Pitfalls of lease variations
This article considers the scenarios where a variation of a lease amounts to a ''surrender and regrant'', and outlines how the unwanted consequences of this can be avoided.
In certain situations, a variation of a lease will amount to a deemed surrender of the existing lease and the grant of a new lease (known as a “surrender and regrant”). This can be the result despite the parties’ intentions when entering into the variation. A number of unwanted consequences stem from a surrender and regrant, so it is important to be aware of the scenarios where this is a possibility and how those consequences can be avoided.
Variations constituting a surrender and regrant
If a lease is varied to such an extent that the variation cannot take effect without the grant of a new lease, the variation operates as a surrender of the existing lease and the grant of a new lease.
In Friends Provident Life Office v British Railways Board  1 All ER 336, the Court of Appeal agreed with the submissions that the court would give effect to the intention of the parties, unless it was compelled by the nature of the changes made to hold that the effect of the deed was to bring about a surrender and regrant by operation of law. Such an effect would only occur where the variation affected the legal estate by either of the following:
- Adding to the demised property.
- Extending the term of the lease.
Sir Christopher Slade doubted whether a surrender and regrant can ever arise, save in those two sets of circumstances, but the possibility was left open.
It should be noted that where the additional property is to substitute property that is removed from the demise, this also results in a surrender and regrant. For example, substituting one set of rooms for another set of rooms will take effect as a surrender and regrant (Giles v Spencer (1857) 3 C.B.N.S. 245).
Furthermore, a reduction in rent in conjunction with the relinquishing of part of the property may also result in a surrender and regrant (Jones v Bridgman (1878) 39 L.T. 500).
Effects of a surrender and regrant
The variation will take effect as a surrender of the existing lease and the regrant of a new lease, on the same terms as the original lease, save for those set out in the deed of variation.
There are a number of issues for the landlord to consider:
- If the original lease was excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 (LTA 1954), the statutory notice procedure that was used prior to entering into the existing lease will not apply to the regranted new lease. Assuming that all the conditions for protection under the LTA 1954 apply, and that no statutory notice procedure is followed for the regranted lease, the new lease will benefit from the security of tenure provisions.
- If the original lease was an “old” lease, granted before 1 January 1996, and the new, regranted lease takes effect on or after that date, the new lease will be subject to the privity of contract provisions of the Landlord and Tenant (Covenants) Act 1995 (LTCA 1995). This means that the tenant will be released from the tenant covenants on any assignment of the lease, given that the regranted lease will not contain any clauses relating to authorised guarantee agreements on assignment, which are often included in a “new” lease.
- As the variation operates as a surrender of the existing lease, any former tenants and their guarantors will be released from liability relating to the tenant covenants. Any guarantor of the current tenant will be released from liability for any future breach under the new lease, where the guarantor is not a party to the deed of variation. However, a guarantor will remain liable for any previous breaches of the tenant covenants under the original lease.
- Any other security under the original lease, such as a rent deposit, will be repayable to the tenant on the surrender of the existing lease, unless a new rent deposit deed is entered into in relation to the regranted new lease.
- The landlord could also lose the ability to enforce any yielding up and reinstatement clauses in the original lease.
The tenant will have separate issues to deal with:
- There may be a charge to Stamp Duty Land Tax (SDLT) for the surrender and regrant of a lease. There will be no refund of any stamp duty or SDLT paid when the original lease was granted. However, there is relief available where the tenant surrenders a lease to the landlord, and in consideration of that surrender, the landlord grants a lease of the same or substantially the same premises to the tenant.
- Where the new lease is registrable at the Land Registry, the tenant will be subject to the Land Registry fees applicable to the registration of the grant of the new lease, not just those applicable to noting the deed of variation.
- A further issue which may arise for both parties is where the lease is compulsorily registrable at the Land Registry (where it is granted for a term of more than seven years or complies with certain other conditions). The tenant will have a duty to register the lease within two months of the date that the lease was granted. If it fails to do so, the lease becomes void and takes effect as an agreement for lease. If the tenant does not understand that the deed of variation has amounted to a deemed surrender and regrant, it is unlikely to realise that the new lease will need to be registered.
Avoiding surrender and regrant
It is possible to extend the term of a lease or add property to the demise of a lease without a surrender and regrant resulting.
Where the parties wish to extend the term of the lease, they can enter into a reversionary lease that takes effect on the expiry of the term of the existing lease. The term of the reversionary lease must commence no later than 21 years from the date it is granted, in accordance with section 149 of the Law of Property Act 1925. A reversionary lease can incorporate the relevant terms of the existing lease by reference, together with any updated clauses that are required. The reversionary lease will be subject to first registration at the Land Registry if it is due to take effect more than three months after the date the lease is granted.
An addition or substitution to the property demised under the lease can be documented in a separate lease relating to solely that additional property. Again the relevant terms of the existing lease can be incorporated by reference, together with any updated terms that are required.
Finally, it is also advisable to consider entering into a separate lease when the property demised under the original lease will be reduced.
This article first appeared in the Property Litigation Blog, July 2017.