What is a Reversionary Lease? A Guide for Landlords and Tenants
A reversionary lease is a lease granted now but with a term that does not begin until a specified future date. The lease is fully formed and legally binding from the moment it is signed; only the period of occupation is deferred. Two scenarios arise in practice: a “pure” reversionary lease taking effect on the expiry of an existing lease (often granted to an incoming tenant), and a reversionary lease granted to an existing tenant to secure continued occupation once the current term ends.
This guide covers when reversionary leases are used, how they differ from lease renewals and concurrent leases, and the key legal requirements around the 21-year rule, Land Registry registration, Stamp Duty Land Tax (SDLT), and security of tenure.
When is a reversionary lease used?
For landlords, a reversionary lease locks in a tenant beyond the current term while market conditions are favourable, secures future rental income, and avoids the procedural cost of a statutory renewal under the Landlord and Tenant Act 1954. It also supports portfolio refinancing by giving lenders certainty over future income. For tenants, it provides certainty of continued occupation that justifies fit-out investment and long-term operational planning, removes holdover risk, and allows planning around supply chain contracts or franchise agreements.
Reversionary leases also appear in restructuring contexts, such as regularising occupation after a series of overholding periods or where lenders require security over future income streams.
Reversionary lease vs lease renewal under the Landlordand Tenant Act 1954
Part II of the Landlord and Tenant Act 1954 (LTA 1954) gives most business tenants a statutory right to renew their tenancy at the end of the contractual term on broadly similar terms, unless the landlord can establish one of the grounds of opposition under section 30(1). The renewal process takes place at or near the end of the existing term and can involve negotiation, Tribunal proceedings, and significant legal cost.
A reversionary lease achieves a comparable outcome by contract, agreed and executed now. Both parties gain earlier certainty, terms (including rent) are locked in, and the procedural risk of a 1954 Act renewal is avoided.
Reversionary lease vs concurrent lease (overriding lease)
A concurrent lease (sometimes called an “overriding lease”) is granted to a third party and takes effect immediately, sitting above the existing lease. The concurrent tenant becomes the intermediate landlord of the sitting tenant; the existing tenant’s occupation is unaffected.
A reversionary lease does not interact with the existing occupation while the current lease is running. It takes effect only once the earlier lease has ended. Both instruments can appear in restructuring, but they solve different problems and should not be substituted for each other.
The 21-year rule: section 149(3) of the Law of Property Act 1925
Under section 149(3) of the Law of Property Act 1925, a lease at a rent or granted in consideration of a fine that is limited to take effect more than 21 years from the date of the instrument creating it is void. A reversionary lease whose term commencement date falls more than 21 years after the date of grant is therefore void from the outset, not merely voidable.
Exceptions exist for certain mortgage-related and settlement-related interests, but they are narrow. Where parties need to secure arrangements beyond 21 years, the usual alternative is an option to renew or a conditional agreement for lease. This limit is a common technical trap and should be confirmed at the outset of any reversionary lease transaction.
Land Registry registration: the 7-year rule and the 3-month rule
Under section 4 of the Land Registration Act 2002, two triggers can make a reversionary lease compulsorily registrable at HM Land Registry:
- The general rule: a lease granted for a term of more than seven years must be registered.
- The reversionary lease rule: any lease taking effect in possession more than three months after the date of grant is compulsorily registrable, regardless of term length.
In practice, almost every reversionary lease triggers one or both rules. Registration must be completed within two months of the disposition. If it is not, the lease takes effect only as a contract between the parties, not as a legal estate, significantly weakening the tenant’s position against third parties.
SDLT on reversionary leases
SDLT on a reversionary lease is assessed by reference to the date of grant, not the date the term begins. Under HMRC’s guidance at SDLTM17070, SDLT is calculated on the net present value (NPV) of the rent payable over the term, plus any premium. An SDLT return must be filed within 14 days of the effective date, which can mean paying SDLT well before taking occupation.
HMRC also scrutinises arrangements where reversionary leases form part of a structure designed to defer or reduce SDLT liability. Where that is a consideration, specialist tax advice should be obtained before any documents are executed. Our SDLT on commercial leases resource provides further detail.
