A Deemed Surrender and Re-Grant
After a lease has completed, the Landlord and the Tenant may re-negotiate lease terms such as, but not limited to: the annual rent, break dates, or the extent of the property. If this is the case, the parties may decide that the lease should be amended to reflect this. A lease can be amended by the parties entering into a deed of variation, however care should be taken when drafting the deed of variation as if this deed is not amended correctly, the law may imply that the existing lease has been surrendered and a new lease has been granted on the new terms which can have adverse consequences for both the Landlord and Tenant if done unintentionally. When a fundamental element of a lease is varied, it can give rise to a deemed surrender of the existing lease and a grant of a new one. This is known as a deemed surrender and re-grant, and this can occur irrespective of the parties’ intention. This can be disadvantageous for both landlord and tenant and therefore this should generally be avoided.
The variations to a lease that can result in a deemed surrender and re-grant are variations that change the legal estate in some way, and the instances where this occurs largely fall within the following two categories:
- The term of the lease being extended; and
- Additional property being added to the property being let.
A deemed surrender and re-grant shall not occur in the following circumstances:
- Reduction in extent of property being let or length of term;
- Alteration in rent amount; and,
- Rectification of a mistake in the lease prior to registration at HM Land Registry.
If a deemed surrender and re-grant occurs without the landlord or tenants knowledge the following may occur:
- Security of tenure – In order to validly exclude security of tenure, the Landlord must serve a notice on the Tenant and they must swear a statutory declaration in the presence of an independent solicitor. If the Landlord and the Tenant are unaware that the variations to the lease have actually caused the existing lease to be surrendered and a new lease granted this procedure will not have been followed and the Tenant will inadvertently benefit from security of tenure regardless of the parties intentions.
- Privity of contract issues – a lease granted prior to 1 January 1996 is considered an “old lease”. Under an old lease, the tenant remains liable for a breach of the lease by a subsequent assignee (a person who purchases the leasehold interest). A lease that commences after 1 January 1996 (a “new lease”) release tenants from liability automatically under the lawful assignment of the leasehold interest, unless the tenant has entered into an authorised guarantor agreement (AGA).
Therefore, the tenant may be released from their liabilities under an old lease on the deemed surrender, and then the re-granted lease is unlikely to contain an AGA. This means that the lease is unlikely to contain a provision that places an obligation on an outgoing tenant to guarantee the performance by the assignee of the tenant covenants contained in the lease.
- Release of guarantor and former tenants liability – Unless the guarantor to the previous lease is a party to the deed of variation they will be released from the guarantee they provided upon a deemed surrender and re-grant.
The key disadvantages for a tenant are as follows:
- Potential liability for Stamp duty land tax (SDLT) or Land Transaction Tax (LTT) – SDLT or LTT is payable upon the grant of certain qualifying leases. If the Landlord and Tenant are deemed to have surrendered the existing lease and granted a new lease then the Tenant may also face SDLT/LTT liability and penalty for late payment. If this is left unpaid, the tenant may even incur a penalty for late payment.
- Land Registry fees –the lease may contain provisions stating that the tenant shall register the lease. In this instance, the tenant should apply to register the re-granted lease and will incur a fee for doing so.