In commercial property, leases are often tailored to fit landlords' and tenants' specific needs and circumstances. However, situations can arise where the original lease terms may no longer be suitable or beneficial. In such cases, a deed of variation can be an effective tool to modify the existing lease.
This article aims to provide a comprehensive understanding of deeds of variation for commercial leases.
What is a deed of variation?
A deed of variation is a legally binding document used to modify the terms of an existing lease. This deed can be used to alter various aspects of the lease, including rent, lease duration, property use, and other key terms. Either party can request a deed of variation, although it requires the mutual consent of both the landlord and the tenant and must be executed as a deed to be legally enforceable.
When to consider a deed of variation
There are several scenarios where a deed of variation may be appropriate:
- Change in business needs: If a tenant's business requirements change, such as needing additional facilities, requiring a different rent, or needing more flexibility to allow third party occupiers into the premises to share occupation (for example, allowing subletting of part), a deed of variation can adjust the lease terms to accommodate these changes.
- Market conditions: Fluctuations in the property market may necessitate adjustments to the rent or other financial terms of the lease. A deed of variation allows for such adjustments to be made without terminating the existing lease.
- Legal or regulatory changes: Changes in laws or regulations affecting the use of the property may require modifications to the lease terms, for example environmental legislation. a deed of variation can be crafted to ensure the original lease complies with new legal requirements.
- Mutual Benefit: Both the landlord and tenant may find it mutually beneficial to amend certain lease terms, such as modifying maintenance responsibilities.
When a deed of variation is not appropriate
A deed of variation may not always be appropriate, and you should take legal advice from a commercial property solicitor before deciding on the best approach. For example:
- Change of tenant: Note that a deed of variation is not used to change the identity of a tenant. This is usually resolved by way of an "assignment" (or transfer) of the lease.
- Rectification: If the original lease contained an error (for example, an incorrect plan), a deed of rectification may be more appropriate than a deed of variation.
Key elements of a deed of variation
- Identification of parties: The deed should clearly identify the landlord, tenant, and any other parties involved in the original lease.
- Description of property: A detailed description of the leased property is essential to avoid any ambiguity.
- Original lease details: The deed should reference the original lease, including the date it was executed and any previous variations or amendments.
- Variation terms: The specific terms to be varied should be clearly outlined, including any new terms being introduced. This section should be precise to ensure that both parties understand the changes being made.
- Effective date: The deed should specify the date on which the variations will take effect.
- Execution and witnessing: As a deed, the document must be executed with the appropriate formalities, including signatures from all parties involved and witnessing by an independent party.
Once a deed of variation has been negotiated, agreed and completed, the changes will take effect. The parties can usually agree the date from which the changes should take effect: usually, this is either from the date of completion of the deed, or from the date of grant of the original lease.
There should be no impact on the other obligations in the lease, which will continue to apply.
Benefits of a deed of variation
- Flexibility: A deed of variation provides flexibility to adapt the lease terms to changing circumstances without terminating and renegotiating a new lease.
- Cost-effective: Amending an existing lease through a deed of variation is generally more cost-effective than drafting and executing a new lease.
- Preserves existing relationship: By modifying the lease terms to suit current needs, both parties can maintain their existing relationship and avoid potential disputes.
Potential drawbacks
- Negotiation challenges: Reaching an agreement on the variation terms may be challenging, particularly if the landlord and tenant have differing interests. Appointing a surveyor to assist with negotiations can help, but this is likely to incur fees.
- Legal formalities: Ensuring that the deed of variation complies with legal requirements and is properly executed can involve additional administrative work and legal costs.
- Unintended consequences:Certain amendments to a lease may be deemed a "surrender and re-grant" of the original lease (for example, extending the lease term, or adding extra space). This can lead to unintended consequences, including additional tax and registration liabilities. Always seek advice.
The alternative to entering into a deed of variation would be surrendering the existing lease and entering into an entirely new one. This can be more costly and time-consuming.
Will the sector I work in affect the approach?
Quite possibly. Different sectors often require tailored approaches to lease variations due to operational and market demands. For example:
- Industrial sector: Industrial properties like warehouses and manufacturing sites may require lease variations to address operational needs. This could involve changes to repair obligations due to the use to which the property is put – for example, due to the impact of heavy machinery or modifications to accommodate environmental compliance measures.
- Office sector: Office leases often involve variations to accommodate technological upgrades or changes in workspace design. This could include alterations to the layout to support hybrid working models or adjusting lease length and break options to reflect fluctuating demand for office space.
- Retail sector: Lease variations in retail properties may focus on flexibility for tenants to adapt to changing consumer trends. For example, variations may include adjustments to rent based on turnover, or profit, rent; changes to permitted use to accommodate evolving business models, or provisions for rent holidays to allow for renovations.
What is the process for obtaining a deed of variation, and how long does it take?
Before documenting a deed of variation, the landlord and tenant must agree on the change(s) with each other in principle. Depending on the nature of the proposed changes, they may need advice from third parties: for example, a surveyor, or a lender.
Once you have reached an agreement, the parties will each need to instruct a property lawyer to assist with drafting and negotiating the deed itself.
Assuming the changes are agreed in principle, the deed of variation is usually a straightforward document that can be agreed in two or three weeks.
Once completed, it may be necessary for the deed to be submitted to HM Land Registry to update the title to the property. If it is not properly registered, the title to the property may be defective. Your lawyer will be able to advise you as to whether this step is required.
Once a deed of variation has been entered into, it forms part of the contractual arrangement between the landlord and the tenant. Assuming the lease allows for transfer to third parties, the lease can still be transferred after a deed of variation is completed.
Conclusion
Deeds of variation are valuable tools for landlords and tenants looking to modify the terms of a commercial lease to suit evolving needs better. By understanding the key elements and benefits of deeds of variation, parties can confidently navigate the process and ensure that their lease remains effective and relevant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
