References are often made to 'extending' a commercial lease.
However, this could apply to two different circumstances.
The first is when the lease will end soon, and the landlord and tenant want to renew the lease.
This is known as a renewal lease.
The second is when the lease still has plenty of time to run, but the tenant wants to extend the time for which they can occupy the commercial property.
Renewing the lease
Tenants of business premises usually have a right to apply for a new lease when their existing lease comes to an end unless the lease has been contracted out of the provisions in the Landlord and Tenant Act 1954.
Assuming that the lease has yet to be contracted out, the landlord and tenant will need to comply with the statutory procedure for renewing the lease, so it is essential that they both seek advice from a solicitor.
The parties can agree to the renewal lease between themselves, or if they cannot agree, they can apply to the court to settle the terms of the lease for them.
Applying to court will, of course, increase costs and lengthen the time it takes to complete the renewal lease, so it is preferable to agree on the terms between the parties if possible.
If the lease has been contracted out of the security of tenure, it is at the landlord's discretion as to whether or not they will grant a renewal lease.
There is no statutory procedure in this case, so the terms of the renewal lease must be negotiated and agreed between the parties.
'Extending' the term of an existing lease
Where a landlord and tenant want to 'extend' the term of a lease which is not coming to an end soon, the landlord can grant an additional lease which starts the day after the existing lease ends.
For example, if a tenant has a lease of 10 years which expires on 5 August 2033, but they want to extend the term to 15 years, the additional lease would start on 6 August 2033 and end on 5 August 2038. Solicitors call this a 'reversionary' lease.
The parties usually agree that the terms of the reversionary lease will be substantially the same as the existing lease.
It is important to note that although a landlord and tenant might refer to this as an 'extension' of the lease, a reversionary lease is an additional lease and is not a variation to the existing lease.
It is not possible to enter into a deed of variation to extend the term of a lease, as this operates as a surrender and re-grant of the lease, which can have unintended consequences.
For example, if there is a guarantor of the lease, they would be released from their obligations.
It could also result in a breach of the landlord's mortgage and any superior lease, and there may be Stamp Duty Land Tax implications for the tenant.
It should also be noted that a reversionary lease which starts more than three months in the future must be registered at the Land Registry, even if the term is for less than seven years.
The tenant's solicitor will be able to deal with the registration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
