"Buying out" a commercial lease from a company

[PinkDalek]

The subject header may be misleading, as might be some of the terms I use below. Professional advice will be taken, if we ever get past our initial discussions on the subject matter that follows.

1. A private limited company (incorporated in England & Wales) holds a lease on a commercial property in England, which is due to expire in 5 years or so, paying ground rent to the freeholders. The shareholders in the private company are also the freeholders. The freeholders are contemplating buying out the limited company's interest, such that the two interests merge (if relevant, the limited company has under-let the property to a third party on commercial terms, also due to expire in 5 years or so). The intention being that the freehold may evntually be marketed, without the underlying complexity of also trying to sell the shares in the limited company.

Q1 Would a surrender be the correct term to use for the possible transaction or is it an assignment?

2. The amount payable to the limited company will be at market value (primarily based on the future rents receivable by the limited company) and I'm not seeking advice re Corporation Tax on chargeable gains/connected parties etc.

What I would like to be clear on is the Stamp Duty Land Tax position on the surrender(?) of the lease on the unencumbered property (Non-residential and mixed use). I have little experience of SDLT but have found this https://www.gov.uk/guidance/stamp-duty- ... ts-payable.

Q2 Am I correct that if the chargeable consideration is less than £150,000 then the SDLT rate is set at 0% (the consideration would be in the region of £80,000)?

Although the consideration is greater than £40,000, it appears that a SDLT return may not be needed (we are not concerned if one is needed but I'd like to understand the situation), if I'm understanding the following correctly (my bold):

Leasehold property purchases where the lease is for less than 7 years

You don’t have to pay SDLT or tell HMRC if you buy a new or assigned lease of less than 7 years, as long as the chargeable consideration is less than the residential or non-residential SDLT threshold.

Chargeable consideration includes:

any premium and the net present value of any rent in the case of a new lease

the consideration given for the assignment or surrender of an existing lease

To work out the net present value (based on the average rent over the life of the lease) you can use the Stamp Taxes online calculator https://www.tax.service.gov.uk/calculat ... ax/#/intro .

I've used the calculator putting Freehold in view of "Choose 'Freehold' if it's a freehold transaction or you're aquiring [sic] an existing lease". I think we may be acquiring an existing lease but property terminology has always been a confusion for me. I'm also unsure what they mean by the lease is for less than 7 years. The remaining term is certainly less than 7 years but when acquired by the company the remaining term was then over 50 years.

Q3 Have I got the SDLT position correct, please, and such that no SDLT return will be needed?

I hope the questions make sense and any knowledgeable replies much appreciated.

[pochisoldi]

Does https://www.gov.uk/government/publicati ... ermination give you any useful pointers?

PochiSoldi

[brightncheerful]

This doesn't answer the 'tax' questions but it might save some money, depending upon the timing of the contemplated sale.

From what you say, currently there is (A) a superior landlord (freeholder), (B) a landlord (the limited company) and (C) an undertenant (in occupation).

If in 5 years time the under-tenancy (C) would qualify for renewal rights under LTA54 then B provided B is not in occupation of the premises would have no rights to renew its lease (unless B has a longer lease than C such that B would be a competent landlord within the meaning of LTA54). Depending on the facts, B's interest could revert to A in which case A would have no need to buy out B's interest.

[PinkDalek]

This doesn't answer the 'tax' questions but it might save some money, depending upon the timing of the contemplated sale.

From what you say, currently there is (A) a superior landlord (freeholder), (B) a landlord (the limited company) and (C) an undertenant (in occupation).

Yes, thanks, correct.

If in 5 years time the under-tenancy (C) would qualify for renewal rights under LTA54 then B provided B is not in occupation of the premises would have no rights to renew its lease (unless B has a longer lease than C such that B would be a competent landlord within the meaning of LTA54). Depending on the facts, B's interest could revert to A in which case A would have no need to buy out B's interest.

Again, yes, thanks. B's lease is about 3 days longer than C's but, given we own B, we'll not be seeking to renew the lease in such a manner. Particularly as B is a limited company which we don't need.

However, we are looking at untangling the situation this year, rather than in 5 years. Such that we may sell the freehold, possibly with C still in situ. The link provided by pochisoldi is very helpful but, given the length, I've yet to study it in full. If I knew what term I was looking for, it would be easier to search and look at the relevant forms.

It may be one of the items listed (most likely one of the first three):

3. Determination: on merger
4. Determination: on surrender by deed
5. Determination: on surrender by operation of law

Determination: by disclaimer - doesn't appear to be applicable
Determination: by effluxion of time - again not applicable unless we wait until the lease term expires
Determination: on forfeiture - again not relevant
Determination of assured tenancies: following a court order - not applicable
Determination: by notice - n/a no break clause now pertaining
Determination: on frustration - n/a
Determination: on enlargement - n/a

If it is 3, 4 or 5 above then fine but I can easily get confused by the terminology.

Do you or others hold any views on which one might be applicable?