When acting for a purchaser of residential leasehold property or a mortgagee, circumstances can arise where the terms of an existing lease of property are insufficient or defective, for the purchaser’s purposes or do not satisfy a mortgagee’s specific leasehold requirements. Additionally, some developer clients frequently require amendments to the extent of demised premises, as defined within a lease, when, for example, sub-dividing a residential property to create more flats.
Possible ways to amend a lease or to resolve a defect in an existing residential lease include the following:
- Deed of Variation: The existing landlord and tenant can voluntarily enter a deed of variation, to amend the existing lease. A purchaser’s solicitor can request that the vendor/existing tenant completes such a deed, prior to completion of the purchase, in the event the deed attracts Stamp Duty Land Tax (SDLT).
- Surrender and re-grant: The landlord and tenant can voluntarily surrender the existing lease and grant a new lease, so that the new lease incorporates the new terms. This could attract SDLT liability for the tenant, depending upon the rent/premium payable for the new lease.
- Court application: A tenant of a long residential lease may apply to court for an order varying the lease, where a lease fails to make adequate provision for certain issues, such as repair and maintenance of the flat/building.
- Indemnity insurance: Indemnity insurance policies have limitations, in that not all defects are covered by insurance. Further, this option does not resolve the defect and only offers a limited financial remedy, in the event the defect results in financial loss. As such, this option should be a last resort. The UK Finance Mortgage Lenders’ Handbook sets out scenarios in which indemnity insurance will be accepted by a mortgagee.
Purchasers’ solicitors should be cautious in that, where a deed of variation of an existing lease either:
- extends the demised premises contained within the initial lease; or
- extends the length of the term of the lease,
it is deemed to be a surrender of the original lease and a grant of a new lease on varied terms.
Any inadvertent surrender and re-grant of a lease, by way of deed of variation, may give rise to the following consequences:
- SDLT may be payable on the new lease, which may be significant if the rent is increased.
- The old Land Registry title number is closed and a new title number is allocated. The Land Registry will raise a requisition. Crucially, any mortgagee’s security in relation to the property/existing Land Registry title number is unintentionally lost during this process and the mortgagee is unprotected.
- Landlords must be cautious that a deed of variation may inadvertently be deemed as a surrender and re-grant and consequently may impact upon the liability of any former tenants and guarantors of the tenant’s obligations under the initial lease. It would be prudent for former tenants/guarantors to consent to and become parties to any deed of variation.
- One way to avoid a surrender and re-grant of an existing lease, in the event of a lease extension for example, would be for the landlord and tenant to complete a reversionary lease, which takes effect at the end of the term of the existing lease (provided the term of the reversionary lease commences no later than 21 years from the date it is granted). The lease can incorporate the relevant terms of the existing lease by reference thereto and include updated provisions. This would circumvent the need for a deed of substituted security/deed of variation and would protect the mortgagee’s security.
- When a purchaser or mortgagee’s solicitor is considering amending an existing lease:
– the mortgagee’s specific requirements should be checked; and
– if the amendments to the lease involve a surrender and re-grant of the lease, the parties should also consider entering a deed of substituted security, to provide for the transfer of the mortgagee’s existing security from the old Land Registry title number, to any new Land Registry title number, to protect the mortgagee’s security.
- Purchasers should consider whether any amendments to the lease constitute a surrender and re-grant, in order to assess the purchaser/tenant’s SDLT liability.
- Land Registry records should be checked, to verify whether or not consents of superior landlords should be obtained to the variation and whether a superior landlord should be joined as a party to any deed of variation.
- If the landlord’s title is registered, a purchaser/tenant’s solicitor should register any variation of the lease at Land Registry against both the landlord and tenant’s titles, in order to bind subsequent parties.
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