The pitfalls of varying a lease

Posted by Strettons on 26th June 2019 -

It is common for parties to vary the terms of an existing lease, particularly in times of economic uncertainty. This can include varying the extent of the demise or varying the rent. It can often allow either party to have greater flexibility but it is a process, not without its pitfalls.

A key concern with a deed of variation is that depending on the terms being varied, it may amount to a surrender and re-grant. This means that where the current lease is deemed to have been surrendered and a new lease is granted in its place, it will amount to a surrender and re-grant where the deed seeks to either add further land into the demise or extend the term of the lease, therefore changing the nature of the original interest granted. For a tenant, the concern of a surrender and re-grant includes the possible charge for Stamp Duty Land Tax.

Landlords also need to be aware of a number of issues when agreeing to enter into a deed of variation which might be deemed a surrender and re-grant: The tenancy may lose the benefit to the landlord of “contracting out” under the Landlord and Tenant Act 1954 (1954 Act), resulting in the tenant acquiring a protected tenancy with statutory rights of renewal. If the tenancy is “protected” the Landlord can only bring the tenancy to an end by establishing one of certain grounds under that Act (e.g. an intention to develop) and even if established, compensation may be payable to the tenant.

Any former tenants and guarantors are released from the covenants under the original lease. The landlord will lose the right to enforce the yielding up provisions in relation to alterations carried out during the term.

If there is a rent deposit in place as security for the existing lease, the deposit will almost certainly be due back to the tenant when the existing lease is surrendered and, as such, on completion of the surrender and re-grant, the landlord will have to pay this back to the tenant, losing the comfort this provides.

There are alternative methods to avoid the risk of a surrender and re-grant. This includes if the variation increases the demise, it is sensible to execute a separate lease of the additional premises with landlord, tenant and guarantor as parties to that lease. Also if the variation increases the term, it may be better to achieve this by a lease in reversion, which will take effect from the end of the original term.