Lauren Beadsworth, a Solicitor in our Real Estate team, provides a brief summary on how landlords and tenants may change the terms of a lease midway through its term.
Why change or vary your lease?
There are continuous changes to the commercial market and to company or individuals’ financial situations. If you are entering into a slightly longer commercial lease, for example of 10 years or more, then midway through your lease term you may wish to change a specific term of your lease, particularly if it no longer reflects what you need for your property or for your business. Sometimes, this can be referred to as a lease ‘re-gear’. This is where a landlord and tenant aim to reach a compromise that is beneficial to both parties and involves a re-negotiation of the lease terms. As an example, this could involve a tenant agreeing to take a reversionary lease (a lease that starts at a future date) which will commence immediately after the end of the existing lease. The landlord may agree that in doing this, they will vary the tenant’s existing lease to provide for a 6-month rent-free period. The landlord secures a longer-term of guaranteed rental income, and the tenant achieves a rent concession and has a period of certain increased cash flow.
Or it could be simpler, the lease plan may need to be amended to reflect the correct extent of the leased area and a deed of variation should be entered into so that the correct plan is inserted into the lease *although please see more on potential pitfalls at the surrender and re-grant section below…
Your lease
Before considering whether a variation is required, check the terms of your lease. What does the lease say can or cannot be done? What can be done but only with the landlord’s consent? Sometimes what is allowed can be worded in a restrictive manner e.g. ‘prohibited except as expressly permitted at clause…’ or ‘Not to…. without the Landlord’s consent’.
If your lease allows for certain things – e.g. a particular change of use of the property, or underletting to a subtenant, or making certain alterations at the property – but requires the landlord’s consent to do so, then a variation is not required. Instead, you will need to apply to your landlord for consent and the landlord’s consent will need to be documented. Usually this will be by way of a formal licence. Your lease may even set out how the consent must be documented. Leases often also specify that a landlord’s consent must not be ‘unreasonably withheld and/or delayed’. This article does not go into the detail of the meaning of this here but it is worth bearing in mind and something that you should look out for.
Varying the lease
If you agree with your landlord to vary your lease, this will usually be documented as a deed of variation. A deed evidences the changes made to the lease and avoids the potential for disputes in the future if one party were to allege that the changes were not agreed and is enforceable between the parties. Depending on what changes are required, deeds of variation can be fairly straightforward. However, the time it takes to negotiate and agree a deed will depend on the complexity of the terms and the willingness of the parties to proceed.
Side letters
There are times where a landlord may not be willing to vary the lease but is willing to allow a tenant a personal concession. Quite often, this could be a temporary rent waiver, which was commonly seen throughout Covid and the lockdowns that took place. The landlord may not want to change the lease itself but to instead to allow a personal benefit to that particular tenant for a set period of time. Usually, a side letter will be used to document this sort of arrangement. This is also beneficial to landlords as the side letter may specify that the arrangement must remain confidential between the parties. As a side letter is not registrable at the Land Registry, this keeps the details of the concession between the landlord and the tenant.
Surrender and re-grant
There are specific circumstances where parties should be wary to not inadvertently trigger a ‘surrender and re-grant’ of a lease. This will occur if a variation to the lease:
- Extends the lease term; and/or
- Adds property to the leased area
This can cause serious disadvantages for either party. For example:
- for a landlord this will cause significant issues if the existing lease is contracted out of the Landlord and Tenant Act 1954 and the contracting out procedures are not followed – effectively giving the tenant security of tenure (see our series linked below for more information on what this is)
- this could release previous guarantors to the lease
- this could trigger a further SDLT payment for the tenant
Other implications
If the lease is registered, then it is best practice for the deed of variation to be registered at the Land Registry. This ensures that the Land Registry records are kept up to date and are correct and protects the tenant’s interest in the property. There is a set Land Registry fee to register a deed and your solicitor can make the application on your behalf.
Costs
Most leases cover costs on variation – it will be anticipated that the tenant will pay the landlord’s costs (including legal costs) when applying for consent under the lease. Where solicitors are involved, the tenant’s solicitor will obtain funds on account in order to provide an undertaking (a commitment) to the landlord’s solicitor to pay these costs. This is routine and payment is usually whether or not the deed actually completes. It is worth bearing these upfront costs in mind when making such an application.
Other considerations
If you have a sublease or if there are any third party consents required (e.g. bank consent to permit a deed of variation and to allow registration at the Land Registry), then the consent of the head landlord or the relevant third party will be required.
If there is a guarantor to the lease, they will need to be a party to the deed of variation so that they are bound by the terms of it and so that it is clear that they are not being released from their guarantee.
If you have a lease and are dealing with the above situation or need advice on this, then please do contact our Real Estate team who will be happy to help.
