“Making amends”: considerations when varying a commercial lease

A landlord or tenant of a commercial lease may wish to vary the terms of the lease in a number of circumstances. Potential motivations could include:

• Changing operational arrangements at the property (such as responsibility for insurance or repairs).
• Altering the 'permitted use', if the tenant intends to change or supplement their operational use of the property or to assign or underlet to another occupier for a different use.
• Granting additional rights to the tenant over the landlord's retained land or reserving additional rights over the demise in favour of the landlord.
• Varying the rent payable under the lease for a defined period or the unexpired term.
• Adding or removing a break right.
• Extending the term or the demise of the lease (but note this gives rise to a surrender and re-grant with associated risks, as explained below).

A variation of a commercial lease must be agreed between the landlord and tenant, and should usually be documented by a deed of variation. Once the deed of variation is signed by both parties and completed, it should be read alongside the lease, so the documents are treated as one. A well drafted deed of variation will include a statement that the parties agree the lease remains in full force and effect, varied by the deed.

Though the process sounds straightforward, there are many pitfalls to avoid, and the approach to be taken in any given case should be carefully considered.

Personal concessions

It is possible to treat a lease as being varied without the completion of a formal deed of variation. This most frequently happens when the parties agree a side letter covering a personal concession such as a change in regularity of rent payment dates. However, this concession would not be registered at the Land Registry and, if personal to the parties, would not be carried forward as a term of the lease should the landlord or tenant entity change (for example, if the landlord disposes of their interest in the property or if the tenant assigns the lease).

If a side letter includes an agreement that is not intended to be a personal concession, the parties need to take care to ensure that successors are made aware of its terms and should consider a formal deed of variation.

Surrender and re-grant

A variation to a commercial lease will be treated as a "deemed surrender and re-grant", if:

• the extent of the property demise is increased

• the term of the lease is extended

A surrender and re-grant means that the original lease is surrendered (and the interest in the property returns to the landlord) and a new lease is entered into, rather than the original lease being varied. 

Without further steps the new re-granted lease may:

• have the statutory protection of the Landlord and Tenant Act 1954 (even if the previous lease did not)

• give rise to a potential stamp duty land tax liability and Land Registry fees for the tenant

• require repayment of a rent deposit paid under the previous lease

• result in release of any previous tenants or guarantors who have given an authorised guarantee agreement and any former tenants and guarantors who otherwise remained liable to comply with the previous lease terms (this will depend on whether the previous lease was completed before or after 1 January 1996)

The parties can avoid an inadvertent surrender and re-grant by completing:

• a reversionary lease if the parties want to extend the term (with the term to start no more than 21 years from the date of grant to comply with section 149 of the Law of Property Act 1925)

• a supplemental lease if the parties wish to extend the demise

As the extent of any potential issues is not always obvious you should always seek legal advice to navigate this complex area of landlord and tenant law.

Guarantors

Whenever a lease is varied, a well-advised landlord will request that any guarantor is a party to the deed of variation. A variation may affect the obligations guaranteed by the guarantor and the guarantor may be released unless they consent to the variation. Lease guarantees often contain anti-release drafting to protect the landlord in this scenario. However, it can be uncertain how the court would interpret the drafting. Usually, rather than risk accidentally releasing the guarantor, the landlord will prefer the guarantor to be party to the deed of variation.

Lenders

Depending on the variation, lender consent may also be required and you should seek this as early in the transaction as possible.

Registration

As a variation to a lease is not a registrable disposition (assuming it does not effect a surrender and re-grant), registration is not compulsory. However, often it is in the parties' interests to require registration to ensure successors in title are bound by it and to maintain an accurate record of title. Because of this, most deeds of variation will require the tenant to register within a specified period following completion.

In practice

Variation of lease terms can be in the parties' interests but there are many related issues to consider and hazards to avoid. If you are considering a variation to an existing lease, please get in touch with our experts to ensure you avoid unintended consequences.