Looking to the future...
Published 2 September 2014
A reversionary lease is a lease that has a contractual term that takes effect on a future date (but it must take effect within 21 years). Reversionary leases are often granted to a tenant with an existing lease, to take effect on the expiry of that lease, giving you certainty of income and your tenant certainty of tenure
If you intend to grant a reversionary lease you should consider the following:
Ensure that any rent deposits, bank or personal guarantor agreements, are carried over to the reversionary lease.
The tenant of the existing lease should be prohibited from assigning unless it also assigns the reversionary lease to the same assignee at the same time.
Repair, Alterations & Decoration
The reversionary lease should oblige the tenant to reinstate alterations carried out during the term or any previous period of occupation. The standard of repair should be linked to the commencement of the term of any previous lease. The tenant may wish for his terminal redecoration obligation in the previous lease to be suspended.
If the reversionary lease term does not commence for some time, then consider a rent review on day 1 to ensure the reversionary lease takes effect with the tenant paying open market rent.
A reversionary lease should provide that if the existing lease comes to an end (except for expiry), the reversionary lease will automatically terminate.
Even if a reversionary lease is for a term of less than seven years (the usual threshold for registration at the Land Registry), it will be registrable if the tenant is to take possession under that lease more than three months from the date of its grant. You may also need to produce Land Registry compliant demise plans.
The effective date of a reversionary lease for SDLT purposes is the date of grant, and not the date that the term commences, and so the tenant’s SDLT liability accrues earlier than if it had waited until the expiry of its current lease.
The reversionary lease usually mirrors the terms of the existing lease, but will need to be updated to reflect legal and regulatory changes.
There may also be other matters to consider depending on the nature of the transaction and the particular property so please get in touch with us if you would like to discuss any specific scenarios further.