Unintentional Consequences Of Varying A Lease

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Unintentional Consequences Of Varying A Lease

Both landlords and tenants alike should exercise caution when agreeing to vary an existing lease. Under certain circumstances the effect of the variation is to give rise to the surrender of the original lease and a grant of a new lease which may not have been the intentions of the parties.

The circumstances when variation results in automatic surrender and re-grant was established in the case of Friends Provident Life Office -v- British Railways Board [1995]. The Court held that an original lease would automatically be surrendered and a new lease granted when a lease is varied to either increase the demise or increase the term. It is interesting to note that on appeal the Court held that a variation of rent alone does not constitute a surrender and re-grant.

For Landlords this is not a desirable position for the following reasons:

  • The tenant would have the benefit of security of tenure under the new re-granted lease if the statutory notice procedure under the Landlord & Tenant Act 1954 has not been complied with to expressly exclude this provision. This is the case even if the original lease had been correctly contracted out of the 1954 Act.
  • If the original lease had been entered into before 1st January 1996 and was subsequently varied after this date then the new re-granted lease would continue to fall under the regime of the Landlord and Tenant (Covenants) Act 1995. The effect of this is that on assignment of the new re-granted lease the tenant would automatically be released from its obligations. This is contrary to the position under new leases granted after 1st January 1996.
  • A former tenant would be released from any obligations under the original lease or under an Authorised Guarantee Agreement as a result of the unintentional surrender.
  • The guarantor to the original lease could be released form its obligations as a result of the lease being surrendered if the guarantor has not consented to the variation of the original lease and the variation would have the affect of prejudicing the guarantor's position. The 1878 case of Holme -v- Brunskill established that where the terms of an agreement are varied which would be binding on the party whose liability the guarantor has guaranteed or the guarantor has not consented to the variation then the guarantor will be released from liability under the guarantee.

A tenant may on the face of it benefit from the surrender and re-grant but tenants should be mindful that stamp duty land tax would be payable on the surrender and re-grant. Furthermore, any charge over the original lease would not apply to the re-granted lease and the lender security would not subsist.

To avoid these issues arising the parties could consider a number of options, for example, surrendering the current lease and negotiating terms for a new lease which would correctly reflect the parties' intentions. Alternatively, an increase in demise could be dealt with by way of a supplemental lease over that part of the property. Similarly the term of the lease can be extended by using a reversionary lease which would commence at some time in the future. Both supplemental lease and reversionary lease must link into the first lease to ensure that both leases work in parity.

Whilst varying a lease to extend its term or the demise may appear to be a straight forward process particularly when both parties are in agreement, it is anything but and all parties to a lease must consider their position carefully to avoid any unwanted repercussions.

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