#UK Commercial Leases: Gearing up as we emerge from the pandemic

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I began writing this as we approached the June quarter day when the concerns of both commercial landlords and tenants were brought into sharp relief following the tough – or non-existent – trading circumstances this past quarter, writes Elizabeth Deyong, Property Partner at law firm Barr Ellison.

Many tenants will inevitably have much depleted cash reserves at their disposal and landlords – who may have allowed a rent postponement or waiver on the March quarter’s rent – will likely have understandable concerns about what the June quarter date (June 24) was likely to bring.

As we look to the future, tenants and their landlords will be having conversations about the benefits to each party of varying existing lease provisions.

Tenants will be looking for additional flexibility to futureproof their businesses.Landlords will be seeking a variation of lease terms which can add value and provide additional collateral for Lenders.

In the situation of a defaulting tenant, there are a number of remedies at a landlord’s disposal to take action against a defaulting Tenant – albeit that some of these have been amended by the Coronavirus Act 2020.

There will undoubtedly be circumstances where the landlord should take a tough line in order to bring to a close a relationship with a tenant that may have been going south prior to the pandemic.

However, for landlords who have the opportunity to think strategically about their individual investments or across their portfolio, then re-gearing existing leases will be an opportunity to improve relations with their tenants whose own businesses will have been suffering, and to futureproof investments going forward.

Extending lease term as a quid pro quo
For example agreeing a short suspension of rent to a tenant that is generally trading well and that is likely to bounce back once the economy is on an upward trajectory, could be agreed in exchange for an extension of the term for an additional three or five or even 10 years to the benefit of both parties to the lease.

Variation to rent payment terms
A landlord could consider varying payment terms to allow rent to be paid monthly. This is an obvious aid to the tenant’s cash flow.

Extending length of the term
Extending the length of the lease term can benefit landlords as it increases the capital value of their properties It can also be beneficial to the tenant who may have goodwill inherent in the property and require longer term security.

An extension of the term can be dealt with by way of a reversionary lease which will be based on the terms of the existing lease but may include more favourable terms or added incentives to entice the Tenant to stay longer.

Assignment and underletting
Regearing a lease presents an opportunity to look at all the existing covenants and how they might be amended to the advantage of both parties.

For example, a variation could be permitted to allow the tenant to underlet at a reduced rent, although the risk to the landlord would be that if the head lease came to an end the undertenant would be in place at that lower rent.  It is a matter of balancing the respective interests of the parties.

Similarly, a tenant who is only permitted to underlet the whole of the premises may be permitted to underlet part to allow greater flexibility for its use of the premises.

Time of crisis bringing landlords and tenants together
Times of crisis inevitably bring landlords and tenants closer together to understand their respective challenges better in a way that does not happen when the economy is running smoothly.

If landlords want to keep their premises occupied then they are going to need to have a dialogue with their tenants as to what lease provisions are no longer working and how leases may be regeared to the mutual benefit of both parties.

If you are considering lease variations, please contact the Barr Ellison Commercial Property team to talk through your proposals and how these can best be captured within a binding Variation Document that is SDLT efficient.

• For more information please contact Elizabeth Deyong – email: e.deyong [at] barrellison.co.uk

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