28 May Commercial Lease Re-Gearing
In our mission to be the go to information site for all Commercial Landlords and potential Tenants, our blog today will cover the obscure topic of varying the Terms of a Lease already in operation – glamorously termed re-gearing.
As we have discussed in detail on previous articles, once a Commercial Lease has been finalised and entered into, the terms on how a Premise is let out are almost set in stone. However, in the real world, circumstances do change (both for Landlords and Tenants) and it might be necessary to revisit the original Terms.
The process of doing so (by way of a Deed of Variation) is known as the re-gearing the Commercial Lease.
Generally under stagnant or diminished market conditions (Brexit being the hot topic at the moment), where the demand for new Commercial properties tend to be affected significantly (naturally due to a reduction of business’s starting to trade or more pressingly, businesses in operation ceasing to trade), re-gearing becomes common place.
Given a Landlord would be better off with a Property let at a reduced rent than vacant for an extended length of time – re-gearing commonly has two end results based on mutual agreement –
- The Tenant might be willing to forfeit their right to exercise a break clause in exchange for a reduced rent or rent-review provision
- The Landlord might be willing to contribute towards the upkeep of the premise for example additions to the demise which are deemed non-essential in exchange for the Tenant to increase the Term of the Lease (this is of course a very simple example)
As you would appreciate, when a Lease is re-geared, it is not as simple as removing/adding a single provision to an existing document. Either the original lease will have to be redrawn completely in order to grant a new Lease or more commonly (and as briefly discussed above) a Deed of Variation would be more suitable.
The above point can be further expanded as follows –
- If an existing Lease is to be re-granted by expanding the current usage of the Property, then what’s known as a supplemental Lease can be granted to sit under the existing Lease
- If the proposal is to in effect grant a new Lease following the expiry of the previous version, then a new revisionary lease can be granted. It is however worth noting that there are a few qualifying conditions which must be met prior to a Lease revision being granted – for instance the commencement date cannot be more than 21 years into the future (do not forget the Stamp Duty implications)
Further additional note to consider where Guarantors are involved when re-gearing a Lease
It is not uncommon for Tenants (especially newly formed businesses) to have a Guarantor in place when they take up a new Lease. This requirement more so applies for the benefit of the Landlord.
In other words, imagine you as the Landlord let a unit to a new Tenant who has set up a brand new company, only been in operation for a number of months, no assets in the company’s possession etc.
In the event of this company ceasing to trade, you as the Landlord will naturally want assurances that the rent will still be paid by the Tenant (or a responsible party), which is where the Guarantor comes into play.
Do remember however that unless you as the Landlord (or Tenant) have included the Guarantor (original or new) as a party to the re-gearing transaction, their responsibilities and obligations are not automatically transferred!
We will continue to add more articles and useful guides in relation to Commercial Leases and the Commercial Conveyancing Process as a whole but please do not hesitate to contact our specialist Commercial Conveyancing team on 0203 375 2187 should you require any further clarification or assistance.