Top (re)-Gear

The overriding objective of most landlords is to improve the investment value of their property.  One of the main goals for occupiers is to keep their costs to a minimum, particularly in the short term.  In this challenging market, there appear to be very few opportunities for both parties to achieve these objectives. However, an increasing number of tenants are considering 're-gearing' their leases.  This can potentially go some way to achieving both of these respective objectives.

Re-gearing usually involves the landlord and tenant agreeing to amend fundamental terms of an existing lease, especially extending the length of the term and altering the provisions for future rent reviews, but can also involve variations to other terms such as break clauses.  In return for the tenant agreeing to extend the term of the lease, a reduction in the level of the current rent is also often agreed.

The advantages to a tenant are clear - a re-gearing will allow the tenant to concentrate on running its business, rather than seeking to relocate, at a reduced rent and without facing potentially substantial dilapidations liabilities at the end of the existing term.  A landlord can also benefit from agreeing to re-gear a lease, as extending the current term, albeit at a lower rent, will avoid the potentially considerable costs of owning vacant property (which can be increased by the burden of having to pay rates on empty properties).  An extension to the term will also avoid the landlord having to seek a new tenant - which may be a difficult task, particularly on terms with a similar level of rent and length of term as agreed in the re-geared lease.  A new tenant will also often negotiate a rent-free period, leading to another interruption in the landlord's income stream.

From a legal perspective, re-gearing a lease is a relatively simple exercise.  The process usually involves the completion of a deed of variation, or a simultaneous surrender of the existing lease and re-grant of the new one.  Regardless of the method used, if the term is extended, the transaction will amount to a surrender and re-grant.  This is important for two reasons:

1. The tenant will be liable to pay stamp duty land tax on the re-granted lease (the amount of which will be dependent on the length of term and level of rent).  Any stamp duty land tax already paid by the tenant on the grant of the existing lease will be ignored.
   
   
2. Both parties will be released from their obligations and any pre-existing liability arising under the existing lease.  Depending on the nature of the revised terms of the re-granted lease, this may have little effect in practice.  However, it is important for both parties to ensure that by re-gearing the existing lease, they do not forego items to which they are entitled (e.g. service charge which the landlord still needs to recover, or any credit due to the tenant for sums already paid in advance under the existing lease).

For further information please contact Stephen Kay

The information contained in this article is for general information purposes only and should not be relied on in isolation without seeking further legal advice that is specifically applicable to your circumstances.