Leases - re-gearing and negotiations


One by-product of the Recession is that lease re-gearings and extensions have become increasingly popular. For example, if a tenant occupies offices on a twenty year lease from 1999 with a break clause at the expiration of year 10 and the normal five yearly upward rent review pattern, the rent agreed at review in 2004 could well be higher than the market rent for the offices as the 2009 review approaches. The typical rent review clause will not allow the rent on review to decrease, so the premises will as a result be over-rented.


In that situation, the tenant might want to exercise its break option - but it might also be persuaded to surrender that break option in return for a reduction in the level of the existing rent. From the landlord’s point of view, the removal of the break clause will guarantee income for the remaining ten years of the lease term. Further, the Landlord might be able, as part of the negotiation, to persuade the tenant to agree a lease extension for a further five years.


A word of warning, however: If a Landlord does manage to re-negotiate and re-gear with his tenant, then the matter will very likely be documented as a formal Surrender of the existing lease and a simultaneous grant of a new one. The effect of a Surrender will mean that both parties are released from any prior breach of covenant.