Implied surrender and regrant of leases

As a landlord or a tenant you may be asked to agree to a variation of a lease, perhaps to increase the size of the premises demised or to agree to a longer term. Beware, as lease variations may result in an implied surrender and regrant of the original lease.

Although this may sound innocuous, as a tenant this could lead to a stamp duty charge on the "new" ie regranted lease (based on the then current rent). As a landlord this may mean that you have lost the benefit of an old lease under which the original tenant would have remained liable on all covenants throughout the term of the lease, as the regranted lease will be deemed to be a "new tenancy" under the Landlord and Tenant (Covenants) Act 1995 . A tenant of a new tenancy will be released from his covenants the moment he assigns the tenancy. If the surrender and regrant was not anticipated the new tenancy will not contain the appropriate obligations regarding authorised guarantee agreements. Also, for some older leases (ie pre 1988), the ability to charge VAT on rent could be lost.

So what amounts to a surrender and regrant? It will almost certainly occur where the variation increases the extent of the land demised or where the length of the term is extended. The way to deal with the former is to use a supplementary lease and for the latter, a reversionary lease.

It is also possible that other fundamental changes could trigger a surrender and regrant, although there is a lack of modern authority in this area and the general view is that most variations of lease covenants will not have this effect.

If there are any other specific issues which you would like to see covered, or if you have any questions arising from this monthly e-mail please contact Mark Heighton on 020 7367 2177 ([email protected])