The re-gearing (or renegotiation) of the terms of an existing lease has become an increasingly popular option for both landlords and tenants in recent years as both parties seek to agree revised arrangements which satisfy their respective short term and long term needs.
An example of a simple lease re-gearing which benefits both the landlord and the tenant is as follows:
The tenant occupies an office building on a 20 year lease from 20 April 1997 with a term expiry on 19 April 2017. In return for the tenant entering into a reversionary lease starting on the expiry of the current lease and expiring on 18 April 2022 (a term of five years), the landlord will grant the tenant a nine month rent free period to take effect from the completion of the legal documents. In this example the landlord benefits by having the guarantee of a further five years worth of rent and the tenant benefits by receiving nine months rent free and certainty of its occupation for an additional five years.
If the terms of the lease are to be revised but with no extension to the lease term (eg the rent or rent review provisions are amended or a break clause is deleted), it will be sufficient for the parties to enter into a deed of variation. However, if the parties also want to extend the lease term there are three options available to them:
1) Vary the terms of the current lease and grant a reversionary lease.
A deed of variation to alter the rent, remove a break clause and/or alter other terms of the existing lease as agreed can be entered into simultaneously with a reversionary lease for a term commencing on the expiry of the existing lease. Generally the terms of the reversionary lease will be based on the terms of the existing lease. It is important for the landlord to remember that as the tenant will have two separate leasehold interests in the property, both the current lease and the reversionary lease should be linked so that the tenant cannot assign one without the other and provisions need to be included so that if the landlord forfeits the existing lease the reversionary lease automatically determines as well. Repairing obligations should also be rolled over into the reversionary lease.
The tenant will incur an SDLT liability calculated on the rent payable for the term of the reversionary lease. This is payable on completion of the reversionary lease.
2) Surrender the existing lease and grant a new lease.
Upon the surrender of an existing lease both parties are usually released from all past, present and future obligations under the lease. However, both parties must carefully consider the exact extent of the release where a new lease of the same premises is to be granted, if indeed any is to be given. Specific consideration should be given to outstanding issues under the lease to be surrendered such as service charge reconciliations, dilapidations (which should be rolled over) and other unremedied breaches.
The new lease is usually completed simultaneously with the surrender. With regards to the terms of the new lease the landlord and tenant could simply agree to base the new lease substantially on the existing lease (with the advantage that this should minimise the amount of negotiations between the parties). The disadvantage of this is that if the lease is old there will be a significant amount of outdated drafting and the lease may in fact favour one party over the other. Obviously if a new lease is negotiated it will normally take longer for the parties to agree its terms.
SDLT will be payable on the rent due under the new lease. It may be possible for the tenant to set off any SDLT paid on the surrendered lease against the SDLT paid on the new lease.
3) Using a deed of variation to extend the term of the lease.
As a matter of law, any variation extending a lease term will amount to a surrender of that lease and the re-grant of a new lease on identical terms. This can have significant implications if the lease is excluded from the security of tenure provisions of the Landlord and Tenant Act 1954. A landlord, by using a deed of variation in this way, may inadvertently grant a tenant security of tenure. Generally the use of deeds of variation to extend a lease term is inadvisable.
It is important to remember that the re-gearing of a lease is best effected by landlord and tenant co-operating with each other in order to facilitate a mutually beneficial settlement. Maintaining good landlord and tenant relationships can prove invaluable where one or both parties finds themselves in need of some flexibility.
The parties must always bear in mind the application of the Landlord and Tenant Act 1954 to the terms of any new or old lease and any surrender. The validity of any notices which may need to be served under the 1954 Act is crucial so advice should always be sought from a solicitor.