Attention commercial landlords: how best to document a tenant’s request for a short lease extension?
Étude de marché 1 juin 2023 1 juin 2023
Royaume-Uni et Europe
UK Real Estate Insights
We consider the options available to a landlord when looking to agree a short lease ‘extension’ requested by a commercial tenant whose lease is outside the Landlord and Tenant Act 1954, and who wishes to stay in occupation of a property following expiry of its lease.
You are a landlord of a commercial premises. The term of your tenant’s lease, which has been contracted out of the statutory security of tenure rights under the Landlord and Tenant Act 1954 (1954 Act), is due to expire shortly. Your tenant has requested a two month ‘extension’ to their lease term.
There are many reasons why parties to a lease may wish to ‘extend’ beyond the original lease term. For example, the tenant may need additional time to complete dilapidations works or to vacate before moving to new premises. Alternatively, the parties may be negotiating a new lease of the premises but will not have agreed terms for the new lease before expiry of the original lease.
Unless a landlord has a new tenant lined up to take occupation immediately, landlords are generally keen to agree an ‘extension’ because they can benefit from a continuing income stream and (where properly documented) insurance, business rates and service charge remain payable.
We would always recommend that an ‘extension’ is formally documented in advance of expiry of the original lease term so that the basis of the tenant’s continued occupation of the property is clear and there is no risk of a tenant inadvertently acquiring statutory security of tenure rights under the 1954 Act. Below we set out the various options for achieving this and highlight their benefits and pitfalls.
Licence to Occupy
A licence to occupy gives the licensee a personal right to use the licensor’s property for a defined period of time. Licences are attractive to tenants because they work well for short term flexible arrangements and do not attract stamp duty land tax (SDLT). They also work well for landlords as ‘true’ licences are personal arrangements which do not create an estate in land and, as such, do not bind successors in title nor do they confer rights under the 1954 Act. Licences tend to be shorter documents than leases and are therefore quicker to negotiate.
The main issue with a licence to occupy (especially when granted to a licensee who has until that date been a tenant occupying the premises under a lease) is the risk that it could, in fact, be construed by a court as a lease, not a licence. Simply labelling an agreement a ‘licence’ on the face of it does not make it a true licence. Where a tenant has been granted exclusive possession of the premises (i.e. they are the exclusive occupier and have the only set of keys to the premises) for a fixed term for a rent they may in reality have a lease and, where that lease has not been excluded from the 1954 Act, the tenant could acquire 1954 Act rights.
Tenancy at Will
A tenancy at will differs from a licence to occupy in that, unlike a licence for a fixed term, either party can terminate it at any time. Provided the document is properly drafted, a tenancy at will does not confer rights under the 1954 Act and the tenancy does not attract SDLT.
This is often the best option for parties looking to document a flexible short-term arrangement, for example when negotiating a new lease of the premises. Tenancies at will are short documents and are usually quick to negotiate.
A potential drawback for a landlord is that there is no guaranteed period of income as the term is uncertain. For the tenant, there is no certainty of term which can create operational difficulties.
Extension by deed of variation to vary the term of the original lease
It is possible but, because of unintended legal consequences, usually inadvisable to ‘extend’ a lease by varying the original lease term using a deed of variation. This will result in a deemed ‘surrender and re-grant’ meaning that the existing lease is automatically surrendered, and a new lease is created on the same terms as the surrendered lease but with the extended term.
Drawbacks for landlords include:
- a risk that the tenant could acquire 1954 Act rights under the new lease;
- release from liability of any former tenants and their guarantors; and
- a breach of financing obligations where lender consent is required but not obtained.
Drawbacks for tenants would be potential SDLT liability for the new lease and the need to register the lease at HM Land Registry.
- Consider at an early stage whether an ‘extension’ to the lease term might be required and, if so, discuss options for documenting this with your legal advisor. Do not leave the matter until after the tenant’s original lease term has expired – it is much better to regularise the position in advance.
- Ensure that all documentation is properly drafted to reduce the risk of the tenant acquiring unwanted 1954 Act rights.
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