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Retail tenants beware – surrendering or varying leases can result in an unexpected SDLT charge

Any tenants surrendering their current leases and entering into new leases are required to pay Stamp Duty Land Tax (SDLT).

Retail tenants attempting to exit from old leases with fixed quarterly rent payments and upward-only rent reviews and replacing them with turnover rents could be in for a nasty surprise from this hidden charge at a time that cash flow is already tight.

The charge also applies if a tenant pays for a variation to their current lease. A relief applies to frank the SDLT payable on the rent under the new lease to the extent that it was taxed under the old lease.

If a new lease is granted, the tenant must pay SDLT on an estimate of the rent payable for the first five years of the term of the lease and ‘true-up’ the tax once the rent payable over the first five years is known e.g. after the fifth year.

If landlords and tenants are taking the opportunity to extend leases the relief referred to above is unlikely to cover all the SDLT payable on the lease variation, or new lease.

A balancing act for landlord and retail tenant

The retail sector is reopening to a ‘brave new world’ and, whilst the trading figures for the first week of opening were very encouraging for many stores, everyone is waiting to see what the first month, and first quarter, trading results look like and whether the initial demand holds up.

The partnership between landlords and their tenants is key to the success of both businesses, as both parties need to make a profit if there is to be a long-term relationship. Landlords must meet the running costs of their businesses, making distributions to their investors, who include many pension funds. Meanwhile, retailers need to rebuild their businesses, investing to ensure that they have a business fit for the post-pandemic world.  The current situation at Intu illustrates what can go wrong when this balance is lost.

If a turnover rent is not going to provide the returns a landlord requires, the landlord needs to undertake a full appraisal of the potential uses for a property, with collaboration from planners to ensure that delays do not jeopardise the project. Large shopping centres such as Westfield and Oracle, Reading, have shown this can be done. A short turnover lease, with a minimal, or potentially zero SDLT charge for the retailer due to the relief available, could be the answer for both the retailer and landlord.

An opportunity for retail tenants who already have turnover leases

For tenants under existing turnover leases granted in 2015 or later, there might be some good news. They might have paid Stamp Duty based on a high (pre-COVID-19) estimate of turnover and therefore be entitled to reclaim tax on a true-up on the fifth anniversary of the lease based on the lower turnover rent paid in the first five years.

A similar rule applies in Scotland, except that the obligation to true-up recurs every three years and at specific events (e.g. termination of the lease).

Would you like to know more?

If you have any questions about the above or would like to discuss your specific needs with someone, please get in touch with your usual Blick Rothenberg contact or one of the partners to the right.

And to discover more insights, please visit our Property & Construction Hub.