Security of tenure and the Landlord and Tenant Act 1954
A reversionary lease can be granted inside or outside Part II of the LTA 1954. If the parties wish to contract out, they must follow the statutory procedure in section 38A of the LTA 1954: the landlord serves a warning notice in prescribed form, and the tenant signs a declaration confirming they understand the consequences. Where the notice is served fewer than 14 days before grant, a statutory declaration before an independent solicitor is required.
Critically, contracting out must be completed before the lease is granted, not before the term commencement date. This is one of the most common procedural errors in reversionary lease transactions.
Key drafting considerations
A reversionary lease must anticipate a gap of months or years between grant and occupation. The following points should be addressed:
- Rent review machinery: Consider whether rent will be reviewed at the term commencement date; where the gap is significant, a review at commencement is generally expected.
- Break clauses: Conditions for exercising a break should operate clearly during both the pre-commencement period and the running term.
- Conditions precedent: Where the lease is conditional on the existing lease having ended or works having completed, those conditions must be precisely defined.
- Third-party consents: Lender consent and, where applicable, superior landlord consent must be obtained before the reversionary lease is executed.
- Changes in the parties’ circumstances: Address assignment, insolvency, and change of guarantor between grant and commencement.
- Interaction with the existing lease: If the existing lease might overrun, define the term commencement date by reference to actual expiry rather than a fixed calendar date.
How Fraser Dawbarns can help
Our commercial property team advises landlords, tenants, and developers on all aspects of reversionary lease transactions: drafting and negotiating the lease, advising on the 21-year rule, Land Registry registration, SDLT, and the LTA 1954 contracting-out procedure. We also act on commercial property conveyancing and commercial property disputes across the region.
Recognised in the Legal 500 for our property work, Fraser Dawbarns has served clients across Cambridgeshire, Norfolk, and East Anglia for more than 200 years. We offer clear, practical advice with transparent costs and direct access to your solicitor throughout.
To discuss a reversionary lease transaction, get in touch with your local office: King’s Lynn, Ely, Wisbech, March or Downham Market. Alternatively, complete the enquiry form and a lawyer will be in touch.
Frequently asked questions
What is the difference between a reversionary lease and a lease renewal?
A lease renewal under the LTA 1954 is a statutory process that takes place at or near the end of an existing lease. A reversionary lease is a contractual lease granted now to take effect at a future date. The end result can be similar, but a reversionary lease provides earlier certainty for both parties and bypasses the 1954 Act renewal procedure.
Can a reversionary lease be granted to take effect more than 21 years in the future?
No. Under section 149(3) of the Law of Property Act 1925, a reversionary lease whose term starts more than 21 years after the date of grant is void. Parties needing flexibility beyond 21 years typically use an option to renew or a conditional agreement for lease instead.
Does a reversionary lease need to be registered at the Land Registry?
In almost all cases, yes. Under section 4 of the Land Registration Act 2002, leases of more than seven years must be registered, and any lease taking effect in possession more than three months after grant is compulsorily registrable regardless of length. Failure to register within two months means the lease takes effect only as a contract, not as a legal estate.
Is SDLT payable on a reversionary lease?
Yes, and the effective date for SDLT is the date of grant, not the term commencement date. SDLT is calculated on the net present value of the rent over the term, plus any premium, and the return must be filed within 14 days of grant.
Does the Landlord and Tenant Act 1954 apply to reversionary leases?
It can. The parties decide at the time of grant whether the reversionary lease will benefit from 1954 Act security of tenure. If they wish to contract out, the warning notice and declaration procedure must be completed before the lease is granted, not before the term commencement date.
What is the difference between a reversionary lease and a concurrent lease?
A concurrent lease is granted immediately and slots between the head landlord and the existing tenant. A reversionary lease does not affect the existing occupation; it takes effect only once the current lease ends. They serve different commercial purposes and should not be confused.
Can a tenant refuse a reversionary lease?
Yes. There is no obligation on a tenant to accept a reversionary lease; it is a matter of contract and negotiation. If the existing lease benefits from the LTA 1954, the tenant retains a statutory right to renew at the end of the current term regardless of whether a reversionary lease has been agreed.
Do I need consent from a lender or superior landlord to grant a reversionary lease?
Often yes. Most commercial mortgages restrict the borrower’s ability to grant leases without lender consent, and many head leases require superior landlord consent before any underlease is granted. Failing to obtain the required consents can put the landlord in breach and may render the reversionary lease vulnerable.