Read the original guidance here:
HMRC SDLT: SDLTM14020 – Term of a lease: Leases for a fixed term: Example 1

Understanding Lease Terms: SDLTM14020 – Fixed Term Leases

This article explains how the term of a lease is determined, particularly for leases with a fixed duration. We’ll clarify using clear examples and relate the concepts to everyday terms.

What is a Lease Term?

A lease is a legal agreement where one party (the lessee) pays for the right to use property owned by another party (the lessor) for a specified period. The lease term is the length of time that this agreement is in effect, which is important for determining rights, obligations, and any taxes that may apply.

The Principle of Bradshaw v Pawley

The Bradshaw v Pawley principle helps in figuring out how to determine the lease term when the lease states a fixed duration. According to this principle, the term of the lease can be defined in two ways:

• Option a): The actual term mentioned in the lease. For example, if a lease says it runs for 25 years from a specific date, that’s the term.
• Option b): The duration starting from when the lease is granted until the end of the period specified in the lease. This means looking at the actual grant date and determining how many years, months, and days that lasts until the end of the lease term.

Examples of Lease Terms

Let’s break this down with two examples that apply the Bradshaw v Pawley principle, showing how to calculate the lease term based on different grant dates.

Example 1: Grant Date of 25 February 2005

Imagine a lease that is stated to last for 25 years starting from and including 25 March 2005. Here’s how it works out:

• In this case:
• – The contractual term (Option a) is 25 years from 25 March 2005 to 24 March 2030.
• – If the lease is granted on 25 February 2005, we need to calculate the second option (Option b).
• – The period (Option b) runs from 25 February 2005 to 24 March 2030, which totals 25 years and 1 month.

Since Option b (25 years and 1 month) is not shorter than Option a (25 years), we take the lease term to be 25 years.

Therefore, for this example, the effective date of the lease is 25 February 2005, the date it was granted.

Example 2: Grant Date of 25 May 2005

Now let’s look at another scenario with a lease still meant to last for 25 years from and including 25 March 2005:

• In this case:
• – The contractual term (Option a), as before, lasts 25 years from 25 March 2005 to 24 March 2030.
• – If the lease is granted on 25 May 2005, we compute Option b.
• – The period (Option b) runs from 25 May 2005 to 24 March 2030, which totals 24 years and 10 months.

Here, Option b (24 years and 10 months) is shorter than Option a (25 years). Consequently, we take the term of the lease to be 24 years and 10 months.

The effective date of this lease, again, is the date it is granted: 25 May 2005.

Effective Date of a Lease

The effective date is the date when the lease is officially in force, which generally is the date it is granted. This date is essential as it may influence things like when payment starts and when rights and responsibilities begin. For more information about effective dates, refer to guidance in SDLTM07600 to SDLTM07750.

Key Considerations

When evaluating the lease term, here are some key points to keep in mind:

• Always check the wording of the lease itself since it outlines the intended term.
• Understand the principle of Bradshaw v Pawley to assess which of the two options applies (Option a or Option b).
• Note the grant date, as it can significantly change the calculated term.
• If the effective date changes due to the grant date, be aware of how that affects transactions and agreements related to the lease.

This clarification aims to make it easier to understand how lease terms are determined and how those terms can impact rights and obligations in a leasing scenario.