Consider the stamp duty land tax (SDLT) implications of a lease re-gear

In the current economic climate, many tenants are seeking to review the basis on which they occupy rented property. This is true across a wide range of sectors. Tenants are holding discussions with their landlords, and those discussions might consider such arrangements as extending leases, reducing rents, surrendering leases, varying their terms, negotiating rent free or reduced rent periods, changing the terms of the turnover lease; the list is endless. The term ‘re-gearing’ is commonly applied to these wide variety of circumstances.

Both landlords and tenants who are considering re-gearing should bear in mind that there will likely be SDLT consequences. This needs to be considered at an early stage since the financial benefits of a re-gearing will need to take into account any SDLT payable. Even in the simplest situations, the rules are complicated and it may not be immediately clear whether there is an SDLT liability and upon whom that liability might fall. For example:

A landlord may have an SDLT obligation if he or she pays its tenant an amount, either cash or other consideration to surrender its lease. Conversely, where a tenant pays a reverse premium to the landlord as acceptance of a surrender, then no SDLT is due.   

Where a lease is surrendered and re-granted, tenants will have a SDLT obligation on any premium and rents due under the new terms. However, the value of the rents may be reduced, resulting in a lower net present value if overlap relief can be claimed. Overlap relief can only be claimed if SDLT was originally paid on the surrendered lease and the new lease concerns ‘substantially’ the same property. 

Furthermore, there might be opportunities following a lease re-gear for a tenant to obtain a repayment of SDLT that had been paid on the grant of the original lease. This will generally apply where rents were originally contingent, uncertain or unascertained, e.g. turnover leases. There are likely to be time limits where such an opportunity must be taken up.

It should be borne in mind that the general rule is that where a tenant has entered into a lease and paid SDLT, it will not be entitled to obtain a repayment of that SDLT if it gives up its lease before its due term finishes. There are of course nuances to this general rule, but it’s a good starting point.

In all cases, SDLT should be considered at an early stage. Please contact our experts should you require specific advice on the SDLT implications of a lease re-gear.