lease, but during the term of the existing lease or any period of occupation before that.
There’s no reason for a lease extension to be complicated but there are pitfalls to beware of if your approach is too simplistic.