June 2012: A commercial property lease re-gear provides a tenant and landlord with an opportunity to review an existing lease and negotiate new terms in advance of the lease expiry date. Lease re-gears are usually considered close to the expiry of the lease term. Should both parties be looking to find mutual benefits at an earlier stage, rather than ‘sticking their heads in the sand’ in an attempt to avoid the potential of impending conflict?
An increasing number of landlord and tenants are considering re-gears as they can present a rare opportunity for landlords and tenants to enjoy a genuine ‘win/win’ outcome.
In these challenging times, more tenants are offloading properties on lease expiry simply to reduce business overheads. On the run up to lease expiry a well-advised tenant may well hold the whip hand and may not have any alternative but to use it. However, it is in the landlord’s interest to keep a property occupied and to engage the tenant in positive dialogue well before lease expiry to avoid the potential of a void.
If the tenant wishes to continue trading from a profitable unit and the landlord has no redevelopment plans and values the tenant, then there is merit in both parties considering their options and making tentative approaches to re–gear the lease. In simple terms the re-gearing of a lease involves both the landlord and the tenant agreeing to amend one or more of the fundamental terms of the current lease including:
• Rent payable
• Length of lease – including break clauses
• Rent review provisions – including ambiguous wording
• Repairing obligations.
Naturally the negotiating strength of both parties will be property specific.
If the tenant intends to stay in the premises beyond the current lease expiry date and the expiry is within the next three/five years or so, then re-gearing the lease could be a valuable exercise. It provides an opportunity for the tenant to negotiate benefits such as a lower rental, realigning break clauses to match their own business targets, receiving a capital payment/rent free period or negotiating favourable repairing obligations.
A landlord may decide that a rent reduction or a rent free period (now or at a future date in the lease) with a trusted tenant is a better option than vacant premises, a reduced income stream, liability for empty property business rates, the possibility of a capital contribution for a new tenant and professional advisors fees. A successful re-gear helps both parties plan for future costs by providing longer-term certainty.
The process of re-gearing a lease is relatively simple. It usually involves the completion of a Deed of Variation or a surrender of the existing lease and re-grant of a new one. The latter will involve the tenant being liable to pay Stamp Duty Land Tax on the re-granted lease which will be dependent on the rent paid and the length of lease taken. Also, as both parties are being released from their obligations under the existing lease, any particular clauses in the lease that are important to either party should be transferred into the new lease.
In the current economic climate, re-gearing is a positive way to help both landlord and tenant achieve their goals. The flexibility of re-gearing means there are many ways to tailor the process to specific circumstances, allowing both parties to reach a mutually beneficial agreement and achieve a genuine ‘win win’ outcome.