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Lease variations - overview
If they take effect as a 'surrender and regrant' lease variations can result in the loss of valuable covenants.
For an 'old' tenancy a large number of covenants may be relevant due to privity of contract:
original tenant
guarantor of original tenant
assignees who gave direct covenants to the landlord
guarantor of assignees who gave direct covenants to the landlord
current tenant, and
guarantor of current tenant
For 'new' tenancies, the list will be smaller:
current tenant
guarantor of the current tenant
former tenant who has given an AGA, and
(arguably) a guarantor of that former tenant whose obligations extend to the period and covenants covered by the AGA
The risks
A guarantor can be lost where a lease variation binds the guarantor and is not 'self evidently insubstantial or non-prejudicial'
A guarantor and/or a former tenant can be lost where the variation triggers a 'surrender and regrant' of the lease
A former tenant or guarantor can remain liable following a lease variation that increases liability but only in respect of the terms of the lease before it was varied. Consequently, landlords need to keep a close eye on the situation where current tenants, former tenants and their guarantors have differing levels of liability as a result of variations
Where the variation releases the current tenant from certain obligations (eg by reducing the rent) then former tenants and guarantors will generally be released to the same extent. With careful drafting, concessions given to the current tenant may be structured to leave intact the obligations of the former tenant - although the courts will strain against that result and will strike down such schemes wherever possible
Changes contemplated by the lease
Former tenants (and their guarantors) will be liable where lease terms change in line with the provisions of the original lease. Those changes are not variations.
Where rent increases on review a former tenant and/or guarantor will be liable for the increased rent, even if the review is carried out after the assignment of the lease. A similar result will follow if the lease contemplates a change from one permitted use class to another or to a broader use within the same class. Former tenants and their guarantors will be bound by the consequences of change. This may be significant if the change of use contemplated by the original lease produces a significantly higher rent at review.
Surrender and regrant
A surrender and regrant will occur, regardless of the parties' expressed intentions:
where the term is extended, and
where the property is increased in size
Neither of these changes can be made within the 'envelope' of the existing tenancy and so must take effect as a surrender and regrant.
A variation purporting to exclude Landlord and Tenant Act 1954 security of tenure must also end the existing tenancy. An agreement to exclude security of tenure can be validly made only between parties who will be landlord and tenant in relation to a tenancy. There is a direct clash between this variation and any expressed intention that the lease should remain in full force and effect. If the variation prevails then there must be a new tenancy. If the statement prevails then the variation would be a nullity. In general, the courts give effect to an express provision and so the likely outcome would be a deemed surrender and regrant.
A reduction in the length of the term probably does not trigger a surrender and regrant if the deed of variation includes a statement that the lease, as varied, continues in full force and effect. However, because this point has not been judicially tested it may be advisable to make a shorter term achievable by the insertion of a right to break.
A surrender of part coupled with a reduction in the amount of rent payable should also be accompanied by an express statement that the varied lease continues in full force and effect.
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