When entering a lease, naturally you will negotiate and agree to terms that suit you at the time. You might find, however, as your business grows and circumstances change, there are aspects of the lease that need revisiting.
In this article, our commercial property solicitors introduce you to leasehold deeds of variation, common reasons modifications are made to leases, the process, costs and formalities involved. We also explore some important risk and compliance issues associated with deeds of variation.
- What is a leasehold deed of variation?
- Who can vary a lease?
- Reasons for seeking a deed of variation on a lease
- Alterations and renovations to the property
- Subletting or change of tenants
- Correcting errors in the original lease
- Do you need a solicitor for a deed of variation?
- The process of obtaining a deed of variation
- Submitting the deed of variation
- How much does a deed of variation cost?
- Does a deed of variation need to be registered?
- Risk and compliance issues
- Costs of obtaining the deed
- Who typically pays for the associated costs?
- Stamp duty implications
- Ensuring compliance with leasehold terms
- Avoiding disputes and legal complications
- Can a deed of variation be challenged?
What is a leasehold deed of variation?
Deeds of variation are legally binding documents that modify the terms of an existing lease between a landlord and tenant. Both parties agree to make changes to the lease, typically by adding, removing or altering specific provisions. This avoids the impracticality and costs of creating an entirely new lease to document revised terms. It is important to note that changes made by deed become permanent, enforceable terms of the lease that will apply to future landlords or tenants of the property.
Who can vary a lease?
Both the landlord or tenant can initiate the process to vary a lease and propose changes to the other party, but you must mutually agree any modifications ie neither party can unilaterally vary the lease. The deed of variation needs to be signed by both the landlord and tenant (and any other relevant parties) to come into effect.
Reasons for seeking a deed of variation on a lease
Whether you are a landlord or tenant, overtime your needs and objectives may evolve as market conditions and business priorities change. Alternatively, issues may crop up during the course of the lease that make some of the original terms unsuitable for your purposes.
By amending the original lease terms agreed, you can accommodate new circumstances and keep the lease commercially relevant. As such, varying the lease provides flexibility, continuity and stability for both parties. For instance, avoiding the need to exercise a break clause and move business location if the lease terms are no longer suitable.
Alterations and renovations to the property
During the course of the lease, you might find the need to alter or adapt the premises. It is common for modern leases to permit internal or non-structural alterations with the landlord’s consent. External or structural alterations on the other hand, are often absolutely prohibited. For permitted alterations, these are typically subject to the landlord’s consent (which is not to be unreasonably withheld). The lease may also impose conditions on the proposed works.
If the alterations you wish to carry out are in contravention of the lease, you and your landlord can agree to vary the lease terms by deed.
Other terms of the lease may also be impacted by the nature of the alterations / renovations you intend to undertake. For instance, if the proposed works change the use of the property permitted by the lease, this clause will also need to be amended by the deed.
Subletting or change of tenants
As we all know, business can be unpredictable, and you might need to consider selling your leasehold interest to another party or subletting at some stage. It is common for commercial leases to permit tenants to transfer their lease to another business (known as an assignment), subject to the landlord’s consent. Subletting on the other hand is more likely to be restricted.
As with alterations and renovations, the lease is likely to impose conditions on the sublet, such as the requirement for the subtenant to be of a particular financial standing. Your landlord is also likely to want to approve the terms of the sublease to ensure these do not conflict with any superior lease.
If the terms of your lease prohibit or restrict subletting of the property as you have planned, a deed of variation may be necessary.
Correcting errors in the original lease
Sometimes, errors or omissions may be discovered in the original lease agreement. These errors can range from typographical mistakes to omissions of important provisions. A deed of variation can rectify such errors, ensuring that the lease accurately reflects the original intentions of the parties involved.
Do you need a solicitor for a deed of variation?
