Given the impact of the current pandemic on the commercial property market, it is becoming increasingly common for landlords and tenants to agree to vary the terms of commercial leases.

These variations can take many forms, including extending the term, amending the rent, postponing rent reviews, altering the demise, postponing or removing break options, or a combination of some or all the foregoing, to name but a few examples.

Practitioners’ attention is drawn, however, to the potential unintended consequences of varying the terms of a lease, such that the arrangement as a matter of law may be construed as a surrender and re-grant, thus bringing the existing lease to an end and creating a new one.

Where the lease predates the introduction of the prohibition on upward-only rent reviews (28 February 2010 by virtue of section 132 of the Land and Conveyancing Law Reform Act 2009) and contains upward-only rent review provisions, the variation, if it constitutes a surrender and re-grant, will very probably render all future rent reviews upwards or downwards.

A renunciation of tenant renewal rights on the original lease might not apply to the regrant. The re-grant may trigger a requirement for third-party consents, such as those of a superior landlord or funder. Tax, and in particular stampduty and VAT consequences, also need to be considered. Where the arrangement amounts to a surrender and re-grant, the deed of variation will be stampable as a new lease. The Revenue’s own guidance, published in July 2020, places considerable emphasis on the intention of the parties in determining whether the variation constitutes a surrender and re-grant.

Unfortunately, the law in Ireland is not definitive as to whether the intention of the parties is paramount in determining whether a surrender and re-grant has occurred or not. In English law, the position on whether a surrender and re-grant has occurred is a matter to be determined on the objective interpretation of the facts, and not just on the intention of the parties. It is not possible to be definitive in providing guidance in this area but, in general terms, where the area being demised is being altered, it is more than likely that the arrangement will be ‘objectively interpreted’ as a surrender and re-grant, regardless of the intention of the parties. A better approach might be to grant a supplemental lease of the additional area. Likewise, care should be taken in extending the term, which again might be ‘objectively interpreted’ as a surrender and re-grant. A better approach might be to grant an option to enter a renewal lease or to grant a reversionary lease. In general terms (but without being definitive), variations that do not alter the demise or extend the term, are likely to be ‘objectively interpreted’ as simple variations without triggering a surrender and re-grant.

The inclusion in the deed of variation of an express provision to the effect that the parties’ intention is simply to vary certain terms of the lease and not to create a new lease by surrender and re-grant should assist, although the law in Ireland is not definitive as to whether the intention of the parties is a determining factor.