For further information, please contact Gavin Whitney, Partner, Fladgate LLP (firstname.lastname@example.org)
It isn’t uncommon, particularly in times of economic uncertainty, for landlords and tenants to renegotiate certain terms of their existing lease in order to allow either party (or both) to have more flexibility. We are often asked to document the new commercial terms; the most straightforward way to do this is to draw up a deed of variation setting out the amendments. A deed of variation amends the lease and shouldn’t be confused with a deed of rectification, which seeks to correct errors made in the original underlying document and which has retrospective effect.
A key concern with a deed of variation is that, depending on the terms being varied, it may amount to what is known as a “surrender and regrant” i.e. where the current lease is deemed to have been surrendered and a new lease granted in its place. In a nutshell, a deed of variation will amount to a surrender and regrant where the deed seeks to either add further land into the demise or extend the term of the lease, and thus fundamentally change the nature of the original interest granted. You should note, where any extra land being added is to substitute land being removed from the demise, the end result will also be a surrender and regrant. A reduction in land will not amount to a surrender and regrant.
For a tenant the main concern of a surrender and regrant would be the possible charge for Stamp Duty Land Tax along with Land Registry fees which will be payable to register the deed/new lease.
Landlords also need to be aware of a number of issues when agreeing to enter into a deed of variation which might be deemed a surrender and regrant:
Security of tenure
If the existing lease was contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954 (1954 Act), the procedure followed to contract the lease out of the 1954 Act will not apply to the new lease created by the deed of variation and the tenant will obtain security of tenure on completion of the deed.
New lease vs old lease
There is a difference between leases granted prior to 1 January 1996 (an “old lease”) and those granted on or after 1 January 1996 (a “new lease”) with the old regime being more favourable to landlords. Therefore, a landlord may not want to inadvertently accept a surrender of an old lease and be left with a new one.
The landlord will lose the right to enforce these provisions in relation to alterations carried out during the term.
If there is a rent deposit in place as security for the existing lease, the deposit will almost certainly be due back to the tenant when the existing lease is surrendered and, as such, on completion of the surrender and regrant, the landlord will have to pay this back to the tenant, losing the comfort this provides.
Landlords should be wary of agreeing to the variation of a lease without first taking legal advice so that they can be sure of the implications of the terms being varied.