Regearing of Leases
It is common nowadays for landlords and tenants to renegotiate the original terms of their commercial leases in a process known as ‘re-gearing’.
Generally, when market conditions are diminishing and the demand for commercial property has been affected, re-gearing becomes commonplace. This is because a landlord would usually be better off with a reduced rental income than an empty property and usually leads to two results:
The tenant may forfeit their right to exercise a break clause in exchange for reduced rental payments. The landlord may agree to contribute towards the upkeep of the premise in exchange for the tenant to increase the term of the lease.
There are many advantages of re-gearing for both tenants and landlords.
Tenants can benefit from rent-free periods and the return of rent deposits can increase cash flow. It can present the opportunity to secure better lease terms assisting with business requirements and objectives. Where tenants are happy in their existing premises, longer terms provide security and peace of mind.
Landlords can benefit from the certainty of rental income for a longer period, an increase in the capital value of assets by removing a break clause and extending the terms of the lease, as well as steady occupier levels reducing empty business rates liability and costly service charges.
It is not as simple as adding or removing a single provision to a document, however. Either the original lease will need to be redrawn completely to grant a new lease, or more commonly, a deed of variation would be more appropriate.
Legal advice must be sought to ensure that the agreement is documented properly and represents the interests of both parties. Depending on the terms being negotiated, there may be implications on Stamp Duty Land Tax liability, security of tenure rights and the release of guarantors that need to be considered.
Our vastly experienced and knowledgeable commercial property team can advise you through all steps when renegotiating the terms of a lease, ensuring that all parties are aware of their legal obligations and that the clients best interests are considered and protected.
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