Stamp duty land tax (SDLT) came into force on 1 December 2003. On or shortly after 1 December 2008, many leases working on a five-year cycle will have their first rent review. If the tenant suffers an 'abnormal' increase of rent on review, it may also be subject to additional SDLT payments. In the current climate, where many tenants are actively seeking concessions in rent, this burdensome liability coupled with an increase in the rent itself, may be one financial outlay too far.
When a lease is granted after 1 December 2003, SDLT is calculated by looking at the rent payable under the lease for the first five years of the term. If, during the first five years of the term, the rent has been reviewed or subject to a 'relevant' variation, the tenant should review their SDLT position and, if necessary, submit a further SDLT return. Variations or increases after this initial five-year period are not usually assessed for SDLT purposes. The ‘abnormal rent increase rule’ is an exception to this position.
If the amount of rent payable increases 'abnormally' after the fifth year of the term, whether or not pursuant to a rent review provision, there is a deemed grant of a new lease in consideration of the excess rent, upon which SDLT will be payable.
The "deemed" lease is assessed on the following basis for SDLT purposes:
- It is made on the date the increased rent first becomes payable
- For the unexpired residue of the original term
- For consideration equal to the excess in increased rent and is
- Linked with the grant of the actual lease.
WHAT CONSTITUTES AN ABNORMAL INCREASE?
Generally, anything over a 20 per cent increase year on year is considered abnormal. The specific calculation involves working out 20 per cent of the highest rental figure on which SDLT has been paid prior to the rent being reviewed, and multiplying this by the number of years between the date on which that rent was first payable and the date on which the revised rent becomes payable. If the resulting figure is lower than the increase in the reviewed rent, the increase is abnormal. SDLT will be payable on the whole of the increase, and a further SDLT return will be required.
TURNOVER RENTS, GEARED RENTS AND STEPPED RENTS
The abnormal rent increase rule also applies to turnover rents, geared rents and stepped rents.
To circumvent the abnormal rent increases rule, tenants may include a cap in the rent review clause stipulating that upon review, any reviewed rental figure is below a specified figure. In the present market, landlords may be more willing to make such a concession.
When rent is reviewed on a five-year basis, further returns and SDLT payments may need to be made after each and every review. It is essential that tenants are mindful of this fact and upon every review carry out the appropriate calculation to see if the increase in rent was abnormal. Failure to do so will lead to the late filing of the required SDLT return and may incur penalties and interest payments.
In the current climate, landlords may be more willing to offer concessions to their clients. In doing so, landlords must be alert to the fact that providing tenants with reassurance, such as an initial cap on the rent, may disadvantage their own financial position if the market recovers and market rents increase abnormally. Landlords should therefore consider any concession they may provide to their tenants in light of their long term financial plan for the property in question.
The abnormal increase rule was introduced to ensure that arrangements were not made for the rent to be deflated during the first five years of the term, which would lead to smaller SDLT payments being made by the tenant, and then reassessed and inflated after this period to take account of the reduction. In reality however, this rule serves to penalise tenants who paid increased rental premiums during the 'property boom' years who are now faced with an additional premium for such increases being deemed abnormal.