Granting a reversionary lease

As a commercial property landlord, you may agree with a tenant that they will stay on in the premises after their current lease ends.  If that is still some time ahead, you will want a way to make that agreement binding now and a reversionary lease is a useful way to do this.  There are a few legal issues to consider, so you should discuss your plans with your solicitor as early as possible.

Landlords are sometimes surprised to hear that we cannot just vary a lease to extend the term. In fact, if we did that, it would be treated as a surrender of the existing lease and the immediate grant of a new one, which would have to be registered at the Land Registry and might attract more tax.

In this blog, we explain why a reversionary lease is often the best solution to this problem.

The advantage of a reversionary lease

A lease gives the tenant a right to exclusive possession of the property.  For most leases, that right starts on the day the lease is completed. 

A reversionary lease is different.  It will be completed (and, therefore, be legally binding on both landlord and tenant) while the existing lease is still in place; but the right to possession will be delayed until the existing lease ends.  This does not present a practical problem for the tenant, who will already have exclusive possession under the existing lease.  The moment that lease ends, the right to possession under the reversionary lease takes effect, so the transition from one to the other is seamless.  While the tenant gets continuity of occupation, the landlord gets an uninterrupted and predictable rental stream, so both parties are happy.

A common trigger for a reversionary lease is if your tenant approaches you to ask for some sort of variation to the provisions of the existing lease.  You might agree, but ask the tenant to commit to add a few additional years to the term in return.  This happened a lot during the Covid pandemic, when many tenants needed to switch to paying rent monthly and landlords asked them to take a reversionary lease to extend the rental stream in return for the concession on monthly rents.

The alternative to a reversionary lease would be for you and your tenant to enter into an ‘agreement for lease’.  This commits you to grant, and your tenant to accept, a new lease when the current one ends.  This might be a better approach if either of you wants to make the new lease conditional, for example on getting planning permission for alterations, but that introduces an element of uncertainty.  From a practical point of view, an agreement for lease also requires you to agree and sign two separate documents.  If you both know that you want to continue with a new lease as soon as the old one ends, a reversionary lease creates immediate certainty.

Variations

A reversionary lease will often be on broadly the same terms as the existing lease but this does not have to be the case.  If you and your tenant have agreed to any variations, you are free to include them.  There are a few detailed bits of drafting your solicitor will want to check, such as rent review arrangements, break rights and how any alterations carried out under the existing lease should be dealt with at the end of the reversionary lease.  For example, if the reversionary lease has only a three year term, it would not be appropriate to copy an open market rent review clause from a longer existing lease.  Your solicitor will advise you on such matters when negotiating with your tenant.

Keeping the current lease and reversionary lease together

When you grant a reversionary lease, your solicitor will usually suggest that you include a provision that while the current lease is still in place, your tenant may not transfer either lease without transferring the other at the same time (often referred to as ‘stapling’ the leases).  This is so you do not end up with a different tenant once the current lease comes to an end.  To do this, you also need to vary the assignment clause in the current lease, which your solicitor can do by including some wording in the reversionary lease.

A lease of the reversion

You may also have heard of a ‘lease of the reversion’.  It is important not to get this confused with a reversionary lease, because although they sound similar, they are very different.  A lease of the reversion is one that is granted by a landlord who has already let a property to an occupational tenant, which slots in between the landlord’s interest (known as the reversion) and the occupational lease.  A lease of the reversion may also be referred to as an overriding or concurrent lease, because it exists at the same time as the occupational lease.  The tenant of this new lease effectively becomes the immediate landlord of the occupational tenant, entitled to receive the rent and enforce the covenants but subject to the landlord’s obligations, such as quiet enjoyment, insurance and services.  This sort of lease is useful if the original landlord wants to retain a rental income but step away from day-to-day responsibility for the property.  It may also be used to move property ownership around as part of a corporate reorganisation of the landlord’s business. 

How we can help

Whatever lease arrangements you want to make, our experienced team is always ready to talk through your plans and help you get the best outcome.

For further information, please contact a legal adviser in our commercial property team at one of our offices – York, Selby, Malton or Pickering.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.