Lease Regearing
Users of commercial property are potentially missing out on the opportunity to re-gear their leases, a process that can produce significant benefits for both occupiers and landlords, particularly if the latter is an insurance company or pension fund.
The key questions tenants should ask themselves are:
Do we have a lease expiry or break option coming up in the next 3 years?
Will we continue to have an operational need for premises beyond the current lease break/expiry date?
If the answer is yes, in many locations market conditions have reached the point where the interests of landlords and tenants have converged and re-gearing of leases can provide substantial mutual advantages. Landlords do not want to lose tenants, particularly from older buildings which might prove difficult to re-let. In the Thames Valley, for example, around 10 Million sq ft of office space is available but, with demand starting to improve, the opportunity to re-gear on favourable terms will not last indefinitely.
The benefits for the tenant can take many forms, including:
Realigning break clauses to match strategic business goals.
A rent holiday or capital payment made by the landlord.
Improvement in common parts and services through full or partial refurbishment.
Reducing the amount of floorspace occupied to match business needs (landlords will usually accept a lower rent from a good tenant rather than lose all of the income).
Review of lease clauses, for example, allowing greater flexibility to sub-let or less onerous repairing obligations.
This is a potentially complex strategy which requires both parties to recognise that they 'need' each other to produce a 'win-win situation'. Constructive advice on values, lease structures and a realistic assessment of market conditions should create the conditions for positive negotiations, resulting in higher investment values for landlords and lower P&L burdens for tenants.