In any financial arrangement, there usually comes a point where some sort of negotiation is required. This definitely applies to tenant / landlord relationships, regardless of whether it’s a residential or commercial lease.
The most common type of negotiation (beyond the initial contract) is lease restructuring. This process should be viewed positively, as it can be beneficial for everyone involved. Here’s more information about it.
What is lease restructuring?
Lease restructuring refers to the act of adjusting the terms of the lease, even though the existing contract hasn’t expired yet. This usually happens in one of two ways:
- New lease terms are negotiated, and entirely replace the current lease. In instances where there are issues to be addressed, the lease restructuring might be carried out together with a deed of surrender.
- The current lease is altered, but kept in place. Certain terms are adjusted to benefit both the landlord and tenant, while some clauses remain the same.
Usually, the process is facilitated by a third-party (e.g. a letting agent).
What issues are addressed in lease restructuring?
This depends on the contractual arrangement, and whether it’s regarding the lease of commercial or residential premises. Here are some of the more common issues that often come up in negotiations:
- Extending the lease. Sometimes, the tenant or the landlord want greater security for the future.
- Changing the rental payment set-up. Payment schedules may be adjusted – e.g. from weekly to monthly, or monthly to quarterly.
- Limiting service charges. A cap on service charges might be introduced, to ensure payments don’t rise significantly in the future.
- The introduction of break options. Depending on the type of break clause, this can provide both landlord and tenant with more flexibility, should their circumstances change.
What are the benefits?
There are advantages to both parties. Here are just a few examples:
- Greater peace of mind for the future, knowing that they can remain in their property / premises for longer.
- The opportunity to change certain lease clauses that no longer offer any benefit.
- The chance to adjust break clauses, bringing them in line with future business plans.
- More flexibility in terms of making alterations or sub-letting the premises to others.
- More beneficial arrangements regarding the return of the deposit at the end of the contract.
- Reduction or cap on rent, or the inclusion of rent-free periods.
- Boosting the property’s capital worth through extending the lease term or renegotiating the break clause.
- Improving investment value with leases that are nearing their expiry date – especially advantageous if the landlord wants to sell the property.
- More security for the future with a longer-term lease; no requirement to find new tenants.
- Ability to avoid Void Rates with a tenant still in situ.