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Hot Topic Highlight – Surrender & Renewal and Stamp Duty Land Tax (SDLT)

Updated: Oct 28, 2023

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What is today's blog about?

In this week’s blog, we take a look at what to consider if you are advising a client on a surrender & renewal of a commercial property, particularly in relation to the Stamp Duty Land Tax (SDLT) implications.

This will be interesting reading for RICS APC and AssocRICS candidates who have Landlord & Tenant and/or Leasing & Letting as a technical competency.

What is a surrender & renewal?

During the term of a lease, the parties may agree to simultaneously surrender the existing lease and agree a new lease (on modified terms). The existing lease is replaced with a new lease commencing now.

In some cases, this may mean that a previous tenant is released from their liabilities earlier than they would be under other options. Care also needs to be taken in relation to any guarantees under the existing lease when granting a new lease, in addition to the position on security of tenure.

As such, there are alternatives to a surrender & regrant, including:

  • Waiting until lease expiry to modify the lease terms (lease renewal)

  • Agreeing a reversionary lease, i.e., a lease with a future commencement date, which is agreed now – so it could, for example, commence in 5 years’ time upon expiry of the current lease with a day 1 rent review. These have been the preferred option in recent years

  • Varying the lease mid-term by way of a deed of variation (lease re-gear or lease re-engineering

What do I need to consider when advising on a surrender & renewal?

There are a myriad of issues to consider when advising a client on a surrender & renewal, including:

  • Impact on security of tenure under Part II of the Landlord & Tenant Act 1954

  • Modified lease terms

  • Impact on investment value for the landlord

  • Tenant’s business plan

  • Landlord’s holding strategy for the property (or property investment)

  • Alternative options available and the pros and cons of each

  • Marriage value created by the agreement of the new lease, i.e., how do you value the benefits to each party?

  • Rental level and how this compares to Market Rent

  • Intentions of each party, i.e., does the surrender & renewal created meet both parties’ objectives? This is essentially the ‘why’ behind the transaction

  • SDLT liability (more on this in the next s

In all scenarios, liaising with your client’s legal advisor and ensuring your client takes the right legal advice is essential.

What are the SDLT implications of a surrender & renewal?

SDLT replaced stamp duty in 2003, which meant that a historic barrier to utilising surrender & regrants was removed.

Where the existing lease is subject to SDLT, if the lease is surrendered then overlap relief applies upon grant of a new lease (of substantially the same premises). This does not apply if the existing lease was not subject to SDLT.

Overlap relief applies because the two lease terms overlap so SDLT would otherwise be double counted (and overpaid).

However, before we delve into the detail of why this might be beneficial, we will take a quick look at how SDLT is calculated on leasehold interests.

How is SDLT calculated on leasehold interests?

SDLT for non-residential (i.e., commercial) leasehold properties is based on the sum of the:

  • Lease premium

  • Net present value (NPV) (of the total rent over the lease term)

NPV is banded for SDLT purposes:

  • NPV of £0 - £150,000 0%

  • £150,001 - £5,000,000 1%

  • Over £5,000,000 2%

HMRC have a useful SDLT calculator online, which you can use for simple calculations.

However, a manual calculation is required for more complex scenarios, such as a surrender & regrant, so always ensure your client checks the exact liability with their legal advisor.

How will SDLT liability be affected by a surrender & renewal?

Based on an example, the SDLT liability would be lower for a surrender & regrant of a new 10 year lease (with overlap relief applying) compared to a 5 year reversionary lease (where overlap relief does not apply). At a rent of £50,000 p.a. the difference would be 35% and this increases if the rent is higher.

If the existing lease was subject to stamp duty, rather than SDLT, however, the liability would be much higher and a surrender & regrant may not be the right strategy to pursue.

Furthermore, the SDLT calculation is not revisited for a surrender & regrant if a rent review is undertaken during the new lease term, e.g., at year 5 in the above 10 year lease example.

By comparison, the SDLT calculation for a reversionary lease is revisited when any day 1 rent review is agreed, which can further increase the liability and creates uncertainty over the total SDLT payment.

What are the benefits of a surrender & renewal?

Apart from the reduced SDLT liability due to overlap relief, a surrender & regrant may be preferable as it creates a simple lease structure and clear documentation. A reversionary lease, on the other hand, creates an additional document which needs to be referred to during the term of the existing and new leases.

How can we help?

Stay tuned for our next blog post to help build a better you.

N.b. Nothing in this article constitutes legal, professional or financial advice.


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