While instructing a solicitor is not a legal requirement, it is very wise to do so. The law surrounding deeds of variation is complex and what might appear to be a straightforward variation at first can result in serious unintended consequences. You should therefore seek proper legal guidance from the outset. A specialist commercial property solicitor can help you:
- determine whether a deed of variation is necessary in your specific situation, or if there is simpler way to achieve your objectives
- assess the terms of your lease agreement and provide guidance on the appropriate steps to take to document the proposed variation
- ensure any proposed changes protect and do not inadvertently affect your rights or obligations under the lease
- highlight and navigate any pitfalls associated with deeds of variations such as the variation being deemed a surrender and regrant of the lease
- ensure the deed is prepared and executed properly, and all formalities or registrations are taken care of
As you can see, legal knowledge and expertise is vital in commercial lease variations. The consequences of getting it wrong can be extremely costly and detrimental to your investment / business.
The process of obtaining a deed of variation
The process of obtaining a deed of variation typically involves the following steps:
- Whether you are a landlord or tenant, once you have recognised and agreed the need to make changes to an existing lease, the first step is to seek independent legal advice from a specialist commercial property solicitor.
- Your solicitor will conduct an initial assessment of the proposed change to determine whether a deed of variation is necessary at all. It may be the case that a licence or consent from the landlord covers your motives for seeking a variation. For example, if you wish to change the use of the premises, the lease may permit this subject to the landlord’s consent. This can be documented as a licence, which does not operate as a variation to the terms of the lease.
There may also be alternative, more appropriate ways to achieve your goals. For instance, if the arrangement is intended to be a personal concession to a current tenant or temporary in nature, it may not be appropriate to fundamentally change the lease binding any future landlords or tenants. A side letter from the landlord could address such a change.
- if a deed of variation is deemed appropriate, your solicitor will identify what addition, deletion or amendment is required to the lease terms to give effect to the variation (if not already agreed between the parties).
- it is likely that there will be negotiations to agree the exact terms of the variation, before the deed is drawn up for comment and approval by the elected solicitor.
Submitting the deed of variation
Before finalising the deed of variation, it is important to obtain consents from any relevant parties, such as superior landlords or mortgagees, before proceeding. This may involve submitting a formal request for consent, providing them with a copy of the proposed deed of variation, and allowing them sufficient time to review and respond.
Along with the deed of variation, you may need to submit additional supporting materials, such as:
- a copy of the original leasehold agreement to provide context and reference to the existing terms and conditions
- Land Registry documents if the property is registered, such as the title deeds or official copies
- any updated plans or drawings that illustrate the changes proposed in the deed of variation
- sworn statements verifying certain facts or circumstances related to the variation
Timelines can vary depending on a number of factors, including the complexity of the proposed changes, the number of parties involved, and their responsiveness. It is advisable to initiate the consent process as early as possible to allow for sufficient time for review, negotiation, and obtaining the necessary approvals. Communicating clearly and promptly with the involved parties can help expedite the process.
How much does a deed of variation cost?
The fees payable for a deed of variation can vary depending on the specific circumstances involved. In some cases, landlords may request an upfront fee for considering initial enquiries made by the tenant into a purported variation. It is not uncommon for some landlords to charge a premium to vary the lease.
Then there are Land Registry fees for registering a variation to a registered lease, which is based on the value of the leasehold interest being varied. This does not include legal fees for negotiating, preparing and executing the deed, which are an additional cost.
Does a deed of variation need to be registered?
A variation is not in itself considered to be a ‘disposition’ under the Land Registration Act 2002, ie it is not a creation or transfer of interest in land that requires formal registration. That said, it is advisable and common practice to register or note the deed against the landlord and / or tenant’s registered title. In particular, registering the deed can help:
- ensure accuracy, particularly when reviewing the leasehold title, which needs to be read together with the lease
- establish priority over subsequent interests or claims that may arise in relation to the property
- notify interested parties searching the Land Registry of the variation and its impact on the lease terms, such as future buyers or tenants
If the lease is unregistered or is for less than 7 years, both parties should endorse a memorandum of the variation on the lease and counterpart. This provides a warning to parties investigating the terms of the lease in the future that variations have been made to the original.
Risk and compliance issues
If you are a landlord, it is important that you consider both the immediate and long-term implications of varying the lease. Changes made through a deed of variation are binding, and they may affect your ability to negotiate future lease terms or property transactions.
