One of the issues that arises in such discussions is whether it's best just to vary the existing lease, by putting back the expiry date by a few years, or to enter into a new short duration lease? The answer will depend on a number of things including the terms of the existing lease - and will sometimes differ depending on whether it is the landlord or the tenant who is asking the question.
Is the expiry date imminent?
If the existing lease expiry date is very close, then this should not be a factor in the decision as to whether to extend or renew.
However, if the parties are documenting their arrangement fairly well in advance of lease expiry, there is a risk to the tenant if it decides to take a new lease that wouldn't apply if the tenant opted for a lease extension. The risk is that if the landlord sells, or otherwise transfers title to, the property before the new lease begins (which would be the day after the expiry of the existing lease), the lease won't be enforceable against the new owner. This is because the tenant can't get a real right (ie good against everyone, not just the existing landlord) until it has possessed the property - and possession in this case means occupation attributed to the new lease, not occupation under the existing lease.
This risk would be removed if the parties don't allow the existing lease to expire before the new one begins, but instead have the new lease starting immediately - which would involve a surrender of the existing lease. See the later comments on possible SDLT consequences of starting the new lease early.
Repairing liability
Many older leases do not contain what would be considered now to be "full" repairing obligations on the tenant. In some cases, a tenant might be best to stick with its existing lease repairing obligation rather than risk negotiation of a new lease - in which the landlord will probably insert a comprehensive provision.
There will be many examples of such existing lease "loopholes"; one would be if the existing lease does not state that the tenant's obligation to repair is regardless of the age or state of dilapidation of the property. In that case the tenant might not be liable for decay or deterioration that is caused by lapse of time (ie the item has just got older) - rather than by any failure by the tenant to implement its repair obligations.
The lack of such wording can sometimes enable tenants to avoid paying for renewal of items, such as the roof, if a repair would be sufficient.
Even if the new lease simply repeated the wording in the existing lease, this could leave the tenant in a worse position as regards this category of repairs, as the clock would have been reset to the date of entry under the new lease - and so the tenant could not exclude historic deterioration, but could only consider lapse of time decay from the date of entry under the new lease.
Dilapidations claim
There's no guarantee that the choice of route will make it more or less likely that the landlord will issue a schedule of dilapidations during, or as part of, the discussion relative to the continued occupation by the tenant. Indeed, dilapidations might form a key part of the commercial terms to be negotiated.
The important thing for each party to do is to consider what rights or obligations it would have in terms of the new documentation (this applying to all lease terms, not just the tenant's repairing obligation) - and if appropriate to make changes. In some cases a landlord or a tenant might decide not to raise the issue, in the hope that silence will benefit their position. A tenant should not assume that just because the landlord doesn't raise the issue of dilapidations in the pre-contract discussions, that the landlord won't serve a schedule almost as soon as the ink is dry on the concluded deal.
Keeping a guarantor on the hook
A landlord might seek to document a continued occupation arrangement by an extension, rather than by a new lease, in order to keep a guarantor on the hook. This won't work unless the guarantor consents to extend its liability - which would usually be done by having it as a party to any document that extends the duration of the lease.
If the guarantor doesn't consent, then just because the existing lease remains in place does not mean that the guarantor will be liable for any tenant breach relating to a period after the original lease expiry date.
SDLT treatment
If the new lease would be intended to run from the date of expiry of the existing lease, it matters not to the SDLT treatment whether the duration of the existing lease is extended or the parties enter into a new lease. Both are treated, for SDLT purposes, as the grant of a new lease - and the due date for payment of the tax relates to the date when the parties contract for the extension or new lease, not to any later date when the existing lease expires.
However, there could be more SDLT payable by the tenant going the new lease route if the parties decide to start it before the existing lease is due to expire - in order to ensure that the tenant can get the real right. In that case there would be what is called a surrender (of the existing lease) and re-grant (of the new, short duration, lease). If the existing lease had been subject to the old stamp duty, instead of to SDLT, then the tenant wouldn't get the benefit of the "overlap" relief - to avoid paying twice relative to the surrendered period.
The message from all of this is simply to take a little time to consider how best to document any agreed continuation of occupation by an existing tenant, as the route chosen can sometimes be of more benefit to one party than to the other.
