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A client comes to you and tells you that ‘my business is doing well, so I have
agreed a deal with my L to extend the term of my lease to 2030 (it currently
expires in 2013). We will increase the rent by £35,000pa to £560,000pa,
with five-yearly rent reviews and a wider user clause’. How should he
structure it (for SDLT purposes)?
Realistically, there are three alternatives:
1. surrender the existing lease and take a new one instead for a fresh 25-year term at £560,000pa plus VAT, with five-yearly rent reviews;or
2. keep the existing lease but increase the rent payable for the remaining
eight years, and take a reversionary lease today of 17 years starting in
2013;
3. keep the existing lease but increase the rent payable for the remaining
eight years, with an option to take a reversionary lease of 17 years
starting in 2013.
If you take option (1) and surrender the existing lease, then the NPV of the lease
over the term would be £10,844,836 which results in SDLT of £106,948. But,
alternative (2) means there would be SDLT on the rent increase of £1,326, and
SDLT on the new reversionary lease of £81,745 – a total of £83,071. Most
efficient of all would be to go for alternative (3), provided the client is prepared
to rely on a contractual option for the grant of the reversionary lease (to be
triggered in 2013, rather than now). In that situation SDLT would only be
payable on the reversionary lease when granted in 2013. Thus the client would
pay SDLT of £1,326 now (for the increased rent on the existing lease), and then
£81,745 in 2013 (giving a cashflow benefit compared to alternative (2) –
although this assumes that SDLT rates do not increase in the interim). Source:
Berwin Leighton Paisner (Real Estate Briefing).
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