It is common in a minerals context for a mining company to take a lease of a quarry and then, once the operation has become established and minerals are being won and worked, to seek to extend the area of the property included in the lease to expand its quarrying operations.
This gives rise to various considerations, including Stamp Duty Land Tax (SDLT) issues.
Varying an existing lease by adding additional property to the demise is treated by the law as a surrender of the existing lease and the grant of a new lease. This triggers SDLT liability calculated by reference to the rent/royalty payable over the term of the lease and any premium.
On this basis, the SDLT would be calculated by reference to the entire area of the property within the new lease and the tax liability could therefore be considerable.
The alternative option is to take a new, supplemental lease of the additional area. This will lead to the creation of a second lease. It will be important to include provisions in the new lease that interlink with the existing lease so the two leases operate together as they should. For example, adding a clause to provide that the parts of the property under both leases must be assigned or charged together.
If an extension of the term of an existing lease is required, this will also operate as a surrender and re-grant. In this event, entering into a second lease to come into effect in the future on the expiry of the existing lease should be considered. This is called a reversionary lease.
In some cases, where a surrender and re-grant is unavoidable the tenant should check whether overlap relief is available. In certain circumstances overlap relief reduces the rent that is taken into account when calculating the SDLT payable on the new lease. The reduction is equal to the rent that would have been payable under the surrendered lease for the period between the date of grant of the new lease and the date the term would have ended under the surrendered lease if it had not been surrendered.
These issues highlight the importance of considering taxation issues at an early stage to ensure that the transaction is as tax efficient as possible.