Separate AST or Deed of Variance?

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    Separate AST or Deed of Variance?

    Evening guys,

    I'd really appreciate your thoughts...

    Existing commercial lease in place for a small ground floor shop (a barbers), with 9 years left.

    4 x small 1 bed flats above...with separate entrance at rear of the commercial shops.

    The flat above the tenant/barbers has been vacated and barbers wish to rent it for the duration of their lease.

    Tenant & his solicitor are pushing for the flat to be added to the commercial lease by way of a Deed of Variance.

    Our Solicitor is adamant that DoV is inappropriate and a residential property needs an AST in order to protect both parties. And that we may be party to some kind of tax avoidance if agree to DoV?

    Which Solicitor is correct?
    Why the continued insistence on a DoV if it is inappropriate?
    If both can legally be used could anyone sum up the pros & cons of each to us/tenant?

    In case it makes a difference the plan is to try to sell the property next year (3 x commercial shops, 4 x flats).

    TIA

    #2
    Whatever the document is called it will be a new lease as you cannot add premises to an existing lease. If the document provides that the tenancy is on the same terms as the existing lease (apart from rent and term and any other points agreed) and it is provided that the two are to be treated as if they are one tenancy (even though they are not) it is more correctly called a supplemental lease. On the other hand if it is on different terms and just happens to end at the same time as the existing lease it is simply a case of the same tenant having two separate and unconnected leases.Ignoring the tax point, which you go for depends on various factors.

    If the lease of the flat is expressed to be supplemental to the lease of the shop it will be deemed to be part of a business lease potentially giving the tenant the security of tenure associated with business premises unless excluded by agreement following the statutory procedure. If the shop is not excluded it is difficult to see how the flat can be. A valuation point to consider is whether the shop and flat taken together will produce a lower rent than if let separately. It cannot be a bad thing to secure a tenancy of the flat for nine years so long as you do not lose out on rent, due allowance being made for the fact that there will be voids for nine years.

    If the flat is let separately there is no guarantee that it will be on an AST - in fact a landlord can never guarantee that a tenancy will be an AST. Have the barbers said who is going to occupy the flat?

    These and other points all need to be considered and I think you would be wise to get a landlord and tenant specialist surveyor to advise.

    I am having difficulty seeing how granting a supplemental lease could amount to tax avoidance, but I am no tax expert. I think you need to ask your solicitor for an explanation.

    Comment


      #3
      I am dealing with a similar situation which I set up for my landlord client many years ago and which has not caused any difficulty.

      A solution for the OP is to let the flat separately on a full repairing and insuring lease where the permitted use is for the trade or business of a barber or such other use within Class A1, subject to the landlord’s consent not to be unreasonably withheld but subject to as is carried on in the ground floor shop or for residential purposes for the tenant's own occupation or under an assured shorthold tenancy letting or as service occupancy for an employee of the business permitted to be carried out on the ground floor (of the building). Rent reviews to coincide with the review dates in the shop lease: review assumed user a letting on an assured shorthold tenancy. The lease for a term expiring on the same day as the shop lease. The new lease to be outside Landlord and Tenant Act 1954.

      The barber might not want to use the flat as an extension to his business but if he did then he would have to take a chance that the planners would not find out or object. Worst scenario is that he would not be able to in which case as the permitted use also includes residential or a service occupancy then no issue.

      Comment


        #4
        The proposal poses both legal and valuation questions the answers to which will depend on the proposed use of the flat and what the parties want to achieve. The valuation points need to be addressed first and the valuer's suggestions put to the lawyer for his observations. Between them the surveyor and lawyer can then come up with one or more possible solutions. This is a classic case where surveyor and lawyer need to work together without the surveyor trying to be a lawyer but appreciating the leagl aspects and without the lawyer trying to be a surveyor but appreciating the valuation aspects.

        Comment

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