Onerous leases: Big issues for landlords and tenants

Due to the global pandemic, dealing with changing property requirements is one of the most significant issues businesses need to resolve, for both landlords and tenants.

At the time of writing, there is a moratorium in place preventing landlords from evicting their tenants as a consequence of the inability to pay the rents.

Tenants and landlords may be considering (or have already entered into) arrangements to reduce cash outflows for tenants in this period, for example through rent holidays, temporary rent reductions, or rent-free periods including the surrender of leases or other changes to lease terms. Whether agreement on a change has been reached or not, businesses will need to consider the tax and accounting issues arising.

In this and successive articles we will look at some of the associated tax and accounting issues for the following areas:

a) Lease modifications and lease variations
b) Provisions
c) Payments related to the continuation or end of a lease

Provisions in respect of future operating lease rentals

In our first article, we focused on lease modifications or variations. In this, our second article, we are looking at provisions in relation to leases in the hands of the lessee.


  • The parties to the lease may need to re-measure the original lease accounting or account for a new lease altogether.
  • FRS 102 - For lessees using FRS102, the effect of any changes will appear in the profit and loss account with the benefit of any rent reduction being reflected in profit and loss in the period that the reduction is intended to compensate (subject to the reduction in payments meeting the criteria of being as a result of Covid-19). This practical expedient is applicable to lessees and lessors.
  • IFRS - For those using IFRS16, depending on whether the amended lease results in a change in original terms and conditions of the lease, a new lease or other changes, there may be adjustments to the lease liability, right-of-use asset, interest expense and depreciation charge. Recent amendments to IFRS16 have also provided a practical expedient for lessees to reduce the complexity of accounting for changes to leases arising as a result of Covid-19, such as not requiring the reassessment of the discount rate. However, this can only be used in limited circumstances: the revised consideration is substantially the same as, or less than, the original consideration; the change in payments must only affect payments originally due on or before 30 June 2021; and there is no substantive change to other terms and conditions of the lease. No such similar allowance has been provided to lessors.

Direct tax

  • The tax treatment of operating leases will generally follow the accounts. There are some specific points to bear in mind:
  • The tax treatment following accounting treatment could accelerate tax deductions and losses which, on the face of it, would be a good thing. However, for large groups with substantial losses, the use of those losses might be restricted when there is a return to profitability under the corporate loss reform rules, specifically where the group’s taxable profits exceed £5m.
  • Where IFRS16 is used, there may be transitional adjustments relating to the amendment of the tax rules for adoption of IFRS16, or in the case of first-time adoption of IFRS16. If a transitional adjustment arises, the adjustment is spread over the average term of the leases giving rise to the adjustment. These transitional adjustments are unaffected by any subsequent lease modifications or terminations. 


  • The VAT treatment of lease modifications will depend on whether the landlord has opted to tax the property or not: 
  • If not, there will be no VAT impact on any changes to the rent invoice. 
  • If the landlord has opted to tax the property, and the landlord accepts a reduced rent or rent holiday, there will not have been a VAT supply by the tenant or landlord, so there will be no VAT to account for on the reduction. 
  • However, if the lease terms are changed or altered in exchange for the tenant doing something for the landlord, there may be a barter transaction between the parties potentially resulting in the requirement for the landlord and tenant to account for VAT based on the value attributed to the supplies – care is required on the drafting of any agreements!


  • If the tenant gives nothing in return for obtaining reduced rent payments (and, if a company is not connected with the landlord) there will be no SDLT to pay, despite this being treated as the acquisition of a chargeable interest by the tenant for SDLT purposes.
  • Similarly, if the tenant gives nothing in return for obtaining a variation to the lease terms permitting the lease to be broken or reducing the term, (and, if a company, is not connected with the landlord) there will be no SDLT to pay. In either case, for leases that were subject to SDLT or the Welsh equivalent, LTT, it will not be possible to obtain a refund of SDLT or LTT paid in respect of the rent that will now not be paid. 
  • For leases of property in Scotland which are subject to LBTT, there is a requirement to submit review returns every three years and when a lease ends or is assigned, and where the rent or term has been reduced, it should be possible to recover the LBTT previously paid in respect of the rent that will now no longer be paid at the time of the next review return.

There is some guidance from HMRC on VAT and SDLT issues arising from variations to a lease in R&C Brief 11/2020.

It is interesting to note that what should be a beneficial movement in the terms of the lease might give rise to some adverse implications – both landlords and tenants should look for detailed advice, especially on drafting of legal documents, to ensure there are no “surprises” after the leases have been amended.

Get in touch

Please note there may be other tax and accounting issues to consider, and this can be a complex area to manage, so please do take further advice where necessary (please get in touch with Prasam Patel from our Real Estate Tax and Accounting team for further information.

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