Lease Re-Gears: A Win-Win For Landlords And Tenants
10 June 2010One of the features of the present difficult economic climate is the increased dialogue between landlords and tenants. There is a growing recognition of a mutual dependence in order to ensure the optimum performance of their respective businesses. The landlord/tenant relationship is usually governed by a lease with each party entitled to rely on the performance of the terms in the lease. Consequently, a re-gear of the lease can only take place with the agreement of both landlord and tenant. That will only happen if both parties see a benefit to themselves in altering the terms of the lease. Therefore, it is fair to say that lease re-gears are a “win-win” for both landlords and tenants.
The motivation for tenants is generally based on cost reduction and/or more flexibility in their mode of operation. A reduced rent, rent holiday or capital payment is usually on the tenant’s wish list, however, re-aligning break clauses to match business targets may be a requirement. Perhaps the cost reduction could be facilitated by reducing floor space occupied and at a lower rent.
In reality, the whole basis of establishing the rent could be altered. In the retail sector, turnover rents are increasingly common. There are various ways in which these can be structured, but effectively some or all of the rent paid is linked to the performance of the tenant’s business. Whilst this is usually seen as a concession to the tenant, it does allow the landlord to benefit from an upturn in the performance of the tenant’s business. In a similar vein, the basis on which future rent reviews are calculated can be altered with fixed or Consumer Price Index (CPI)-linked reviews popular or reviews subject to a collar (minimum) or a cap (maximum) rent.
Tenants can also benefit by benchmarking their repairing liabilities to a new updated Condition Report. This may limit their exposure to a dilapidations claim in the future. If the landlord is confident that the tenant has maintained the property well during the period of occupancy, he/she may view this concession as costing little or nothing. Greater flexibility to allow sub-letting all or part of the premises or regarding usage of the premises can also be achieved. Alternatively, the tenant may be seeking to achieve refurbished communal areas at minimum cost or an increase in the services provided by the landlord. In some cases, the tenant may even approach the landlord to provide extended premises in order to facilitate his/her business growth.
Of course, a well-advised landlord will seek to secure maximum benefit from negotiations. Landlord concerns usually centre on securing income flow and maintaining or increasing a property’s investment value. Security of income for as long as possible is a particular concern for landlords at present where the recession has resulted in an increase in tenant default, pre-pack administration and company voluntary arrangements, (CVAs). Working with tenants by re-gearing the lease may be a way of helping each other through a difficult time, particularly when re-letting premises may be difficult.
It follows that a landlord normally wants the tenant to commit to a longer lease or to remove or move back a break option. The landlord may also seek to have fixed or minimum rental uplifts at future rent reviews. These are features, which usually increase the investment value of the property making it more saleable.
The list of potential trade-offs which can be achieved in a lease re-gear is lengthy. It depends on the terms of the current lease and the needs/desires of both parties. Crucially, the stronger the tenant covenant, the greater his/her bargaining strength. In the current economic climate, re-gearing is a positive way to help both landlords and tenants achieve their goals. Much is at stake, however, and both sides would be well advised to engage experienced, professional advisers or negotiators.