18 Oct 18 by Nick Holman
We are all of course aware of the economic downturn which the country encountered but one potential benefit which has come from this has been the increased dialogue between Landlords, Tenants and their relevant representatives. During a financially difficult economic climate, the majority of parties have recognised that they have a mutual dependence in order to optimise their business performance.
The Landlord and Tenant relationship is governed by the lease which connects the two parties together and provides the terms which each party must adhere to. A lease re-gear therefore can only be an option if both parties are in agreement and for that to happen there must be benefit to both the Landlord and the Tenant. In other words, there must be ‘wins’ for both parties.
But, what is a lease re-gear? Put very simply, it is the process of renegotiating or restructuring the terms of the lease during the course of the contractual term to achieve financial benefits and/or more favourable lease terms. Once new terms have been agreed, there are two main methods to achieve a re-gear.
• The grant of a new lease in place of the existing lease. This may be done in conjunction with a deed of surrender if there are specific issues which need to be addressed.
• A variation of the existing lease, which alters specific terms which have been agreed under the re-gear and if the parties have agreed a longer term, then a new lease and a reversionary lease, which comes into effect only on the expiry of the existing lease.
As a cautionary note, both parties will be released from their obligations under the existing lease when the new lease is granted so if there are particular clauses in the existing lease which are important to either party, they should endeavour to see these transferred on to the new lease.
The parties should also consider implications of Stamp Duty Land Tax on the re-granted lease.
So what are these benefits?
For the Tenant, these benefits may include the following: –
• An opportunity to revisit the terms of the lease and refocus the lease arrangements to meet current circumstances.
• Realigning break clauses to match strategic business goals and adjusting their requirements for operation.
• Reduce rents, additional rent-free periods or capital payment by the Landlord.
• Possibilities of greater flexibility on assignments, sublettings, alterations, removal of Rent Review clause, removal of user restrictions (subject to planning) or the return of deposits.
• Securing the premises for an extended period under terms which are favourable to the Tenant.
For the Landlord these benefits may include the following: –
• Securing occupier levels will mitigate the Landlord from Void Rates and in multi-occupied premises will also ensure that the Service Charge is covered by the Tenant.
• Enhancing the capital value of the Landlord’s property by extending the lease term or by negotiating the removal of the Tenant’s break options.
• The Landlord may make preemptive regear enquiries with Tenants on leases close to expiry which may preserve investment value, especially if the Landlord is considering a sale of the premises or is looking to refinance.
• The capital uplift and/or the secured future income stream the Landlord may obtain from the re-gear allows them to offer rental concessions, reduced rent or potential works to the Tenant.
Most importantly for both parties a successful re-gear provides long-term certainty allowing the Landlord and the Tenant to plan for future costs and income stream.
To explore re-gear opportunities please contact a member of the team at Vickery Holman.