Property UPDATE

Issue No.3 Autumn 2005

Tenants holding over – Extra SDLT to pay?

Was your lease granted after the introduction of Stamp Duty Land Tax (SDLT) on 1 December 2003?  Is your lease continuing (or might it so continue in the future) beyond the original fixed term?  If so, you may be required to make a further SDLT return to the Inland Revenue within 30 days of the start of any holding over, pay additional SDLT and be liable for interest and penalties if you fail to do so.

This is certainly a trap for the unwary.  A lease may continue by agreement or say because of the security of tenure provisions of the Landlord & Tenant Act 1954.  If your lease continues beyond the original fixed term for even one day the Inland Revenue treat this as adding an extra full year to the original term.  Similarly, if you stay just one day into a second year of holding over it is treated as a second full year and so forth. 

As soon as such period of holding over begins you, as Tenant, must:

• file a new SDLT return within 30 days of the first day of holding over
• recalculate the SDLT payable from the original start date of your lease and
• pay any additional SDLT

There are only very limited circumstances where the above is unlikely to apply (e.g. if the rent is below certain levels and the term is for less than 7 years).

Any SDLT is calculated not just on the extra year but over the whole of the original term as now extended.  On any recalculation credit is given for any SDLT already paid.  However, it is possible that even if no SDLT was payable on the original lease (for example because the relevant rent values fell beneath the £150,000 threshold for commercial rents) SDLT may now become payable for the first time on the whole amount. 

Regrettably the Inland Revenue will not refund SDLT paid if you do not in fact stay for the full year.  However, if immediately at the end of your old lease a new lease is granted the above rules will not apply but SDLT will be calculated on the term of the new lease.  In some limited circumstances both the old and the new lease may be deemed to be “linked” transactions, for example if there were no new negotiations for the grant of the new lease.  This is an anti-avoidance provision to prevent a series of short leases being granted at the outset rather than a single lease for a longer term.

In summary therefore, if you are holding over or you anticipate holding over under the terms of your lease in the near future contact us immediately for advice in relation to your SDLT obligations.

Subletting Over Rented Properties – New Solutions?

A common problem for Tenants is that many leases state that the rent payable on a sublease must be the higher of the passing rent under the lease or the full market rent. If the property is over- rented, a Tenant may struggle to find anyone prepared to take a sublease.

The 2002 case of Allied Dunbar Assurance Plc -v- Homebase Limited closed the dooron overcoming this problem by use of a side-letter. In this case, the lease prohibited any underletting at less than the passing rent, but the Tenant hoped to get round this by entering into a side-letterwith the subtenant tocompensate the subtenantfor the difference betweenthe market rent and thehigher passing rent. The Court decided that the side-letterwas a collateral deedto be viewed alongside thesublease and hence whenread together clearly breached the subletting provisions of theheadlease.

The 2004 decision in NCR -v- Riverland Portfolio No1 Limited may, however, provide a solution. The headlease contained the usual provisions restricting underletting unless at full market rent or (if greater) the rent passing under the headlease. The Tenant sublet the property at the passing rent, but agreed to pay a reverse premium to the subtenant to subsidise the sublease rent. The reverse premium was payable by annual installments.  Even though in practical terms there was little difference between the effect of the two arrangements, the Court decided that the reverse premium, unlike the side letter in the Allied Dunbar case, would not affect the rent payable by the subtenant.  If the landlord ever needed to enforce terms against the subtenant then the full passing rent would be payable. There was therefore a genuine grant of a sublease at the required rent, albeit one that was induced by the payment of a reverse premium.

The reverse premium option will only be available if the wording of the lease does not prohibit payment of a premium from a Tenant to a Sub-Tenant (i.e. a reverse premium). There are other potential problems in using this option. Clearly the Tenant must be able to afford to pay the required sum to the Sub-Tenant. In addition there is the risk of the Sub-Tenant breaching its sublease or becoming insolvent, either of which could result in termination of the sublease and the Tenant losing any reverse premium paid. Any Tenant considering this option should carefully check the covenant strength of the proposed Sub-Tenant before parting with a substantial sum. Ideally payment of the reverse premium should be made in stages over the remainder of the term.

Perhaps the most heartening news for Tenants is a recent announcement made by substantial property owning companies who are members of the British Property Federation (“BPF”). These landlords announced that leases granted from 30 April 2005 will no longer require sublettings to be at the higher of the passing / market rent. Where an existing lease permits subletting, they will also allow subleases to be granted at the market rent. The BPF said that they hoped this would become standard policy for the commercial property industry and called on other owners and investors to follow suit.

Land Registry Plans – New Requirements

 Following recent changes in the law many more property transactions must now be registered at the Land Registry for the first time.  However, many of the plans in existing leases or old unregistered titles do not meet the Land Registry’s current requirements.  You may therefore find that we have to ask you to have new plans prepared.  In particular this will be the case where existing plans do not meet the following requirements:

• Plans must be to scale, with the metric scale marked (imperial measurements are no longer allowed)
• Plans must have a compass point and other “ orientation points” to enable the Land Registry to identify the exact location of the property.
• The property must be clearly identified by suitable colouring, edging or hatching (which matches the text of the deed).
• Edgings must not be so thick as to obscure other details on the plan – this is often the case where plans have been copied over many years and the original is not available.

If a new plan is required we can often refer you to companies that can prepare plans, particularly where plans of leasehold properties are needed.

Note:

Please note that this newsletter is not intended to be a comprehensive statement of the law and should be used for guidance purposes only. If you require specific legal advice please contact Alastair McClean, Michael O’Shea or Sharon Rutter or by telephone 020 7493 2903.