Real Estate things you once knew but may have forgotten - Demising an additional area should not be dealt with by a deed of variation

It is not unusual for a landlord to agree to let an additional area to a tenant. It may be that an office tenant of part of a floor wants to expand and the landlord has an additional area free on that floor or that a retail tenant needs more storage space and the landlord agrees to let an additional basement storage room. How do you document this?

It is clear that entering into a deed of variation in such circumstances would amount to a surrender and regrant of the lease. This leads to the following problems:

• Additional stamp duty land tax (SDLT) is payable by the tenant - SDLT will be payable on the deed of variation as if it were a new lease and based on the then rent. This leads to double payment of SDLT since SDLT will have been paid on the original lease. The tenant must also remember that if the lease is registerable at the Land Registry, it will need to register this new lease. The old registration will not protect them as that lease has effectively been surrendered
• Landlord and Tenant (Covenants) Act - the surrender and regrant will mean that there is effectively a new lease in place. If the existing lease is an "old" lease for privity purposes the landlord will lose the benefit of this. The deed of variation will be subject to the 1995 Act. This means that on an assignment the tenant will be released from its obligations and the landlord will only be able to request an AGA where reasonable
• The tenant may gain security of tenure - the exclusion procedure fulfilled for the previous lease will not apply to the new lease created by the deed of variation and therefore a tenant may inadvertently gain security.

The way to deal with this situation is to grant a supplemental lease of the additional premises. In most cases the supplemental lease can be a relatively short document incorporating in respect of the additional premises the terms of the main lease. There are various matters that should be considered in doing this:

• Time periods in the supplemental lease should be calculated by reference to the start date of the main lease e.g. decoration years and rent reviews
• If the supplemental lease is of a small area, it may be that you want to only permit alienation in conjunction with alienation of the main lease. Likewise forfeiture may be required if the main lease is forfeited. You may also need to consider varying the existing lease so as to tie the existing lease into the supplemental lease in terms of alienation and forfeiture (such a variation would not amount to a surrender and regrant but there would still be a problem if the existing lease was excluded from the security of tenure provisions of the 1954 Act)
• You will need to consider if any extra clauses are required to deal with rent review. It is likely that the additional area will be included as part of the premises for the rent review under the main lease. Further provisions may be required e.g. that a wall separating the original premises from the additional premises has been demolished
• Any break option in the main lease may need to be repeated in the supplemental lease and the main lease varied so as to link the 2 break clauses (ie one cannot be exercised independently). Similarly, any landlord's right of pre-emption as a pre-condition to assignment needs to apply to both leases. As with alienation/forfeiture any variation to the existing lease along these lines will not be a surrender and regrant (but the 1954 Act could still cause problems)
• If there are any other terms of the main lease which need varying for the additional area e.g. do you want the same permitted user or is this area only to be used for ancillary storage? If there is a specific service charge percentage in the main lease, an additional percentage may be required for the supplemental lease.

In conclusion, although it seems a relatively simple matter to demise an additional area, particularly if it is a small area such as a storeroom, careful thought is required for the documentation of the additional demise.

If you require any further information please contact Angela Dennis at angela.dennis@cms-cmck.com or on +44 (0)20 7367 3953