21 August 2017

Concurrent, Overriding and Reversionary Leases: if you're gonna say it, say it right

Lawyers do sometimes make life difficult for themselves. Let's take lease classification as an example. The same lease may be variously described as a concurrent lease, a lease of the reversion and an overriding lease, sometimes rightly and sometimes wrongly, and, to complicate matters further, there are also reversionary leases, which may be leases of the reversion. With this dizzying array of legalese, one can’t help but suspect that some lawyers enjoy both the mental gymnastics, which their legal language requires and the cementing of their position as legal gate-keepers, which it ensures.

Here at Forsters, we prefer a bit of straight talking:

Concurrent Leases

Let's take a common and simple scenario. A developer grants a lease of a substation to an electricity provider (we'll call this the "Substation Lease"). He subsequently grants a lease of part of the development site, which includes the substation, to a retailer (we'll call this the "Retail Lease"). The Retail Lease is granted subject to the Substation Lease. The Retail Lease is a concurrent lease. Strictly speaking, the Retail Lease is a lease of the reversion to the Substation Lease. Concurrent leases are therefore sometimes referred to, rightly, as leases of the reversion

The key point is that the Substation Lease and the Retail Lease are both granted out of the same interest. This has important consequences. It means that the Retail Lease may be for a term which is longer or shorter than the Substation Lease. It also means that if the Retail Lease is terminated by forfeiture or landlord break, this will not bring the Substation Lease to an end, which continues to exist independent of the Retail Lease. Contrast this with what would happen if the developer granted the Retail Lease first, with the retailer granting an underlease of the substation to the electricity provider (the "Underlease"). In this scenario, the Retail Lease would have to have a longer term than the Underlease granted out of it. In addition, if the Retail Lease were terminated by forfeiture or landlord break, the Underlease would fall away too (subject to certain statutory rights of renewal, or relief from forfeiture).

Let's go back to the first scenario. The Substation Lease is granted by the developer. Then the Retail Lease is granted by the developer, subject to the Substation Lease. For so long as the term of the Substation Lease coincides with the term of the Retail Lease, the tenant of the Retail Lease is entitled to the rents under the Substation Lease. Where the Substation Lease is an old lease for the purposes of the Landlord and Tenant (Covenants) Act 1995 ("LTCA"), the tenant of the Retail Lease is entitled to the benefit of the tenant covenants under the Substation Lease, and is subject to the burden of the landlord covenants under the Substation Lease, to the exclusion of the developer. Where the Substation Lease is a new lease, the developer is subject to the burdens and is entitled to the benefits of the Substation Lease alongside the tenant of the Retail Lease, but the developer cannot do anything in respect of the Substation Lease which derogates from the grant of the Retail Lease to the tenant of the Retail Lease.

Simple, right?

Concurrent Leases are sometimes described as overriding leases, presumably because they are slotted in above existing leases. Strictly speaking, however, overriding leases are a specific statutory sub-set of concurrent leases.

Overriding Leases

An overriding lease is one granted pursuant to s19 of the LTCA. This section allows a former tenant with continuing liability (including under an AGA), or a guarantor of such a former tenant’s continuing liability (let’s call them “FT/G”), to require the landlord to grant him a lease, in certain circumstances, namely that the landlord has exercised its right under s17 to require the FT/G to pay (broadly) rent or service charge arrears under the original lease, and the FT/G has paid in full.

The overriding lease will be for a term equal to the original lease, which it overrides, plus three days. It will otherwise be on the same terms as the original lease, but excluding personal covenants and provisions that have ceased to have effect.

Overriding leases are highly problematic, and deserve a blog post all of their own (I think I see where this is going). For example, how do you calculate the term where the tenant of the original lease is holding over? I’ll leave that one hanging…

Reversionary Leases

The term reversionary lease is used to describe a lease "where possession is delayed to a future date" and is different from a lease of the reversion. In simple terms a reversionary lease is one which is granted today, with a term commencement date of tomorrow or some other future date. A reversionary lease cannot specify a term commencement date which is more than 21 years after its date of grant.

Of course, it would be possible to grant a concurrent lease/lease of the reversion, which is also a reversionary lease. In other words, this would be the grant of a lease, which is slotted in above an existing lease, for a term which takes effect at some future point.

Plain talking can be tricky when the subject matter is so complicated. Still, let’s not make things more difficult for ourselves. Let’s call a spade a spade.

Elizabath is a Senior Associate in our Commercial Real Estate team.


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