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Accounting Treatment - Deed of Easement Grant

Accounting treatment of premium paid by grantee.

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Hi All. My limited company owns a building and in order to access my rear garden, one needs to walk on the neighbour's land. My neighbour agreed to give my building a right of way, and this was formalised legally through a Deed of Easement Grant. The Deed is for 5 years. I paid a one-off sum (premium) of £5,000 on completion and I pay £500 annually. Other parties have a right of way over the same land, and have respective agreements with the neighbour.

I am unsure as to the accounting treatment of the one-off sum of £5,000. I am aware with Leases, the tenant should capitalise the one-off premium paid on completion and amortise it over the term of the lease. But, this isn't a lease - I am not the only party using the land and my right of way can be terminated by the neighbour, with 6 months' notice.

Any thoughts? Thanks.

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By paul.benny
21st Feb 2021 18:50

Although it may not meet the legal tests to be a lease, it sounds like a lease to me for accounting purposes. FRS102 talks of granting rights to use assets - it doesn't say anything about exclusivity.

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Replying to paul.benny:
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By Acc1066
21st Feb 2021 21:40

Thanks. And in terms of tax treatment, reasonable to apply the same rules as for lease premiums?

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Hallerud at Easter
By DJKL
21st Feb 2021 20:58

"my right of way can be terminated by the neighbour, with 6 months' notice."

In such a circumstance what happens to the £5,000 you paid, is a proportionate amount then returned or is it all forfeit?

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By Acc1066
21st Feb 2021 21:24

All forfeited.

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Hallerud at Easter
By DJKL
21st Feb 2021 22:18

In that case to me there is effectively a rolling six month agreement to a max of five years and accordingly all the front end costs hit the P & L year one, others might differ in their view re this, but given the only guarantee is six months it appears to me that year one the cost is £5,500 and years 2-5 £500 each if paid for that year, as presumably the £500 is not due to be paid past when any exercised six month notice expires. (You do not need to pay the £500 after the agreement is terminated by the other party?)

Sweet deal for the other party..

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Replying to DJKL:
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By Acc1066
22nd Feb 2021 00:13

Yep - the £500 annual payments would stop, if the Deed was terminated using the six months notice.

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Replying to DJKL:
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By paul.benny
22nd Feb 2021 07:46

I'd interpreted the termination provisions differently, so yes, now agree that the full premium goes to P&L in year 1.

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