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SDLT And Commercial Leases
In the weeks leading up to the introduction of Stamp Duty
Land Tax (SDLT) on 1 December 2003 the government pushed through
a range of amendments which will further increase the burden
of the new tax on commercial leases. One of the key changes
was to delete the Finance Act provisions that excluded from
SDLT calculations rent reviews to reflect the open market
taking place after the first two years of the term. Under
the amended rules the only changes that do not have to be
estimated at the outset or included in a further land transaction
return are those taking place after the end of the fifth year
of the term. Inevitably these changes will impact upon the
negotiation and drafting of commercial leases.
RENT REVIEW DATES
Rent reviews or stepped rents taking effect after the end
of the fifth year of the term do not have to be brought in
to the SDLT calculation, and will not trigger an obligation
to submit a further land transaction return. However, the
price of this "concession" was the loss of the original
provision, under which no account would be taken of open market
rent reviews taking place more than 2 years into the term
of the lease.
To avoid triggering a requirement for a further land transaction
return it is now extremely important that the first rent review
of a 5-year pattern should take effect after the end of the
fifth year of the term. A rent review date at or before the
end of the fifth year would fall foul of the rules requiring
(a) a further land transaction return when the revised rent
is ascertained,
(b) payment at that point of any additional tax based on the
increased rent and
(c) an NPV calculation for the rest of the term of the lease
applying the highest figure payable for any 12 month period
during the first five years of the term.
So - to avoid falling within the new rules the first rent
review should be on day one or two of the sixth year of the
term.
In practice, the impact might be mainly administrative. A
rent review at the end of the fifth year might mean that one
day's worth of the revised rent must be declared and taken
into account and so liability for additional tax would be
unlikely. The rent figure rolled forward for the rest of the
term would still be the initial rent (being the highest figure
payable for any 12-month period during the first five years).
However, the mere fact of having to put in a further land
transaction return would be an administrative inconvenience.
At its simplest, the land transaction return poses 70 questions.
It becomes far more complex and additional forms and continuation
sheets are required where the lease is subject to occupational
underleases.
Where the lease has been assigned, the assignee takes on responsibility
for any further land transaction return required after the
assignment, together with liability for any additional tax.
Where a rent review falls at or before the end of the fifth
year of the term, therefore, the assignee will need to insist
upon full information as to the original land transaction
return and the tax paid at the outset. The prospect of having
to carry out this chore is unlikely to fill an assignee with
joy, and could be avoided by pushing back the first review
by a day or so.
The potential importance of postponing the first review is
underlined when each rent review falls to be determined. The
hypothetical lease will generally be on the same terms as
the actual lease. Consequently, where the actual lease directs
a rent review at or before the end of the fifth year of the
term then so will the hypothetical lease. This may give tenants
an opportunity to raise points at review, arguing not only
that the effect on the hypothetical tenant's bid of the initial
liability to SDLT will be exacerbated by the need to put in
a further return. To avoid this argument it would be worth
directing the valuer to assume a rent review under the hypothetical
lease on a date after the end of the fifth year of the hypothetical
term. Even then, it is quite possible that a tenant might
point to the discrepancy between the actual rent review date
and the assumed rent review date to argue that this departure
from reality should not be allowed.
Malcolm Dowden December 2003
For guidance or detailed advice contact:
Malcolm
Dowden
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