North East Connected

Shifting Gears on Commercial Leases

Since the start of the pandemic, it is unsurprising that, as property legal advisers, we have found ourselves being engaged to advise on existing landlord-tenant relationships, including lease regears.

Whilst there is cause for some optimism with the vaccine programme now underway, strict lockdown measures will remain in place for the foreseeable.

The dialogue between landlord and tenant in many cases will therefore need to continue, and an issue worthy of exploration is that of lease regears.

A lease regear is a restructuring of the existing lease to vary the current terms or it can be a renegotiation to agree terms of a new lease.

The purpose of the restructuring or renegotiation process, in the context of the pandemic, is to find a common ground space that can help assist with the tenant’s cashflow and immediate financial commitments, whilst bringing increased value long-term for the landlord.

Some of the more obvious examples of lease regears include lease extensions with an initial rent-free period and/or half rent free period.

The rent incentive period can provide the tenant with much-needed breathing space during full lockdown and some time to both get business back up to normal levels and adjust to comply with social distancing requirements when opening is permitted.

From the landlord’s perspective, the longer lease term may improve the value of its overall investment. There is also, of course, the possibility of pushing back tenant break options or removing the tenant break altogether in exchange for rent incentives to assist with cash flow.

Where budgets allow it would be prudent for both landlord and tenant to appoint an agency surveyor to assist in this negotiation process, and an experienced agent will likely to be able to advise upon whether there is a viable regear option worth pursuing.

Once the terms of any re-gear have been agreed in principal, and placed into  Heads of Terms, the legal process can commence.

The formal process of documenting a lease renegotiation or lease renewal will in most cases be a relatively straightforward process of documenting a variation to the existing lease or entering into and agreeing a form of renewal lease.

Having said that, we have seen more complex regears which involve the shifting of existing bank security from the existing long leasehold interest over to the fresh lease granted by the landlord.

With a significant number of businesses either closed or operating on a limited basis, it is clear that continued open lines of communication will be required amongst landlord, tenant, property agent and solicitor.

It will be crucial that a level of transparency and collaboration exists between respective parties to navigate a path through the myriad of issues that the on-going pandemic continues to throw up.

By Ricky Handa, associate solicitor in the commercial property team at Hay & Kilner Law Firm in Newcastle

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