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Reversionary leases

Reversionary leases

Some leases grant tenants security of tenure – an automatic right to renew, subject to certain statutory exceptions. When the lease doesn’t have security of tenure, but the parties agree the tenant can have a new lease at the expiry of the current lease, the new lease is a “reversionary lease”: one that’s granted now but starts at some point in future. However there are a few points to consider when negotiating such a lease.

  1. Starting rent. The term starts in future. Will the parties agree the rent now, or will there be a first day review? If there’s a review is it to market rent at the start of the term, or to the greater of the current passing rent and market rent at the start of the term?
  2. Alienation. If the current lease is assigned during the rest of the term, the reversionary lease should also be assigned at the same time to the same assignee. This should be secured as a condition to assignment of the reversionary lease. If it is set out in the lease correctly, it will be upheld by the Landlord and Tenant Act 1927 as a reasonable condition. If the current lease allows the landlord to impose other reasonable conditions on consent to assignment of that lease, assignment of the reversionary lease should fall within the range of reasonable conditions. However, as a counsel of perfection, some landlords will require a deed of variation to the existing lease, to make explicit that the existing lease cannot be assigned unless the assignee simultaneously takes an assignment of the reversionary lease.
  3. Repair and dilapidations. The standard of repair required by a lease is normally the standard at the date the lease is granted. However in a renewal, the tenant should be obliged to yield up the premises in the condition required by the previous lease. If there is an existing schedule of condition, reattaching it to the new lease is quite straightforward. Any works authorised by existing licences to alter should be expressly referenced in the new lease, and the premises should be capable of being yielded up without those alterations.
  4. Rent review. Any tenant’s existing alterations need to be disregarded on rent review, unless it is expressly agreed that these are to be rentalised.
  5. Forfeiture. If the current lease is forfeit for breach of covenant or tenant’s insolvency, the landlord will not want its freedom to deal with the premises fettered by a reversionary lease. This can be achieved by specific drafting in the forfeiture clause of the reversionary lease. The landlord will need to bring two sets of forfeiture proceedings and the tenant will need to apply for two sets of relief.

These issues are not generally contentious but if they’re not picked up either at heads of terms stage or in lease drafting, they can create uncertainty later.

By Suzanne Gill

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