Lease Regear UK — Restructuring a Commercial Lease Before Expiry

What Is a Lease Regear?

A lease regear (sometimes called a lease restructure or lease renegotiation) is a consensual variation of the terms of an existing commercial lease, agreed between the landlord and the existing tenant, before the lease's contractual expiry. Common regear terms include: rent reduction (with or without a reverse premium from the landlord); extension of the lease term (in exchange for a premium from the tenant or removal of a break clause); removal or addition of a break clause; changes to the repairing obligations (e.g., schedule of condition attached to limit the tenant's dilapidations liability); changes to the user covenant (to permit new uses); changes to the alienation covenant (relaxing subletting restrictions); and in some cases a surrender of the existing lease and simultaneous grant of a new lease on revised terms. Regears differ from LTA 1954 lease renewals — a regear is agreed before the statutory renewal process is triggered, and the terms are entirely a matter of negotiation between the parties without court involvement.

• Rent reduction: landlord reduces the passing rent in exchange for tenant committing to a new term; reverse premium may be paid by landlord to incentivise the regear
• Term extension: tenant extends their commitment in exchange for a rent reduction, reverse premium, or removal of an onerous break clause pre-condition
• Break clause removal: tenant agrees to give up a break right in exchange for financial or other concession from the landlord — removes uncertainty about whether the tenant will exercise the break
• Repairing obligations: schedule of condition attached; tenant's liability on exit capped at the condition shown at the start of the regear term; avoids dilapidations disputes on expiry
• User/alienation covenant: landlord agrees to relax restrictions in exchange for tenant's renewed commitment — improves the tenant's ability to assign, sublet, or operate a broader business

Deed of Variation vs Surrender and Re-Grant

A lease regear can be documented in two principal ways, and the choice has significant legal consequences. Deed of variation: the existing lease continues; the deed amends specified terms of the existing lease (rent, term, break clause, etc.); the lease retains its original term commencement date and existing contracted-out status (if any); no SDLT on the variation unless a new premium is paid or a significant NPV change arises. Surrender and re-grant: the existing lease is surrendered; a new lease is simultaneously granted on revised terms; the new lease is a separate lease transaction; it must be independently contracted out of LTA 1954 protection if the parties intend no security of tenure (warning notice/declaration required); SDLT applies to the new lease NPV (but offset for the surrendered lease's NPV under Sch 17A FA 2003); Landlord and Tenant (Covenants) Act 1995 — old lease obligations are discharged; new lease creates fresh privity of contract regime (outgoing tenant can be required to enter AGA on assignment).

• Deed of variation (preferred): simpler; preserves existing lease; LTA 1954 status unaffected (if contracted-out, remains contracted-out without re-doing the procedure); no SDLT unless premium/NPV change
• Surrender and re-grant: full new lease — must re-contract out of LTA 1954; SDLT on new lease (with Sch 17A offset); new L&T(C)A 1995 regime; specialist legal advice essential
• Surrender and re-grant trap: a deed of variation that extends the term or creates a materially new obligation to pay a different rent may be treated by HMRC or the courts as a surrender and re-grant even if labelled a variation — Jenifer Mann v Mason (1999); specialist advice required
• LTA 1954 contracting-out: if the regear is documented as surrender and re-grant, the landlord must serve a new LTA 1954 warning notice and the tenant must make a new declaration before the new lease is granted — failure = the new lease has full LTA 1954 security of tenure
• L&T(C)A 1995: if regear creates a new lease, original tenant's obligations under the old lease are discharged; AGA can be required on any future assignment of the new lease

SDLT and Tax on Lease Regears

Deed of variation — SDLT: a variation to an existing lease is not generally a new chargeable transaction for SDLT purposes (HMRC SDLT Manual SDLTM30000 series). However, if the variation grants a new term, increases the rent, or adds a new obligation to pay a premium, SDLT may arise on the new element — specialist SDLT advice should be taken. Surrender and re-grant — SDLT: treated as (1) the surrender of the existing lease (no SDLT on surrender by itself), and (2) the grant of a new lease; SDLT is charged on the new lease premium (if any) and the NPV of the new lease rent; Sch 17A FA 2003 reduces the NPV of the new lease by the NPV of the surrendered lease's unexpired term — often significantly reducing or eliminating the SDLT charge. Tax on consideration: reverse premium paid by landlord to tenant (to incentivise the regear) is typically a capital payment by the landlord (deductible capital expenditure for CT purposes) and may be a capital receipt for the tenant (taxed as disposal proceeds on the lease disposal — specialist tax advice needed). VAT: where the property is opted to tax, all rents and premiums are VAT-able; VAT treatment of a reverse premium is complex — generally outside the scope of VAT as a capital payment, but confirm with a VAT specialist.

