Lease re-gearing, put simply, is the process of re-negotiating the terms of an existing lease and, whilst there is unlikely to be any obligation on either party to a lease to enter into any re-negotiation, re-gearing usually benefits both a landlord and tenant. Indeed, there’s unlikely to be any agreement on new terms unless there is something in it for everyone. For example, a landlord might agree to the payment of rent on a monthly basis instead of quarterly or agree a rent free period, which might help with a tenant’s cash flow. In exchange, a tenant’s break right could be removed or the contractual term lengthened or a new rent review provision agreed, which provides a longer period of a guaranteed rental income for the landlord or the chance to benefit from market increases in rent at an early time.
Essentially, a landlord and tenant can agree to renegotiate any clause in the lease including the permitted use, the right to assign the lease, alteration provisions etc. But, ultimately, effecting these changes will probably mean incurring some costs, so there has to be a real benefit.
So, how should a re-gear be carried out?
Professional advice may be needed at an early stage. A solicitor, surveyor or valuer may need to advise on any wider implications of the proposals. Certainly, once an agreement has been reached, any changes should be formally documented by the parties’ solicitors. This might necessitate a deed of variation, the grant of reversionary lease (where a new lease is granted to start at a date in the future but the term of the existing lease continues to apply for the remainder of its contractual term), or even by the surrender and grant of a new lease on new the agreed terms. It is highly likely that new land registry applications will need to be made and where there are changes to the rent or term of the lease, Stamp Duty Land Tax may have to be revisited.
It is particularly important to note that some variations to the lease will, in fact, effect a surrender of the existing lease by operation of law and this can, in some circumstances have devastating effects in terms of each parties’ rights and obligations.
Any guarantors will need to be a party to new documents to ensure that their guarantee obligation remain enforceable, security of tenure provisions need to remain the same (unless renegotiated), and that may mean that contracting out processes need to be repeated. It is important to check if any additional consents will be required – the landlord’s mortgagee and any superior landlord and so on. There are other considerations to bear in mind and ensuring you have a solicitor instructed will be helpful to ensure nothing is missed.
It is important to remain transparent throughout the process and communication between all parties will be vital to maintaining and improving good will between a landlord and tenant.
Lease re-gearing can facilitate changing business needs for both landlord and tenant and as the economy changes it might be worth considering this as an option as your business needs evolve.
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