You may come across the phase lease “re-gears” or “re-gearing”, particularly with commercial property leases, and wonder what on earth this is describing.
Just what is a lease regear, and what does it mean?
In short, a re-negotiation of the lease so that there’s a benefit for both the landlord and tenant.
Often this means that it extends longer to have a reduced rental level now. Therefore, you tend to define a lease regear by what the two parties want out of the property interest – the landlord, and tenant.
So, one will trade-off one factor of the lease, to benefit another; and the other vice versa, on hopefully a mutually beneficial basis.
It’s not that either party has to do any of this. After all the current lease is a set contract that sticks until it ends.
It’s more a case of the parties openly renegotiating a whole new lease, and then agreeing to either surrender the current lease for a brand new one from now, or agree on a new lease to take effect in the future immediately after the current lease ends (known as a reversionary lease).
The Win-Win Situation
The common feature of a re-geared lease is the current lease being extended for a longer period.
This usually benefits the landlord more, as they can have the tenant committed for a longer period to pay rent and therefore increase the investment value of their property.
However, it can sometimes benefit a tenant more, such as a valuable location that their business goodwill depends upon.
In addition to simply increasing the lease term's length, you can agree to remove mid-way break options to have the same eventual effect of a longer committed period.
To compensate for this greater security, the landlord will often help reduce the rent or even have a rent-free period. For a tenant in difficult times needing a cash-boost in this current budget year, this has helped.
You can even get more sophisticated with the basis of agreeing on this level of rent both now and in the future, for example having ‘turnover rents’ based upon the successful occupation of the tenant, or new rent reviews through say index-linking.
This cash-benefit can also be structured in other ways than just a rent reduction, for example, a capital or premium payment from one party to another, or them funding works such as a major refurbishment of the property.
Other Little Tweaks
Following the main terms considered and agreed, don’t forget to use the opportunity to make other helpful changes to the lease and from new Heads of Terms.
After all, this is a brand-new lease being agreed; therefore, you may as well use this time to look at other adjustments that may pay dividends in the future.
Maybe there are restrictions or rights to do with how the lease can be alienated and transferred or sublet that can be changed. Or even down to the type of use and occupation that is permitted.
Also, look at what alterations, repairs, refurbishments, and service charge liabilities may be needed now or in the future.
The Knock-on Effect
Okay, you have a new lease ready to roll, and solicitors are being instructed.
Remember then what the knock-on effect of this new lease will be for everyone, particularly with other costs and liabilities being incurred.
There are fees and legal costs to cover, usually each side paying their own. But don’t forget others, like a valuer or building surveyor.
You may also need to officially gain the consent of other third party interests to this, for example, the building insurers, mortgage lenders, and guarantors to the lease who may then fall away from future liability without express permission.
Even just tweaking a few fundamental features of an existing lease, like the rent and demise, can imply a whole new surrender of the existing lease and grant of a new one afterwards.
You then have issues of whether any new lease is inside or outside the protection of the Landlord or Tenant Act 1954, which may end up being one position rather than another which is expected.
Plus, check if any dilapidations, reinstatement, and service charge liabilities can still be preserved going forwards.
With a new lease, a tenant may also need to pay SDLT tax liabilities, and the requirement for a new EPC assessment that meats the new minimum level.
How to Legally Document
You then come to the finale – the ultimate new legal lease through solicitors.
Ensure everyone understands what this will actually be; often a surrender of the current lease through one Deed, and grant of a new lease through another document.
But as mentioned earlier, it could also be s reversionary lease to kick-in straight after the existing lease, which otherwise stays untouched.
Plus, double-check any associated documents such as side letters, and Licence of Alterations or Assignments.
And when all complete, final signatures and completion are required, along with possible lodging with Land Registry.
Lease Re-Gearing Gaining Popularity
In even-more uncertain times, then long leases with many years still to run can be a huge commitment for any landlord or tenant to have.
Having that long term security against shorter-term flexibility and cost-effectiveness will always be a difficult tension to have.
Therefore, always remember that you’re dealing with a real property person at the other side of the legal document who may well have something to give away for your benefit.
Okay, you’re all still hooked to the current lease, but open negotiations can be at least begin to see if something even better and mutually beneficial can be agreed.
Start with the simple idea of a longer lease term being forfeited for an immediate cash benefit, but then develop talks into all kinds of other tweaks and modifications.
Then calculate the overall costs and consequences of this, and how you can legally document this.
And hey presto; you have a wonderful regeared lease.
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