One of the main pitfalls you want to avoid is the variation being deemed as a surrender and regrant of the lease. This happens when a variation results in extending the lease term or additional property is added to its demise. Although it is a problem for both parties, landlords may inadvertently lose some important controls and protections if appropriate action is not taken. In particular:
- If the existing lease was contracted out of security of tenure provisions, this would not carry through to the regranted lease. This means the tenant will gain a legal right to remain in the property after the expiry of the regranted lease, even though this is not what was originally intended.
- The deemed surrender also results in releasing any former tenants and their guarantors from their liabilities under the original lease terms.
These potential pitfalls can significantly impact the value of your interest in the property, and any plans to sell in the future.
Costs of obtaining the deed
In addition to legals, there may be other costs associated with obtaining the deed. These will largely depend upon the specific circumstances and nature of the variation, but can include:
- Consents: the freeholder or landlord of any superior lease and any lenders or charge holders may require payment for providing their consent to the variation.
- Valuation: in some cases, a valuation may be required to determine the impact of the variation on the property or rent.
- Surveyor: with some types of variation, for example a deed of variation for a lease plan, a surveyor must be employed to prepare a Land Registry compliant plan.
Who typically pays for the associated costs?
Associated costs can be borne by either party, however, will most likely land on the party who initiated the variation. More often than not, this is the tenant, particularly when it comes to seeking alterations or to sublet the property. Landlords often require that the tenant cover their legal costs in these circumstances.
Stamp duty implications
Stamp Duty Land Tax (SDLT) may be applicable if the deed of variation:
- includes the payment of a premium or any other consideration
- results in an increase in the rent payable under the lease
- is deemed a surrender and regrant of the lease, which triggers SDLT liability
Ensuring compliance with leasehold terms
It is important to check whether the addition, deletion or amendment of existing terms impacts on the remainder of the lease. This requires careful review and consideration of the lease as a whole, ideally by an experienced legal professional. Conflicting terms may lead to complications further down the line.
Avoiding disputes and legal complications
The best way to avoid issues is to follow a careful and thorough process, starting with seeking specialist legal input. A knowledgeable property solicitor will take into consideration the commercial and practical realities of the proposed variation, and tailor their advice to set you up for the best possible chances of success.
Another important step is to consider the interests of all parties interested in the property / lease beyond just the landlord and tenant. Obtaining consents and signatures from guarantors or mortgagees can easily be overlooked but cause issues. Likewise, communicating with and notifying insurers or property managers of the variation to the lease enables a smooth process for completeness.
Further steps to take include:
- Registering the variation at the Land Registry so that a public record of the changes is on notice for anyone interested in dealing with the property and your interests prioritised.
- Maintaining accurate records: keep copies of all correspondence, agreements, and the executed deed of variation in a secure and easily accessible location. These records will be essential if any disputes arise in the future.
Can a deed of variation be challenged?
Once you have completed the process of varying your lease, ideally (and in most cases) you can continue business as usual on the revised terms. While it is possible to challenge the validity of a deed of variation, whether such a challenge will succeed depends very much on the specific circumstances. As with any other deed, its validity can be called into question as a result of:
- Improper execution – this could involve issues such as the absence of required signatures or the failure to follow specific witnessing instructions.
- Lack of consent – if it can be shown that one of the parties did not give their informed consent to the variation. This could be because they were pressurised or coerced into signing. If the variation significantly disadvantages or alters the rights or obligations of one party without proper justification, this is also indicative of consent issues .
In conclusion, deeds of variation are a useful tool that provide flexibility in leasing arrangements. If done correctly, you can adapt the lease terms as your circumstances change. At the same time, leasehold variations have their fair share of potential risks and complications. Employing the services of an experienced commercial property solicitor is key to avoiding costly mistakes.
Here at Harper James, our highly experienced team of commercial property lawyers are experts in dealing with commercial lease variations. We can help you negotiate terms that respond to the needs of your current and future business, while protecting your rights and Interests at all times.