Time to Reflect for Landlords and Tenants; as Economic Tensions in Landlord-Tenant Relations Look Set to Remain, Many Business Tenants Have Struggled on, Giving Little Thought to Restructuring Their Leases and Reducing Operating Costs. Tim Clark, Head of Commercial Property at Black Country Corporate Law Firm Hawkins Hatton, Considers Some of the Options Which Could Provide an Opportunity for Both Landlords and Tenants to Mutually Benefit

The Birmingham Post (England), September 9, 2010 | Go to article overview

Time to Reflect for Landlords and Tenants; as Economic Tensions in Landlord-Tenant Relations Look Set to Remain, Many Business Tenants Have Struggled on, Giving Little Thought to Restructuring Their Leases and Reducing Operating Costs. Tim Clark, Head of Commercial Property at Black Country Corporate Law Firm Hawkins Hatton, Considers Some of the Options Which Could Provide an Opportunity for Both Landlords and Tenants to Mutually Benefit


So some economists believe the austerity measures facing Britain could even trigger a dreaded "doubledip."

From a tenant's perspective, premises will still be "over rented," where cost per square footage is too high. For the landlord, there will be lingering fears over tenant insolvency with little chance of rental growth at the next review date. There could however be a golden opportunity for parties to sort out their differences, begin with a clean slate, and modernise their leases so that they truly reflect market conditions. Taking a conciliatory approach could well be far more prudent than getting embroiled in litigation over unpaid rent!

"Re-Gearing" Leases A "re-gearing" arrangement could fit where sub-letting or assignment is simply not an option. In a typical scenario, the tenant would surrender the break clause, but the existing rent would be reduced. By removing the break clause, the landlord guarantees income for the remainder of the term and, by substituting an open market rent review for a fixed/ index-linked formula, improves the prospects of an uplift in rent at the next review. The landlord may also want to extend the term of the lease.

There are several mechanisms by which this can be achieved. A deed of variation is required solely to remove the break clause, revise the rent and alter any other terms of the existing lease. If the term of the lease is to be extended, there are two options.

The existing lease may be surrendered and replaced by a new lease (incorporating new rent, review provisions and the longer term.) Alternatively, and in addition to the deed of variation, the parties will enter into a future lease (a reversionary lease,) that will come into effect when the existing lease expires.

From the tenant's perspective, replicating the old lease with the new would probably be a tactical disadvantage, as a more favourable outcome is likely to be achieved in a tenant orientated environment. As for the landlord, if the lease was an "old tenancy" ( granted before January 1 1996,) the tenant is already "on the hook" for the full duration of the term, and by surrendering the existing lease a valuable covenant may be lost.

That said, all current disputes in the new lease can be "put to bed," or at least regularised. What about removing that worrying personal guarantee clause (agreed to innocently when the market was buoyant,) or dealing with the timing of reinstatement of alterations, the terms of future underletting, and maybe a "deal" over dilapidations? …

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Time to Reflect for Landlords and Tenants; as Economic Tensions in Landlord-Tenant Relations Look Set to Remain, Many Business Tenants Have Struggled on, Giving Little Thought to Restructuring Their Leases and Reducing Operating Costs. Tim Clark, Head of Commercial Property at Black Country Corporate Law Firm Hawkins Hatton, Considers Some of the Options Which Could Provide an Opportunity for Both Landlords and Tenants to Mutually Benefit
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