Deed of Variation of a Lease: a trap for Tenants

If a deed of variation to extend the term of a lease seems too good to be true, that is because it is!

I have written before about how to make a commercial lease simple. One of the key points I wanted to make then is that when we make something like this simple, we are managing a complex process in a seemingly simple way. I also noted the dangers of over-simplification. One of the most infamous examples of that is the Deed of Variation of a Lease which extends the term of a commercial lease. I have also said before that commercial leases are one of the most unregulated areas of law, but this instance is an important exception.

Deed of Variation of a Lease – The Traps

The apparent extreme simplicity of a Deed of Variation of a Lease which extends the term of a commercial lease makes it tempting for tenants not to bother with legal advice. However, the apparent simplicity is deceiving:

• The first issue to understand is that this document is NOT a lease extension. A residential lease can be extended but the law of commercial leases is completely different. The term of a  commercial lease cannot be extended. 

• A commercial lease can be renewed – meaning the tenant is granted a new lease of the same (or similar) property and the terms of the new lease depends on the negotiations and whether or not the tenant has security of tenure. 

• The Deed of Variation of a Lease which apparently extends the term of an existing commercial lease is really doing something quite complicated: the law automatically deems this to be both a Deed of Surrender of the current Lease and the grant of a new Lease. In other words, what the documents says and what the document actually does, are quite different! That begs the question, why use such a document at all? Why not just use a document which says what is does (i.e. which really is simple)?

• Often, such a Deed of Variation of a Lease also includes a clause stating something like the following:

“the Tenant hereby gives notice to the Landlord of its wish to terminate the Lease on (date).” 

If you think about it, that’s a bit odd. Why, at the start of the Lease, would the Tenant give the Landlord notice to terminate the Lease on the day that the Lease will anyway end? This seemingly innocent looking clause is actually terminating the tenant’s security of tenure rights. Security of tenure rights are so advantageous to a Tenant that any other mechanism to exclude them from a lease or to terminate them requires the tenant to go through a number of steps. Indeed, it is much easier to change the rent than to exclude security of tenure: the tenant must receive a special warning notice and then sign a special declaration after a “cooling-off period” of at least 14 days or swear a statutory declaration in front of a solicitor or commissioner for oaths who is not at all connected to the transaction. In that way, the law seeks to ensure the Tenant is certain what it is giving up. The mechanism of a simple clause in a Deed of Surrender is an anomaly: the only instance when a simple clause in the main document can succeed in removing the Tenant’s security of tenure without any notices, declarations or statutory declaration – even though this document does not actually call itself a Deed of Surrender!

• Even if the surrender clause is removed, if the Deed of Variation of a Lease is only giving a very short new lease term, the tenant may lose the right to use its security of tenure to get a new, longer lease afterwards and may only be able to get a new, very short lease.

Deed of Variation of a Lease – Some of the Unintended Consequences for the Tenant

As the so-called Deed of Variation of a Lease is actually deemed to be a Deed of Surrender and a new Lease, that means the Tenant still needs to consider all the following issues:

• As it is actually a new lease, the tenant may have liability to pay Stamp Duty Land Tax. However, note that this is not a new lease that ends when the old lease finishes. This is a new lease which starts on the same day that the old lease started but ends at a later date! The potential tax liability can be substantial. Often tax relief is available on the overlapping period but that is certainly not always the case and in any case there is now a reasonably complex (and completely unnecessary) tax return to deal with

• It may need to be registered at the Land Registry. Failure to register the new lease properly (i.e. as a new Lease and not just as a Deed of Variation of a Lease) can have serious consequences, for example, the lease can become void as regards the legal estate and it actually takes effect as an agreement for lease, which is hardly a safe place for your business.

• The parties will not have considered who is going to make any Land Registry applications and there will be no express obligations imposed on the other party to provide evidence of identity or assist with requisitions by the Land Registry.

• If the landlord’s interest is mortgaged, the deemed surrender and regrant may not only put the landlord in breach of the terms of its mortgage, but potentially lead to serious complications for the Tenant. The Landlord may not even have the power to accept a surrender, which would mean the “Deed of Variation of a Lease” is void and the original lease remains effective.

• The deemed surrender and regrant of an underlease may breach the terms of a superior lease and make it liable to forfeiture. It is common for leases to contain a prohibition against varying or accepting any surrender of an underlease. Forfeiture will also bring to an end any interests that derive from the forfeited lease, including the regranted underlease.

• Any payments or rent-free period may be subject to VAT.

Better Alternatives

There are other ways to achieve flexibility but signing a misleading Deed of Variation of a Lease is unlikely to be the right thing for the tenant. For example, a better and simpler approach is to agree a new lease which starts on the day after the current lease ends and which is on the same terms as the current lease (or which specifies brief changes to those terms).

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