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Property Law

Can A Deed of Variation Be a Deemed Surrender of an Existing Commercial Lease?

Are you a landlord or tenant of a commercial lease? Depending on when you entered into the lease it may provide for ‘upward only’ rent reviews.

Commercial leases from before February 2010 typically contained upward only rent reviews. This meant that the rent could only increase at each rent review date, and that is what the parties had signed up to in the first instance.

However, the Land and Conveyancing Law Reform Act 2009 introduced a significant change iin respect of commercial leases. Section 132 of the Conveyancing and Law Reform Act 2009, which commenced in February 2010, provided as follows:

132.— (1) This section applies to a lease of land to be used wholly or partly for the purpose of carrying on a business.

(2) Subsection (1) shall not apply where—

(a) the lease concerned, or

(b) an agreement for such a lease,

is entered into prior to the commencement of this section.

(3) A provision in a lease to which this section applies which provides for the review of the rent payable under the lease shall be construed as providing that the rent payable following such review may be fixed at an amount which is less than, greater than or the same as the amount of rent payable immediately prior to the date on which the rent falls to be reviewed

(4) Subsection (3) shall apply—

(a) notwithstanding any provision to the contrary contained in the lease or in any agreement for the lease, and

(b) only as respects that part of the land demised by the lease in which business is permitted to be carried on under the terms of the lease.

The vitally important change is contained in subsection (3) which now permits the rent to stay the same or fall at rent review time. This effectively prohibits the use of ‘upward only’ rent review clauses in commercial leases from February 2010.

You will note, therefore, this significant difference between leases which were entered into prior to the Land and Conveyancing Law Reform Act 2009 and those signed after the commencement of this act.

Deed of variation

There is a significant consequence flowing from this act and the granting of a deed of variation between the parties after February 2010. Let me explain.

If the parties agree a deed of variation, which may deal with a reduction in the rent and other terms, it is possible that the granting of this deed will bring about a de facto surrender of the original lease. 

The consequence that flows from this, if it occurs, is that the new lease cannot contain an enforceable upward only rent review clause and the landlord will have a less valuable property interest.

And you need to understand that the intentions of the parties when entering into the deed of variation are immaterial; the fact is that if the lease term is extended you are probably looking at a new interest in the land and you can rest assured you do not have 2 leases as the first one will be a deemed surrender.

Deemed surrender

How could this deemed surrender occur?

One of the ways this can happen is if one of the terms of the old lease which is varied/changed is the term of the lease. If the term is increased, for example, there is decided UK case law which holds that if a term is increased a new legal interest in the land comes into existence and the old one, the original lease, is deemed to have been surrendered.

Conclusion

The law surrounding land and interests in land can be complex and requires professional legal advice. Each case must be looked at on its own particular facts and circumstances.

However, one thing is clear: should you not obtain professional advice you run the risk of making a costly mistake that can greatly affect the value of the interest you hold, either as a landlord or tenant.