Variations that increase the area of demised premises take effect as a surrender and regrant, irrespective of the parties’ intentions, because the additional land cannot be added without itself being demised. This has important consequences for landlords and could affect the value of their investments.
A surrender and regrant will create a “new” lease for the purposes of the Landlord and Tenant (Covenants) Act 1995. If the previous lease was an “old” lease, the variation will release any former tenants and guarantors who might otherwise have remained liable until the old lease expired. It will also deprive the landlord of the benefit of privity of contract with the current tenant – and will release current guarantors unless they refresh their guarantees. The new lease will also qualify for security of tenure under the Landlord and Tenant Act 1954, unless it is expressly excluded from the Act before the addition to the demise. It should also be remembered that rent deposit arrangements may cease to operate on the surrender of a lease and that the grant of a new lease may relieve a tenant from obligations to repair or reinstate to the extent required under a previous lease.
Spencer v Secretary of State for Defence [2012] EWHC 120 (Ch) provides us with another example of the damage that may be caused by a surrender and regrant. The parties agreed to add land to the tenant’s demise and entered into a memorandum varying the lease, without realising that they had effected a surrender and regrant. The memorandum recorded that the rent payable for the area farmed by the tenant would increase from £16,250 to £16,333 per annum. It was completed while the tenant’s rent was subject to review in accordance with section 12 of the Agricultural Holdings Act 1986.
Section 12 provides a mechanism that enables either party to instigate a review of the rent payable in respect of an agricultural holding. The tenant had been hoping for a rent reduction, but the arbitrator increased the rent substantially. The tenant accepted that it was liable to pay the increased rent until completion of the surrender and regrant, but argued that the deed of variation set a new rent, which could not be upset.
The judge rejected the landlord’s argument that the outcome of the arbitration should be incorporated into the new lease. The tenant’s old lease did not provide for the arbitration. Consequently, the landlord could not import the outcome into the terms of the new lease. However, the judge did accept that something had gone wrong with the language in the deed of variation. Neither party had intended to compromise or determine the arbitration. Consequently, the instrument must be construed to mean that the rent payable under the new lease would be £16,333 per annum or the rent fixed by the arbitrator – which might have gone up or down. Alternatively, the court would imply a similar term to make the parties’ contract work.
The traditional conveyancing solution is to grant a separate lease of additional land when adding to a demise. This avoids a surrender and regrant and should help to reduce the risk of problems like this.
Allyson Colby is a property law consultant
