Introduction
Commercial leases often last for ten or more years. The original intentions of the parties often change and frequently landlords and tenants agree that the original lease must be varied to reflect fresh commercial terms or changes in circumstance.
Often the way in which a lease is varied is not considered in any great detail, which can result in some serious consequences for landlords anxious as ever to preserve their investment.
Formalities of variation
A lease entered into as a deed between the parties should properly be varied by way of a formal deed of variation. This is not always the case. In Norfolk County Council -v- Dencora Properties (1995) a lease had been entered into with an option to determine being granted to the tenant. The tenant alleged that the option had been varied within the lease by correspondence. The tenant's argument failed and it was held that the terms of the lease had not been varied and the tenant failed to establish that there had been an agreement to vary the lease, which would then lead to a variation.
It is essential that the parties take clear advice as to exactly how to formulate any variations that have been agreed.
Continuing liability of tenants
Landlords need to be particularly careful in seeking to agree and document variations where a lease has been assigned by an original tenant. An important issue is whether or not the original tenant remains bound by any variation agreed after an assignment.
The Court of Appeal in the case of Friends Provident -v- British Railways Board (1995) drew a distinction between a variation giving rise to an obligation not originally contemplated by the parties and the position where the provisions of the lease allow for some future variation of the tenant's obligations. A typical example of this is a rent review clause, where the original tenant will remain bound to perform its obligations as to payment of the varied rent.
It has been established that where there is a variation of a fundamental term of the lease, such is the extent of the demise or length of the term, there is an implied surrender of the original lease and a regrant of a new lease on the varied terms. An obvious implication of this for a landlord is that the Landlord and Tenant (Covenants) Act 1995 will apply to the new lease as a new tenancy with the consequent release of an original tenant from ongoing liability. Another unintended consequence could be the release of any guarantors or other assignees who have given direct covenants to the landlord at any time before the implied surrender. A tenant may have an additional liability for stamp duty on the new lease and, if registrable at HM Land Registry, would have to re-register the lease.
The practical way in which to avoid these possible pitfalls is for the landlord to deal with an extension of the term by way of a grant of a reversionary lease which would commence the moment the existing lease came to an end. Any extension to the demise should be dealt with by way of supplemental lease.
Guarantors
The position under general law is that unless the guarantor covenant in a lease specifically provides to the contrary, a variation in the terms of a lease between the landlord and tenant, if it could prejudice the guarantor, will release the guarantor unless it has given consent to the variation. The release will be from all liability under the lease, not merely additional liability for the guarantor's additional liability. Section 18 of the Landlord and Tenant (Covenants ) Act 1995 does contain provisions that seek to restrict a former tenant's liability to any increase in liability after the variation which may be by deed or side letter has been entered into.
The Contract (Rights of Third Parties) Bill
Variations of leases would appear to be about to become still more complicated! Under the proposed Contract (Rights of Third Parties) Bill which is due to become law later this year and which contains provisions enabling a third party to enforce the terms of a contract, the parties to a contract may not by agreement vary the contract so as to alter that third party's entitlement. Although the precise implications of this proposed legislation have yet to be fully defined, it may well be the case that a tenant within a multi-let building may be able to argue that variations between a landlord and another tenant could fall foul of these provisions. It does appear likely that leases as well as agreement for leases would be treated as contracts for the purpose of this legislation.
For further information please contact Jon Vivian on 0171 367 2116 or e-mail jmv@cms-cmck.com.
