There are various means whereby tenants can surrender their leases, and they must take care to protect their interests. Peter Sugden explains
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An express surrender is effected by means of a deed. This conveys the tenant’s leasehold interest back to the landlord, and, usually, the landlord, tenant and any guarantor will release each other from their respective lease obligations. Where the lease is registered at HM Land Registry (HMLR), the deed has to be in the form of a transfer (now a form TR1), and, following surrender, application must be made for closure of the title and the removal of any entry on the landlord’s title. However, it should be noted that a lease granted for a term of less than 21 years will never be registered at HMLR.
Surrenders effected deliberately are treated in the same way as purchases. While local searches and inquiries are not normally carried out unless there is a special reason (for example, the surrender of a headlease interest subject to underleases), the landlord and tenant will need to check that the tenant is entitled to surrender, and, equally, that the landlord is entitled to accept the surrender.
A prior agreement to surrender will be enforceable only if a county court order is first obtained to authorise it under section 38(4) of the Landlord and Tenant Act 1954. This is a “rubber stamp” application, which can usually be obtained in a matter of days or even on the same day.
One item to consider when surrendering leases subject to service charges is the question of balancing charges. An absolute release will absolve the tenant from further liability and vice versa. If moneys will be due or owing at the end of the service charge year, the parties should consider preserving the right to recover them in the surrender deed. Similarly, the tenant will not be able to recover rent paid in advance unless it is dealt with specifically.
Surrender of part
On any surrender of part, it is essential to consider any consequential impact on existing lease terms and to cover these in a deed of variation. For example, these will cover reductions in service charge percentages or changes in rights granted.
If a surrender of part is to be accompanied by a variation to include additional premises, one must be alert to the possibility of an implied surrender and regrant. Where a lease is being varied by the extension of the term or by the demise of new space, then a surrender and regrant is implied. Not only does this give rise to a stamp duty liability, as if a new lease had been granted, but where the original lease is an “old” lease for the purposes of the Landlord and Tenant (Covenants) Act 1995, a “new” lease will be created for the purposes of the Act, which will not have any “new” lease alienation controls.
In this situation, it is preferable to have alongside the surrender of part a supplemental lease of the new space (by reference to the terms of the existing lease) that has appropriate alienation preconditions. An additional provision should also be included, whereby any dealing involving the supplemental lease is accompanied by a simultaneous dealing with the existing lease.
A deed of variation of the “old” lease is also required both to prevent it being assigned separately from the supplemental lease and to make any changes necessary to the rent review clause: for example, an assumption that the additional space is included for review purposes. That further deed of variation would not amount to a surrender and regrant.
Surrender by operation of law
Surrender by operation of law can happen inadvertently, as in the case of an implied surrender or regrant or where a new lease of the same premises is granted to the same tenant before the old lease has expired. It can also be effected by the delivery and acceptance of keys by the landlord. However, it will depend upon the basis of delivery and acceptance: this is a favourite trick, sometimes attempted by liquidators to effect a surrender without the landlord realising what is happening. Alternatively, the landlord may take action contrary to the landlord and tenant relationship, such as changing the locks.
However, a surrender by operation of law is frequently effected deliberately in place of a deed of surrender. This is sometimes out of convenience, but it often occurs because the landlord, if paying a premium to the tenant of more than £60,000, can thereby avoid stamp duty.So long as there is no prior written agreement to surrender, there will be no stampable document.
There will usually be a deed of mutual release between landlord and tenant and any guarantor covenants between the parties. Provided that this does not refer to or recite the surrender, it is considered that this, in itself, is not stampable, as it is not conveying an interest in land.
Stamp duty and VAT
Stamp duty is payable ad valorem on a premium of more than £60,000 paid by a landlord to a tenant. However, a premium paid by a tenant to a landlord does not attract ad valorem duty, only fixed £5 duty. As stated above, an agreement to surrender can be stampable even where the surrender itself is effected by operation of law.
VAT follows the normal principles of election. Where the landlord is paying the tenant, it is the tenant’s election that matters. If an election has been made, it is necessary for the tenant to charge. If the tenant is paying the landlord, it is the landlord’s election that is relevant, and, where the landlord has elected, the landlord also needs to charge VAT.
Peter Sugden is a commercial property partner at solicitors Manches
