What is a reverse premium and do I want one?

When someone signs a lease, it’s a binding commitment to pay the rent, rates and service charge up to the next break or to the end of the lease.

So what happens if for some reason the occupier has no need to stay in those premises for the full term of the lease?

They can ask the landlord to take the premises back and if the market has substantially risen and he or she is confident that he can get someone to take your place and pay more rent, that’s a possibility. However, far more likely is that the economy isn’t great and the occupier either wishes to downsize or maybe the business has even been taken over. In this case, the landlord will expect payment until the legal obligations come to an end.

So what can the occupier do? The option that’s left (if the lease permits it) is to effectively ‘sell’ the outstanding obligations, i.e. to find someone else willing to pay the rent that has been agreed until the end of the term.

As we’ve said, most likely the market will have dropped, so in order for someone else to be willing to pay the rent, they will need a cash sum. This cash sum is known as a ‘reverse premium’.

Do you want to receive a reverse premium?

Sure, if the building is right for you and the combination of the rent, what’s left of the term, the reverse premium, the option to renew the lease and a bunch of other factors all work in your favour, why not?

The biggest reverse premium we’ve achieved for a client was in the region of £1 million (yes, you did read that right!)

While deals like that don’t come along every day, Warwick Bookman & Associates were able to identify and value that opportunity. Our client ended up with the offices they needed and a nice boost to their bank account.

We’ve done other similar deals on a smaller scale, too. Without our actions on their behalf, these clients would not have found the relevant sites and / or not have received the premiums.

So, in the right time at the right place, a reverse premium is a happy thing for the incoming party to receive.

Do you want to pay a reverse premium?

As we’ve outlined above, payment of a reverse premium becomes necessary if you’ve taken on an over-rented lease and need to get out of it.

Obviously we’re not psychic and life throws curved balls, but we work very closely with our clients to understand their business and combine that with our extensive knowledge of the market to ensure that leases are negotiated correctly and break clauses come into play as far as possible so that the lease meets their needs and reverse premiums don’t need to be paid to get them out of overpriced commitments.

In the current market, you need to be very careful of landlords and letting agents offering substantial rent-free periods and cash sums in order to maintain an over-inflated headline rent. This is now often the case. If you sign a 10 year lease (with no breaks) at a rental of £50,000 per annum more than the market rate and you wish to dispose of it after 3 years, you will most likely need to pay £350,000 to get out of your commitment.

Think very carefully before you enter into any commitment in the current climate.

Hiring a professional may not be cheap, but it’s a lot cheaper than hiring an amateur.