Real Estate Investment:Today

Feature: It’s time to re-gear commercial leases

By Mark Jones, partner and commercial property expert at law firm, Shakespeare Martineau

Since the Covid-19 pandemic, there has been an irreversible shift towards hybrid working. Some businesses no longer need huge office spaces and with many companies tied into lengthy leases, simply waiting for them to expire is not a feasible option. By re-gearing commercial leases, both landlords and tenants can achieve a mutually beneficial solution that ensures spaces work for the new world of flexible working.

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 commercial levers on both sides that may mean they want to undertake this process.

In response to the pandemic, businesses were forced to invest in technology and platforms which made working from home easier than ever before. Now restrictions have eased, and workforces can return to the office, many employees prefer to split their week, keeping their company culture alive, while also giving them a better work/life balance. In fact, in a recent survey, 57 per cent of employees said they preferred hybrid working, to either working full-time in the office or from 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 for example rental rates, length of term, underletting, extent of the demise and issues relating to service charge. Tenants need to understand what works for their business and then try to achieve that through negotiation.

Reducing the size of the demise can also help them to reduce costs in order to mitigate the impact of rising inflation, which reached a thirty year high in February 2022. It has been reported that businesses in England and Wales are currently wasting £10 billion per year on unused offices, so it is important for companies to examine their finances in detail and reduce any unnecessary expenditure. Both workplace strategies and location choices are now being questioned.

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.

Landlords can also benefit from the re-gearing of a commercial lease. From a landlord’s perspective, they may be persuaded to re-gear their lease to increase the value of their portfolio. Re-gearing a lease can also provide more certainty for landlords, as the lease is essentially 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 a lease is that it can be done at any point during the term, as long as both the tenant and landlord agree. 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.

It is imperative for both parties that the re-geared lease is documented correctly, so seeking expert advice early on can help to ensure the process goes smoothly. 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 it any part of the document is unclear, there is greater risk of a lawsuit, costing both parties valuable time, money and resources.

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 allows 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 could be a winning situation all round.

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