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Re-gearing commercial leases – the options

Which option to take?

Which option to take?The vagaries of the economy have forced many tenants to revisit their leases in order to limit their financial exposure.  At the same time, since the letting market has become so flat, landlords would rather not see their existing tenants fail and their properties become vacant.

It has therefore become commonplace for landlords and tenants to renegotiate the commercial terms of their leases in order to improve or consolidate their respective positions.

These variations are called a “re-gear”. Common examples include:

  • A tenant agreeing to delete its break option in return for a reduction in rent.
  • A landlord paying the tenant a capital sum to refurbish the premises in return for the tenant agreeing to increase the lease term.

Whatever the commercial terms that are agreed it is important to consider how the changes will be documented.

Surrender and re-grant
Where a lease term is increased or where the extent of the demised premises is increased then such variations take effect as a surrender of the existing lease and the grant of a new lease if documented by way of a deed of variaition.

However, this can produce some unintended consequences.  It is better to deal with an increase to the term by way of a Reversionary Lease (to take effect when the current lease expires) or by way of a Supplementary Lease (where the extent of the demised premises is increased).

Guarantors
Beware of what happens to guarantors when leases are varied.  If the variation is material and potentially prejudices the guarantor, then unless he has consented to or is a party to the change, he will be discharged from his obligations for future breaches.  That may have a negative impact on asset value.  Also consider what effect variations will have on a former tenant’s liabilities under an authorised guarantee agreement.

Reversionary leases
A reversionary lease cannot begin more than 21 years into the future.  The effective date of a reversionary lease for SDLT purposes is the date of the grant, not the date the term commences and therefore SDLT where relevant will be due within 30 days of the date of the grant of the reversionary lease.  An agreement for reversionary lease will defer the date on which SDLT becomes payable, however, so this is worthy of consideration.

Re-gears give rise to a number of tricky technical legal points. It is always worth obtaining the best possible advice to make sure that the re-gearing is implemented in the most watertight yet cost-efficient way possible.

By Elizabeth Deyong, Head of Commercial Property at Cambridge solicitors Barr Ellison.

Disclaimer: While we do all that is possible in terms of ensuring its accuracy, this blog contains general information only. Nothing in these pages constitutes legal advice. You need to consult a suitably qualified lawyer from the firm on any specific legal problem or matter.

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