It is common for parties to seek to vary the terms of an existing lease, without realising that in certain circumstances this can create an unintentional surrender and re-grant of the lease.
The two main variations which cause an automatic surrender and re-grant are:
- an extension of the term of the lease; and
- an extension of the property demised under the lease.
Usually this situation occurs by way of a ‘Deed of Variation’, where the parties seek to vary the existing terms of a lease. Where this variation tries to either extend the term or the demised property then, rather than varying the existing lease, this variation will actually cause a surrender and re-grant of the lease.
The original principle was established in the case of Friends Provident Life Office v British Railways Board . Crucially, the Court held that the intention of the parties was irrelevant and the unintentional surrender would not be set aside simply because this was not what the parties had intended.
So what is the problem with an unintentional surrender and re-grant? As Landlord, you will need to consider the following issues:
If the original lease was excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 and you do not re-address this issue upon subsequent lease, the Tenant will gain 'protected status' and will be entitled to an automatic renewal of the lease at the end of the term. Any plans the Landlord has for the property, for example redevelopment, on expiry of the lease will potentially be affected and in order to oppose the Tenant’s application for a new lease, the Landlord will need to rely on one of the statutory grounds for opposition set out in the Landlord and Tenant Act 1954.
If a lease renewal is successfully opposed by the Landlord, the Tenant may be entitled to compensation. The compensation provisions apply where the Tenant is prevented from having an automatic right of renewal upon expiry of a protected lease where the Landlord has exercised one of the statutory grounds for opposing a renewal under the Landlord and Tenant Act 1954. The compensation is usually the rateable value of the holding but this could be doubled where the Tenant has been in occupation for more than 14 years.
You must also consider the implications of releasing the liability of former Tenants and Guarantors, as they will not be liable under the new lease unless they have consented to do so and are a party to the Deed of Variation. If the previous lease contained Guarantor provisions, the unintentional surrender will effectively release this Guarantor from its liabilities going forward. Your unintentional re-grant will not therefore have the protection of the Guarantor provisions unless the guarantor also enters into the deed of variation. The issues which arise as a result of an unintentional surrender and re-grant do not only affect Landlords. A Tenant will need to consider, amongst other things, SDLT overlap and Land Registry issues.
An unintentional surrender and re-grant of a lease will likely have SDLT implications for a Tenant. The Tenant will have paid the SDLT liability for the old lease on commencement of the term, and the new lease, created by the unintentional surrender and re-grant, will also likely attract duty. On this basis, the Tenant will have 'lost' the SDLT they have paid for the remainder of the term under the old lease, and will face fresh liability for the term granted by the new lease. It might be possible for the Tenant to claim for overlap relief to avoid paying SDLT twice for the same period, but this would need careful consideration prior to the grant of the new lease.
If the Land Registry considers that the ‘variation’ the parties have entered into has, in fact, effected a surrender and re-grant of the lease, the Land Registry will register the variation as a new lease and close the old leasehold title.
So how can you avoid falling into the trap of an unintentional surrender and re-grant?
- If you are looking to extend the property demised under a lease, you could put in place a separate lease for that additional part which will run concurrently with the existing lease.
- If you need to add to the term of the existing lease, you can put in place a ‘reversionary lease’ which will commence upon expiry of the existing lease and run for the extended time period. Note that reversionary leases are compulsorily registerable at Land Registry regardless of their length of term if they are granted for a term commencing more than 6 months in advance at the date of completion.
- If neither of these options appeals, you could consider a formal surrender of the existing lease and grant a whole new lease incorporating the varied terms.
And of course… always seek professional advice!