Lease Variation: problems, pitfalls, and potential alternatives
When is lease variation required, what to avoid and alternatives to consider?
What is a lease variation?
Put simply, a lease variation is when the terms of a completed lease between parties need to be amended or changed in some way, usually recorded by means of a formal deed of variation. It is possible that the parties considered before the final form of the lease was agreed that certain terms of the lease may need to be flexible or variable, which would avoid the need for a deed of variation. If this is the case, it is possible that entering into a consent or licence will be satisfactory to effect the change or amendment.
When is a variation necessary?
Before entering into a formal variation of the lease, you need to consider whether a consent or licence given by the landlord would achieve the same aim in a much simpler manner.
Situations when a lease variation is necessary include (but are by no means limited to):
- When the landlord and tenant have agreed to vary the terms of the lease, for example where the tenant has agreed to surrender part of the premises demised by the lease and consequential variations and release provisions are required.
- Where the existing lease plan is inadequate, and the parties want to amend the plan and description of the demised premises to comply with Land Registry requirements;
- Where the tenant wishes to install plant and equipment outside the boundaries of the property demised and there are insufficient rights granted by the lease;
- Where variations are incorporated into a licence upon the landlord giving consent to assign, alter, change use or charge the property; and
- Where the parties wish to rectify a mistake in a lease.
The main pitfall to avoid: deemed surrender and re-grant
If a variation of a lease results in either an extension to the term or additional property being added to the demise, it is almost certain that the variation will be considered a deemed surrender and re-grant – i.e., a surrender of the whole of the existing lease and a re-grant of the new lease.
This is an issue if the existing lease excludes sections 24 to 28 of the Landlord and Tenant Act 1954, because, unless the statutory notice procedure to exclude security of tenure is not carried out in relation to the regranted lease, the tenant will benefit from security of tenure under Part II of the Landlord and Tenant Act 1954.
The deemed surrender of the existing lease will also have the impact of fully releasing any former tenants and their guarantors from their liabilities under the original lease terms.
This can cause issues for both the landlord and tenant because regranted leases can be compulsorily registerable and there may be a gap between the date of regrant and registration if the parties are not aware of this.
There are also potential financial pitfalls if a deemed surrender and regrant occurs because there probably will be Stamp Duty Land Tax (in England) or Land Transaction Tax (in Wales) implications on the whole of the rent and term of the regranted lease.
Superior landlords or lenders will need to be informed that the lease is being varied. If there is a superior lease, it needs to be considered whether the variations of the lease would be inconsistent with the terms of the superior lease and, therefore cause it to be in breach of it. If this is the case, the superior landlord’s consent will be required before such variations can be made.
Guarantors for a present or a former tenant that have given an authorised guarantee agreement would need to be made a party to the deed of variation; otherwise, if the lease is varied and a guarantor has not consented to the variation, that guarantor will be released from all liability under the guarantee.
If the lease is unregistered or is for less than 7 years, the parties should endorse a memorandum of the variation on the lease and counterpart. This provides a warning to parties investigating the terms of the lease in the future that variations to its original terms have been made. A variation will need to be registered at the Land Registry in the case that the lease is registered.
Also note that VAT may be chargeable on any consideration for the lease terms being varied.
Alternatives to a surrender and re-grant
If the proposed variation would result in the term being extended, the parties could enter into a reversionary lease to take effect at the end of the term of the existing lease instead of varying the existing lease term.
If the proposed variation would result in additional property being added to the demise, the parties would be advised to negotiate and enter into a separate supplemental lease of the additional property instead of a variation.
If you would like further help or advice in relation to a lease variation, please contact a member of the Real Estate team.