Pitfalls relating to Lease Extensions
If you have asked your landlord for a rent concession due to difficult economic conditions, your landlord may have proposed a longer lease term in return for perhaps a rent-free period, or a discounted rent. In these circumstances, it is important that the deal is structured to avoid unforeseen costs.
If a tenant thus has a longer lease, the landlord may be able to increase the residuary value of the property. Thanks to this higher value, the landlord may be able to meet criteria set by any lender with regard to loan-to-value lending requirements. In this way, although a rent concession may seem to be detrimental to the landlord’s interest, it could actually be beneficial.
Looking at 3 alternative ways of implementing a lease extension, say for 5 years, the following alternatives could be considered:
- Having an agreement to take a new 5-year lease when the existing lease expires. To protect the tenant, this agreement should be registered at the land registry, just in case the landlord should sell their interest in the property in the interim. A £40 fee would be payable to the land registry and there would be no Stamp Duty Land Tax (SDLT) payable until the lease was actually completed following the expiry of the existing lease. The gamble here is that the rates of SDLT could change, which could affect the new 5-year lease. It seems unlikely however that tax rates might fall.
- Having what is called a reversionary lease for a 5-year term, with the term commencing on the expiration of the existing lease. If the rental levels are such that SDLT would be payable, then that tax would be payable within 14 days of completing the reversionary lease. This would obviously affect cash flow, and that SDLT payment would have to be made before the current lease expires. As in alternative 1, a land registry fee could be payable following completion of the lease, either if rights are being granted or reserved in the lease that affect other parts of the landlord’s title, or if the aggregate period of the lease when adding the remaining period of the existing lease to the new lease term exceeds 7 years.
- Varying the existing lease by extending the term by 5 years. Extending an existing lease term will be regarded as a surrender and re-grant of the lease. As a result, depending upon the amount of rent being paid and the length of the new lease period, this could mean additional costs for the tenant, through having to pay SDLT within 14 days of completion of the variation, and land registry fees, for registering the new lease, if the same circumstances apply as mentioned in 2 above.
In summary, the first alternative is likely to be the least expensive, and the third option is likely to be the most expensive, as no credit is given for any SDLT already paid.
Contact our commercial property lawyers in Brighton & Hove, Uckfield, Sevenoaks and Ashford
If you have any queries or need advice please contact David Ashton e. firstname.lastname@example.org, t. 01825 745366 in Rix & Kay’s dedicated Commercial Property Team based in Brighton & Hove, Uckfield, Sevenoaks and Ashford.