Extending a lease term - Beware!

Extending a lease term by a few months may seem simple. The tenant may be granted a rent concession, or rent free period, in return for an extension of the lease term. However, whilst it may seem a straightforward concept, extending the lease term can cause problems, for both landlords and tenants. Stamp Duty Land Tax and land registration requirements need to be considered and where the landlord itself is a tenant, superior landlord’s consent may be needed too. 

How should I document the extension?

It is widely known, that extending the term of a lease will, even if documented by way of a deed of variation, operate as a surrender and re-grant of the lease. This can cause particular issues for landlords where the original lease was contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954 (1954 Act) because the re-granted lease will not be contracted out. 

In most cases therefore a properly advised landlord will not want to document a lease extension by a deed of variation but will, instead, either surrender the existing lease and grant a new one, or use a reversionary lease. A reversionary lease is a lease that starts at some point in the future. In these circumstances, it would start on expiry of the existing lease. 

If the new lease is to be contracted out of the 1954 Act, the statutory procedure can be followed prior to the grant of the new lease.

How long is the term of the new lease?

Whilst the landlord’s primary concern is likely to be ensuring that it does not end up with a protected tenant, rather than a tenant with a contracted out lease, a tenant with a protected tenancy needs to take extra care in agreeing short extensions. 

This is because an extension of a year or less can severely limit the tenant’s rights under the 1954 Act.

For example, if a protected tenant is given a six month rent free period, in exchange for an extension of six months to the lease term:

• The new lease will remain protected under the 1954 Act;
• However, under section 26 of the 1954 Act, the tenant must have a term certain exceeding one year to be able to serve a section 26 request and trigger the lease renewal process.
• As the tenant will be unable to serve a section 26 request, it will have to wait for the landlord to serve a section 25 notice to trigger the lease renewal process.
• The right to an interim rent only arises following the service of a section 25 or section 26 notice.
• The tenant will not be able to take advantage of any fall in market rent because it cannot serve a section 26 notice and may be left with an overrented property.
• The landlord may choose not to serve a section 25 notice because it wants to continue to receive the higher than market rent payable under the lease.

The effect is the same regardless of whether the arrangement is documented by a surrender and the grant of a new lease, or a reversionary lease. The tenant needs to be aware of this trap and ensure that any transaction is structured so as to avoid this. 

TLT has extensive experience in advising both landlords and tenants on the 1954 Act and lease renewal proceedings. If you would like to discuss, please get in touch.

Contributor: Alexandra Holsgrove Jones