The Pitfalls of a Surrender & Re-grant

The potential implications for landlords and tenants when varying the terms of a commercial lease.

During the term of a lease, it is not uncommon for the parties to wish to agree a variation of its terms. For example:

• extending the original term
• additional space being granted in a building or development.

However, there are potentially costly pitfalls to landlords and tenants if such a variation is not documented appropriately. For example, the variation may result in an unintended surrender of the existing lease, and regrant of a new lease.

The leading case of Friends Provident Life Office v British Railways Board (1995) confirms the established principle: any increase in the extent of the premises let to the tenant, or in the term for which they are to be held, will result in a deemed surrender and re-grant. However, it appears in most instances, a variation in respect of either an increase or reduction in the level of rent reserved by the lease will not result in an automatic surrender and re-grant: Jenkin R Lewis & Son v Kerman (1970).

The negative consequences to a landlord of a surrender and regrant include:

• the potential loss of right to the benefit from guarantees contained within the lease, whether under an Authorised Guarantee Agreement (‘AGA’) or otherwise
• the potential loss of the ability to enforce covenants at the end of the term, to include yielding up and dilapidations requirements
• the new lease shall have the protection of the security of tenure provisions contained in the Landlord and Tenant Act 1954, where the parties have not followed the exclusion procedure on the regrant of the new lease, despite any exclusion of the old lease
• Potential claims from third parties due to the failure to obtain consent to the new lease.

On the other hand, the negative consequences to a tenant of a surrender and regrant include:

• the new lease potentially resulting in an additional Stamp Duty Land Tax (‘SDLT’) charge. In some circumstances, the tenant may be able to claim overlap relief, subject to restrictions
• a requirement to register the new lease at Land Registry with a new title number, rather than as a simple variation

There are ways to avoid these pitfalls. If the parties wish to increase the extent of the demise, a separate lease may be entered into by the parties. Similarly, in the event the parties wish to increase the length of term, a properly drafted reversionary lease will avert any surrender and regrant. In both instances, carefully drafted documentation will be necessary to protect the parties.