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Should I Stay or Should I Go? (You’ve Got to Let Us Know)

In a fast-moving economic environment, it is common for leaseholders to find that their existing premises are no longer ‘fit for purpose’ and for tenants to assume that they will need to relocate to new premises to get what they want from a building. But this need not be the case.
May 18, 2022
Leases are contractual agreements, and you are bound by the lease terms, but you need not let your leases constrain your property thinking. Leases reflect the status quo, but it is possible to think creatively, in order to achieve your property ambitions.

There are other alternatives to costly and disruptive business relocation which, with a little collaboration between landlord and tenant, can prove mutually beneficial.

Although not right for every business or circumstance, lease restructuring represents one such opportunity.

By understanding your respective business interests there is often mutual benefit to be achieved. However, the success of this approach is reliant upon engagement and collaboration.

As a tenant, your primary concern will be how your premises add value to your business – from modern office premises ideally suited to changing working practices and colleague/client engagement, to accessible warehousing optimised to specific business requirements.

Meanwhile, landlords understand that it rarely makes commercial sense to lose a ‘good’ tenant, so their best interests will usually be served by retaining and prolonging tenant occupancy, as this will enhance both income and capital value.

Aligning your interests

Where tenant and landlord interests align, there are often opportunities to be exploited.

Perhaps your existing warehouse is ideally situated but undersized, yet there is scope to extend. A commercially minded landlord might consider undertaking works in exchange for an extended lease term or improved rental income.

Or perhaps your office premises need modernising to meet your future workplace strategy and you have more flexible workspace, enhanced meeting facilities, showers and improved environmental credentials in mind, which will allow you to attract and retain the best talent.

But what sort of triggers might lend themselves to a potential lease restructure?

Break Options

A tenant-only break option always has value to an occupier, irrespective of whether there is an intention to break the lease – but this can go unrecognised.

Break options represent uncertainty for a landlord and the capital value of their asset will often diminish leading up to the option date. If you do not require or are willing to forgo the flexibility, why not consider varying the lease?

You could achieve a rent free or similar incentive or mitigate the impact of a forthcoming rent review, while the landlord can preserve capital value and rental income.

Rent Reviews

A rent review clause constrains the landlord and tenant to a hypothetical valuation scenario which is often divorced from reality.

To mitigate rental and/or lease liabilities, you might consider a lease restructure or extension. Meanwhile, your landlord would stand to benefit from extended contractual income and corresponding increased capital value.

Lease Expiries

An obvious one perhaps, but it pays to think creatively about what can be achieved when renewing a lease on existing premises.

So, should you stay, or should you go?

In commercial property, win-win scenarios should be the norm, not the exception. In most cases, neither you nor your landlord will be prejudiced by having an open and frank conversation about your respective business interests, albeit you should have a considered strategy in place to maximise your negotiating position.

Before taking any action, it is important to speak to a lease advisory specialist, who will be able to assist you in formulating a commercial property strategy aligned to your needs.

Our team of lease advisory experts work with both landlords and tenants, providing and broad and balanced understanding of the market, and have the commercially minded and collaborative approach necessary to ensure the best possible outcome.

So, if your building is no longer fit for purpose and you would like support to establish what the next step on your property journey should be, Vail Williams can help.