16 / 04 / 2020
Perplexed by property law? Relax, Solicitor Claire Haynes is here to answer your most pressing questions…
Q: My business has a 10 year lease of office premises which will come to an end in 2022. The landlord has recently asked me to extend occupation at the premises until 2032. In return the landlord has agreed a major discount to the rent for a year and that the rent will remain the same as I currently pay. It feels like a good deal as I would like to stay at the premises, but I am concerned that there might be implications or hidden costs which I have not thought about. Please can you advise what they might be?
A: It sounds like your landlord is proposing a ‘re-gear’ which is the re-negotiation of some of the key terms of your existing lease during the term of the lease. Typical examples of re-gearing include changes in the rent and rent review provisions, length of the term and removing a break clause.
The deal which is made during the re-gearing exercise is often advantageous to both the landlord and the tenant, for different reasons. In your case, by extending the term the landlord would get certainty of rental income for a longer period which could increase or preserve the capital value of the landlord’s asset. You would get a rent free period or reduced rent which increases the cash flow of your business. Staying at the premises is good for business continuity and you would have certainty of the rent payable in the coming years. If the landlord is keen to tie you in for a longer term and you are in a strong bargaining position you might be able to negotiate other beneficial terms for the extended period as well as the discounted rent.
You mention that you have agreed that the rent will remain the same. Is the intention that this will be for the whole of the term until 2032? If this is the case, you should check that there are no rent review provisions in any new lease that you are sent as they could increase the rent payable.
In terms of hidden costs there could be Stamp Duty Land Tax (SDLT) implications depending upon the way in which the transaction is structured:
- Surrender of your existing lease and grant of a new lease – you would not be entitled to a refund of any SDLT paid on the grant of your existing lease but it is likely you could claim ‘overlap relief’ as the new lease is of the same premises. This is relief for SDLT already paid on rent during the ‘overlap period’ of the term of your existing lease and the period which also falls within term of the new lease. SDLT would be payable on grant of the new lease on the remainder of the rent.
- Grant of a reversionary lease – a reversionary lease is a lease where the term only commences after expiry of the existing lease. When a reversionary lease is granted SDLT is due at the date of grant of the reversionary lease and not the date the term commences. SDLT is payable at the rates prevailing at the date of grant of the lease. Only time will tell whether these rates are advantageous.
- Agreement for grant of a reversionary lease – SDLT would be due at the time of grant of the lease unless the agreement is ‘substantially performed’ in advance of completion. Here this would be where the purchaser pays substantially all of any consideration specified in the contract. For certainty your landlord may prefer to put a reversionary lease in place now but an agreement to grant a reversionary lease may be better for your cash flow as it seems unlikely you would need to pay the SDLT until the time of grant of the new lease.
- A deed of variation to extend the term – this would take effect as an implied surrender and regrant which would have the same SDLT implications as an express surrender of your existing lease and the grant of a new lease. I have referred to this situation above.
Legal advice is recommended to discuss the pros and cons of each route and to ensure your agreement is properly documented. Good luck with your negotiations.