• Deed of variation SDLT: not generally a new chargeable transaction; but specialist SDLT advice needed where the variation extends the term, increases rent, or involves a new premium
• Surrender and re-grant SDLT: Sch 17A FA 2003 offset; NPV of new lease reduced by NPV of surrendered lease — often reduces SDLT significantly; new SDLT return required within 14 days of completion
• Reverse premium (landlord pays tenant): capital expenditure for landlord; capital receipt for tenant; complex tax analysis; specialist advice needed
• Premium (tenant pays landlord): capital receipt for landlord (CGT/CT on gains); capital expenditure for tenant — seek CT advice on treatment
• Scotland: LBTT on surrender and re-grant; same Sch 17A-equivalent offset applies; LBTT annual returns required if new lease rent is variable; LBTT specialist advice recommended

MEES and Regear Negotiations

The MEES (Minimum Energy Efficiency Standards) regulations require commercial landlords to achieve a minimum EPC rating before letting or renewing a commercial lease. The existing MEES threshold (EPC E) applies; proposals to upgrade this to EPC B by 2030 are in policy development. Regears provide an opportunity to address MEES compliance jointly: the landlord may agree to carry out EPC upgrade works as part of the regear (funded by the landlord, perhaps in exchange for a rent increase); the lease may be varied to permit the landlord to access the premises to carry out EPC upgrade works; a landlord who needs to upgrade to EPC B or C before 2030 has a strong incentive to negotiate a regear while the existing tenant is in place, rather than carrying out works in a void period. Green lease clauses: a regear is an opportunity to introduce green lease provisions — targets for energy consumption, EPC rating obligations, reporting obligations, sustainability fit-out conditions.

• MEES compliance: if the existing lease expires before 2030 and the building needs EPC B upgrade, a regear locks in the tenant while works are carried out — avoiding a MEES-driven void
• Landlord-funded upgrades: landlord agrees to carry out EPC improvement works as part of the regear; access provisions agreed; tenant may accept a modest rent increase in exchange for a landlord-funded EPC upgrade
• Green lease clauses: regear opportunity to introduce energy reporting obligations; EPC rating targets; fit-out sustainability requirements; aligned with institutional investor ESG requirements
• Timing: MEES upgrade works typically take 3–12 months depending on the building; coordinate the regear to provide sufficient notice for works to be completed before regulatory deadlines
• Schedule of condition: if landlord carries out significant structural or fabric works as part of the regear, a new photographic schedule of condition should be agreed as the baseline for the tenant's dilapidations liability at the end of the regear term

Practical Steps for a Lease Regear

Heads of terms: agree non-binding 'subject to contract' heads of terms covering: proposed new rent; reverse premium or premium; new break clause structure; new term; repairing basis; MEES works; any changes to user/alienation covenants. Red book valuation: both parties should obtain independent RICS Red Book valuations of the lease and the building to inform the negotiation. Market evidence: obtain comparable evidence of current market rents and incentive packages for the relevant building type and location — essential for the negotiation and for any SDLT/tax analysis. Legal structure: decide at heads of terms stage whether to proceed by deed of variation or surrender and re-grant (after taking SDLT and legal advice). LTA 1954 position: confirm the current status — is the lease inside or outside LTA 1954 protection? If outside (contracted-out), does the contracted-out period cover the extended term? Regear documentation: instruct solicitors to prepare the regear documentation; allow 4–8 weeks for negotiation and completion.

• Timing: start regear discussions 12–24 months before the lease break or expiry date — sufficient time for negotiation, documentation, and any MEES works without the pressure of impending expiry
• Heads of terms: non-binding summary of proposed terms; agreed before instructing solicitors; RICS valuers should be involved at this stage
• SDLT due diligence: get early SDLT advice on whether the proposed structure (deed of variation or surrender and re-grant) triggers a SDLT charge and, if so, how to minimise it
• LTA 1954 check: confirm whether the existing lease is inside or outside LTA 1954; if contracted-out, check the contracted-out period covers the regear extension; if inside, consider contracting out as part of the regear
• Scotland: LBTT position should be assessed at the same time; LBTT annual return obligations for new lease under LBTT; specialist Scottish commercial property and tax solicitors required

Frequently asked questions