Understanding Non-Chargeable Consideration in Lease Agreements: Tenant Payments and Landlord Costs

SDLT and a Tenant Paying the Landlord’s Costs on a Lease

HMRC says that certain payments a tenant makes towards a landlord’s costs when a new lease is granted, or an existing lease is extended, are not treated as chargeable consideration for SDLT. This can reduce the SDLT calculation, but only where the payment is genuinely for qualifying landlord’s costs rather than part of the price for the lease.

• On a new lease or lease extension, a tenant’s payment of the landlord’s statutory enfranchisement or lease extension costs can be excluded from chargeable consideration.
• Other reasonable landlord’s costs on or incidental to the grant of the lease may also be excluded, including where the tenant is only obliged to pay them.
• This treatment can still apply on a lease extension because SDLT law generally treats an extension as the grant of a new lease.
• The exclusion may apply even if the lease drafting describes the payment as rent.
• If one payment covers both chargeable and non-chargeable items, the amounts must be split on a just and reasonable basis.
• The facts and documents matter, because unclear drafting or bundled payments can make it harder to show that the sums are true reimbursement of qualifying costs.

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SDLT on leases: when a tenant paying the landlord’s costs is not chargeable consideration

This page explains a narrow but important SDLT point for new leases and lease extensions. In some cases, the tenant pays the landlord’s legal or other costs connected with the grant of the lease. HMRC’s guidance says certain payments of that kind are not part of the chargeable consideration for SDLT. That matters because SDLT on leases is based on chargeable consideration, so excluding these amounts can affect the SDLT calculation.

What this rule is about

For SDLT, tax is charged on “chargeable consideration” given for a land transaction. On the grant of a lease, that usually includes things like any premium and the rent.

The issue here is whether amounts paid by the tenant to cover the landlord’s costs should also be treated as consideration for the grant of the lease. HMRC’s manual says that some categories of landlord’s costs are excluded.

This point commonly arises in two situations:

• statutory lease enfranchisement or lease extension claims, especially for flats and long leases of houses; and
• ordinary lease grants or lease extensions where the tenant agrees to pay the landlord’s reasonable costs connected with the transaction.

What the official source says

HMRC states that, when a new lease is granted, the following are not chargeable consideration:

• a tenant’s payment of the landlord’s costs under the statutory rules for enfranchisement or extension of leases of flats and long leases of houses, or the tenant’s obligation to pay those costs;
• a tenant’s payment of the landlord’s other reasonable costs on or incidental to the grant of a lease, or the tenant’s obligation to pay those costs.

HMRC also says this applies to the extension of a lease, because in law an extension is treated as the grant of a new lease.

The manual goes further. It says these payments are not chargeable consideration even if, under the lease drafting, they are reserved as rent.

However, if the lease provides for one combined payment covering more than one thing, such as rent and service charge, the excluded amount is not simply ignored in full. Instead, the amount left out of chargeable consideration must be identified using a just and reasonable apportionment.

What this means in practice

The practical effect is that not every payment from tenant to landlord increases the SDLT bill.

If the tenant is paying the landlord’s qualifying costs, and those costs fall within the categories HMRC identifies, those amounts should not be treated as chargeable consideration for SDLT on the lease. The same applies where the tenant is not paying immediately but is under an obligation to pay those costs.

This is especially relevant where the figures are substantial. Landlord’s legal and valuation costs in lease extensions and enfranchisement-related matters can be significant. If they were included as chargeable consideration, they could increase the SDLT calculation unnecessarily.

The point about lease extensions is also important. Even though parties may think of the transaction as simply extending an existing lease, SDLT law generally treats that as the grant of a new lease. HMRC’s guidance makes clear that the same exclusion for qualifying landlord’s costs can apply in that context.

The statement that the exclusion applies even if the sums are “reserved as rent” is also practical. Lease drafting does not by itself decide the SDLT treatment. A payment that is truly reimbursement of qualifying landlord’s costs does not become chargeable consideration merely because the lease labels or structures it as rent.

How to analyse it

A sensible way to approach this issue is to ask the following questions.

• Is there a grant of a new lease for SDLT purposes? This includes a lease extension where the law treats the extension as a new lease.
• What exactly is the tenant paying, or obliged to pay? Identify each element separately if possible.
• Is the payment one of the categories HMRC says is excluded? In particular, is it:
  • the landlord’s costs payable under the statutory enfranchisement or lease extension rules; or
  • the landlord’s other reasonable costs on or incidental to the grant of the lease?
• Are the costs genuinely the landlord’s costs of the relevant transaction, rather than part of the price for the lease dressed up as costs?
• If the lease uses a single combined payment, can the different elements be separated on a just and reasonable basis?

In practice, the paperwork matters. The lease, side letters, completion statements, invoices, and any statutory notices may all help show whether a payment is truly reimbursement of qualifying costs rather than consideration for the lease itself.

Example

A tenant agrees a lease extension of a flat. As part of the transaction, the tenant must pay the landlord’s reasonable legal and valuation costs incurred in dealing with the extension. Under HMRC’s guidance, those costs are not chargeable consideration for SDLT, because the extension is treated as the grant of a new lease and the payment is of the landlord’s reasonable costs on or incidental to that grant.

If, however, the documents provide for one undivided annual sum said to cover both rent and another non-chargeable item, the whole figure is not automatically excluded or included. The amount that counts as chargeable consideration must be apportioned on a just and reasonable basis.

Why this can be difficult in practice

The main difficulty is characterisation. The manual excludes certain landlord’s costs, but only where they are properly within the categories described. Not every payment to a landlord will qualify.

Some transactions blur the line between:

• reimbursing the landlord for reasonable costs of the transaction; and
• paying part of the price for the lease.

Another difficulty arises where the drafting is unclear. If the lease or completion statement bundles together rent, service charge, administration charges, and costs into a single figure, the SDLT treatment becomes more complicated because an apportionment is needed.

The reference to “reasonable costs” is also fact-sensitive. HMRC’s manual states the exclusion, but whether a particular amount is truly a reasonable cost on or incidental to the grant may depend on the facts and the documents.

Finally, this is HMRC manual guidance, not the legislation itself. It is a strong indication of HMRC’s approach, but the legal result ultimately depends on the legislation and the facts of the transaction.

Key takeaways

• A tenant’s payment of certain landlord’s costs on the grant of a lease or lease extension is not treated by HMRC as chargeable consideration for SDLT.
• This can include statutory enfranchisement or lease extension costs, and other reasonable landlord’s costs on or incidental to the grant of the lease.
• If one payment covers both chargeable and non-chargeable items, the SDLT position depends on a just and reasonable apportionment.

This page was last updated on 24 March 2026

Useful article? You may find it helpful to read the original guidance here: Understanding Non-Chargeable Consideration in Lease Agreements: Tenant Payments and Landlord Costs

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