With many companies now operating a hybrid working model following the work from home directive in 2020, many businesses no longer need the amount of physical space they once did. Businesses should not go on paying for unused space, and waiting for their leases to expire, so what is the answer? Re-gearing a commercial lease could be the financial solution.
What does re-gearing a lease mean?
Re-gearing a lease involves a landlord and a tenant deciding to change the terms of the lease. From the tenant’s point of view, this involves changing the terms consensually with the landlord to meet their interests. There are often commercial levers on both sides of the negotiating table that make this process an attractive and mutually beneficial arrangement.
In response to the pandemic, businesses quickly invested in technology and platforms which made working from home easier than ever before. Now restrictions have eased many workforces simply do not want to go back into an office environment full time, with a recent survey showing that 57 per cent of employees said they preferred hybrid working – splitting their week between office and home. With less people onsite every day, offices can now be smaller while still accommodating employees’ needs.
When re-gearing a lease, all terms can be changed/negotiated such as rental rates, length of term, underletting, and issues relating to service charge. From a tenants perspective understanding what works for their business is key to getting the right deal from their landlord.
With inflation at a 40 year high, any way of mitigating the impact of rising inflation has to be worthy of consideration and with premise costs making up such a large proportion of a business’ expenditure – working to reduce that can only be a good thing.
For tenants, re-gearing a lease can allow more flexibility than simply switching to a smaller office, enabling them to transform the space into one that works more efficiently for the business. Many companies are choosing to repurpose their traditional office space into a ‘hub’ for employee collaboration and socialising. This creates the perfect opportunity for companies to really think about the needs of their business and raise any potential layout changes or improvements to the building that may be needed. Offices can no longer be ‘one size fits all’ but should have features bespoke to the individual needs of the company.
The advantages of re-gearing can be attractive to landlords too, for example they may be persuaded to re-gear the leases to increase the value of their portfolio. Re-gearing a lease can also provide more certainty for landlords, as the lease could be renewed prior to the anticipated renewal date. Landlords would rather have renegotiated leases than vacant premises and have to pay empty business rates. Compromising with tenants and allowing them to adapt offices in line with their needs may mean that they become more invested in the space and are less likely to move in the future. If a tenant wants refurbishment or alterations, then they may want to secure a longer lease term.
A major benefit of re-gearing is that it can be done at any point during the lease term, as long as there is mutual agreement. It is important for both parties to maintain a good relationship and regular dialogue. For tenants, this means ensuring that there are no rent arrears that need to be paid, as well as keeping the space in good condition. Basics like this make it more likely that both parties will be open to negotiation, making the process more straightforward for all involved. If the relationship is strained or logistics mean that negotiation is challenging, it may be possible to be in contact via the agent.
As with any change to legal documentation it is so important for both parties that the re-geared leases are properly documented. The consequences of the new documentation not being properly considered could include the tenant having to pay extra stamp duty land tax, or the tenant losing their security of tenure. Like any legal contract, if any part of the document is unclear, there is greater risk of a lawsuit, costing both parties valuable time, money and resources, so seeking expert advice early on can help to ensure the process goes smoothly.
Re-gearing leases gives both tenants and landlords the opportunity to check that it is still fit for purpose and beneficial for both parties. It can provide an immediate solution to the problem of wasted space and a way of minimising the impact of rising inflation by reducing the business’ outgoings. It can allow companies to modernise, minimise their expenditure and improve their employees’ work/life balance, while simultaneously giving landlords the opportunity to increase their return on investment. Essentially, re-gearing a commercial lease can be a win win situation.
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