Lease Registration and SDLT - Don't be caught out
Once a lease is granted, it is tempting to plough ahead with occupation formalities and the first set of payments whilst forgetting about two key aspects of the transaction - registration and Stamp Duty Land Tax (“SDLT”).
Within two months of being granted, a lease must be registered at the Land Registry if:
- it is for a term of over seven years; or
- the term commences more than three months after the lease was granted.
Typically registration will be the tenant’s responsibility.
Where compulsory, failure to register will result in the lease being an ‘equitable’ lease, rather than a ‘legal’ lease. The tenant will still be able to occupy the property and the landlord can continue to collect rent. However, either party may run into difficulties when they try to exercise their rights, or enforce obligations, under the lease:
- Rent Recovery
In the event that a tenant does not pay rent due under the lease, the landlord may be unable to recover that sum from a guarantor.
- Additional time and expense when dealing with the lease or the property
Should a Landlord wish to sell the property, a purchaser’s solicitors would most likely insist that lease is registered. As a sale without registration would prevent the lease being transferred to the purchaser as new landlord and would instead continue as a personal contract between the original landlord and tenant.
Tenants would likely run into the same hurdle if they attempted to sell their leasehold interest, or if they wanted to assign or sublet.
- Enforcement of Liabilities
If a lease has been assigned, its liabilities will only be enforceable against the original tenant until the lease is registered. So, in the event of a significant breach by the assignee, a landlord may find that it can only issue proceedings against the original tenant.
Further, if the two month deadline has already passed, it is entirely at the Land Registry’s discretion whether to permit late registration. If they do not, the lease will need to be granted again in order for it to be correctly registered, causing both the landlord and tenant to incur further time and expense.
Once granted, HMRC will not need to be notified of a lease for SDLT purposes if:
- for a lease of seven years or more, it is granted after 12 March 2008 and consideration (other than rent) has a value of under £40,000 and the charged rent is less than £1,000.
- for a lease of under seven years, it is granted after 12 March 2008 and consideration does not exceed the ‘zero-rate threshold’ for the type of property.
Otherwise, failure to notify HMRC will result in a £100 fine, increasing to £200 if the return is more than three months late, and a further penalty (up to the amount of tax due) if more than 12 months late. On large leasehold transactions, 12 month penalties can amount to a significant unexpected cost.
If you would like to discuss any of the issues raised in this article, or need any advice, please contact Nicholas Ripper or give us a call on 0345 070 6000.
Alternatively, click here to find out what our Real Estate team can help you with.
This article was prepared by George Bogle.