There is an inherent tension between the needs of the Tech industry and that of the larger landlords. Tech companies need to remain agile to adapt to their ever-changing market place whilst landlords value stability and a nice steady income, above all else. Yet they know the biggest growth in the next few years will come from tech firms, especially in London and the Thames Valley.
SMEs are changing the way they manage their exposure to the property they occupy. They think in much shorter timelines, which at its most extreme is on a quarterly rolling basis and rarely more than a 2-year cycle in the early stages of growth. As such, the “non-traditional” leasing sector that is suited to this type of occupier has seen a meteoric rise over recent years, leading commentators to suggest that by 2030, 30 per cent of all office space will be let under “non-traditional” or “flexible” leases.
However, I am finding that despite co-location companies taking space in the Thames Valley, including Fora’s recent acquisition of 27,589 sq. ft. space in Landid and Brockton’s iconic Thames Tower, that many tech companies are still opting for longer commitments and adapting the internal environment to suit their workforces.
The key is to retain agility by ensuring that the lease provisions are as flexible as possible in the current market, which can be done in a number of ways.
- Term - the trick is balancing the need for certainty of a reasonable period against retaining flexibility. Landlords typically favour longer leases with a minimum of 5 years and ideally 10 or above and most businesses prefer shorter leases, possibly with security of an option to renew. This can also help to reduce upfront Stamp Duty Land Tax. Rent discounts can be given for accepting longer lease periods but it would be advisable then to secure a right to terminate early, say at the end of the fifth year, known as a “break clause”.
- Rights to assign or sublet – Where a break clause is not offered and a business no longer needs the space these rights gain greater importance. If the building can be sensibly divided it would be sensible to extend the right to underlet the “whole” of the space to allow underlettings of “part”. Careful drafting is needed to ensure that the circumstances and conditions attached to these rights are fair and marketable. Ensure the lease contains adequate rights to share and, if possible, not only with Group Companies but also with key partners – known affiliates, contractors etc. We often advise partnerships to secure a right to assign a lease to an LLP should they convert.
- Break Clauses – If offered, these rights need to be carefully drafted as there are many traps which have led to a large number of negligence claims against solicitors. The opportunity to make mistakes when drafting or serving a break notice is on the increase. Many tenants are caught out by serving break clauses incorrectly or by failing to comply with strict conditions set out in their lease.
In particular, recent case law highlights the importance of ensuring absolute compliance where the conditions or procedure to exercise the break are prescribed in the lease and solicitors are also getting this wrong on a regular basis! A notice was found to be void where it was served on the correct landlord but the name of that landlord had not yet been registered at the Land Registry and as such they were not technically the legal registered owner (the “registration gap”).
Ensure that the notice is served correctly – the lease will often prescribe the method of service and any minor mistake may invalidate the notice. For example, if the lease states that the notice needs to be served by hand at the registered office, it will be invalid if served by first class post! A court even found a notice served on blue paper to be void because the lease said it should be served on pink paper!
Therefore most importantly try to get the business to make a decision early enough to deal with any such issues to eradicate mistakes and probably best to outsource the risk.
Finally, be aware of opportunities to improve your lease terms during the term itself. Known as “lease re-gearing” this requires proactive management to make your leasehold properties work for you, potentially reducing costs and providing better business flexibility.
It is important to know that you are not necessarily stuck with your contractual terms and a lease can be varied at any time. Rent reviews, break dates and end of term dates give good opportunities for tenants to explore the possibilities of approaching the landlord to obtain better terms.
For example, if you intend to stay in a building beyond the current lease break or expiry and the break or expiry is within the next three years or so, re-gearing the lease could be a valuable exercise. This can be done in a number of ways and deserves another article on its own but the main benefits might include:
- Most commonly trading a break clause for a rent holiday; or
- Realigning a break clause to match your own business strategy (often pushing back a year or two); or
- Trading a break clause or extending the term for a capital payment from the landlord; or
- Negotiating other benefits such as a refurbishment of the communal areas or services provided by the landlord, reviewing lease clauses themselves to give greater flexibility to allow sub-letting of part, for example, or reducing the amount of floor space that you occupy and of course potentially lowering the rent.
Nick Carter, Partner and Head of Property, Boyes Turner
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