Lease regearing

Lease regearing

Published:

Author: Matthew Kemp

Against an uncertain economic backdrop, 'regearing' a lease offers a potentially win-win opportunity for a landlord and a tenant to restructure the lease arrangement

Regearing means replacing one lease with a new one, on renegotiated key terms. The parties are free to do this at any time, and should aim to do so to their mutual advantage.

The parties' commercial goals may have altered in recent years, and revisiting a significant contract like a lease may be particularly attractive.

From a landlord's perspective, regearing is an opportunity to protect its investment and mitigate the risk of voids; while from a tenant's perspective, regearing can be a chance to manage costs and address occupational needs.

Advantages

The advantages for a landlord include:

  • enhancing the capital value of its property by extending the lease term or the removal of tenant break options
  • the capital uplift and/or secured future income may allow room for the landlord to offer rental concessions or reduced rent to attract tenants
  • pre-emptive regearing of leases close to expiry may preserve investment value, especially in anticipation of a sale or financing
  • securing occupier levels will mitigate costly service charge and rates voids

The advantages for a tenant include:

  • opportunity to revisit lease terms (which were agreed in better times) and refocus the lease arrangement to better meet current needs
  • capital payments, rent free periods or reduced rents may be on the table for negotiation in return for extended lease terms or the removal of break options
  • possibilities for greater flexibility on assignment, subletting or alterations, the removal of rent review clause, the repositioning of break options or the return of rent deposits
  • securing premises for an extended period in a buyer's market or to meet a specific need - for example following significant capital expenditure on a physical asset

Legal and tax considerations

There is no statutory framework for a lease regear. The parties are free to approach each other at any time during an existing lease with a view to renegotiating terms.

However, it is often lease events such as rent reviews and tenant break options which bring these matters into focus and trigger discussion.

Once new terms have been agreed, there are two main methods of achieving the regear:

  • The grant of a new lease in place of the existing lease. Generally speaking, this will automatically extinguish the existing lease without the need for a formal deed of surrender. The parties may opt to use a deed of surrender if specific issues need to be addressed.
  • A variation of the existing lease to alter the terms agreed whilst it remains in place and if a longer term is agreed, a new lease - a reversionary lease - which takes effect only on the expiry of the current lease.

Tenants should bear in mind that Stamp Duty Land Tax (SDLT) will be become payable if the rents payable exceed the taxable threshold. Some SDLT liability may arise depending on the terms agreed, but, in principle, either method of regearing is essentially tax neutral in effect.