The legal effect of varying a lease can sometimes be to destroy the existing lease and bring a completely new lease into being, with unexpected and far-reaching consequences.
1. When does a 'surrender and regrant' occur?
A surrender and regrant occurs where variations to a lease are so inconsistent with the continuation of the existing relationship that the law deems the existing lease to have been surrendered and a completely new lease brought into being. This can occur without the parties intending it, or even realising that this is the effect of their variation.
2. What variations can trigger a surrender and regrant?
The parties to a lease can vary most terms without triggering a surrender and regrant, but a variation that increases either the length of the term or the physical extent of the premises will take effect as a surrender and regrant.
3. Why should landlords be worried about an unexpected surrender and regrant?
If a variation causes a surrender and regrant, the new lease will be between the current landlord and the current tenant. Any guarantor of the current tenant will be released, and any previous tenants and guarantors will similarly be off the hook. If the existing lease is contracted out of the protection of the Landlord and Tenant Act 1954, the new lease will attract full security of tenure and renewal rights for the tenant. And if the existing lease pre-dates the Landlord and Tenant (Covenants) Act 1995, the landlord may find that an 'old tenancy' with full original tenant liability is replaced with a 'new tenancy' under that Act.
4. Should tenants also be concerned about an unintended surrender and regrant?
The biggest potential trap for tenants is the need to stamp and register the new lease. Depending on the rent payable and how long is left on the lease, Stamp Duty Land Tax on the new lease could be considerable. However, if the existing lease was granted since SDLT replaced stamp duty in 2003 then overlap relief should help to mitigate or even eliminate the SDLT liability.
5. How can I avoid a surrender and regrant?
Extending the term of a lease without triggering a surrender and regrant can be achieved by granting a reversionary lease, that only commences on the expiry of the existing lease. When extending the physical extent of the demise, a supplemental lease of the additional area can be granted. These solutions both rely on the creation of a second lease, so it is important to interlink the two leases to ensure that they are always dealt with together. Alternatively, if none of the disadvantages mentioned above causes any concern on an individual transaction, it may actually be preferable to embrace the surrender and regrant and be left with a single new lease of the enlarged or extended demise.
This article originally featured on Place North West.