The Office Lease – Risks and Opportunities

When negotiating an office lease, the tenant may be dealing with the property industry for the first time. It is then tempting to focus only on the rent and assume everything else is a relatively minor issue. That would be a mistake.

Three Points To Be Aware Of

1. The office lease does not have to be fair.

2. Risks in the property industry involve relatively large numbers.

3. Certain words and phrases in an office lease may appear to have one meaning but actually have a     very different meaning in court.

Three examples:

• If a repairing obligation includes the words “put and keep” then the tenant may find itself upgrading the whole premises despite only having, say, a 3 year office lease. To add insult to injury, the tenant may only realise what it’s got itself into after the lease ends, meaning it would not even be able to use the property in its renovated state.
• The extant of the “premises” being rented may seem to be a matter of common sense but it may or may not include the windows, doors, non-structural walls, structural walls, pipes and cables and the roof! The extent of the premises simply depends on what the office lease happens to state but it will be up to the tenant to repair and insure the whole of the premises. That may sometimes not be a problem but beware that the building may only look like it is in a good condition: be sure not to have liability for hidden defects, to find out about any incidents in the insurance history of the building and, to confirm that the building is fully insured (i.e. for its full reconstruction value).
• In a modern office building, a relatively small and brief fire in the kitchen of a small office premises, can easily cause damage that causes £100,000 of costs to the landlord and the other tenants in the building.

Is Your Landlord Solvent?

Many mistakes made by tenants actually come down to a belief that the landlord, as it owns a commercial property, is relatively wealthy. This is frequently not true. Although the landlord may be part of a corporate group which is wealthy, the landlord company itself may have bank financing and internal company loans which exceed the value of the building and thus is simply supported from one year to the next by its parent company. Such arrangements are not uncommon and tenants should therefore take the extra time to think carefully and ensure they remain protected even in the event of the landlord’s insolvency.

An office lease is a very flexible document which manages many risks (each of which may be larger than the annual rent) in a business relationship that will usually continue for many years. An office lease can easily lead to the financial ruin of either the landlord or the tenant but if handled properly, these risks can be managed in a way that allows both parties to safeguard their businesses and grow. How the risks are managed must also reflect the financial, organisational and technical ability of each party to cope with it on a long term basis.

Office Lease Flexibility

An office lease should also reflect the potential for a tenant’s business priorities to change over time. This is true for start-ups as well as more established businesses. Consider:

• Many businesses adopt strategies which reflect the prevailing attitudes of Investment analysts, who sometimes like focused businesses and sometimes instead prefer businesses with a spread of activities and hence risk. As tenants may buy or sell subsidiaries, open new divisions of their business or themselves become take-over targets, it is important that the office lease remains flexible enough for a tenant to change its business strategy.
• For start-ups, the future is quite unpredictable, so it would often be helpful to adapt the office lease so that at least the cost of the lease is predictable. For example, larger landlords may agree to having a fixed service charge and rent to be paid monthly in advance instead of the standard 3 months in advance. As a further example of a common problem, will the landlord carry out an (expensive) inspection of the premises months after the tenant has vacated and then invoice it all to the tenant?
• Does the office lease ensure that at the end of the lease, the tenant can choose to take a new office lease and remain in the premises or would there be a lengthy discussion about the new rent level and open competition from any new potential tenants? For a tenant, that prospect may not only be worrisome from a financial perspective but also the time perspective – the process of carefully selecting new premises and moving into them is very time consuming. A lease can manage this is many ways.
• If there is further space available in the building, would it be prudent for the tenant to reserve that space for 6 – 12 months?
• Might the tenant need specialised telecom and data cabling installed in the building? That might be expensive, slow and even forbidden if the office lease in is a listed building or if, as so often happens in London, the landlord also needs consent from one or more superior landlords. Such issues can be addressed in the lease at the outset, to avoid expensive problems in the future.
• Does the landlord facilitate contact between the tenants? This does not take much effort for a landlord but clearly, is better discussed at the outset if it might be important. A simple gathering of the tenants twice a year could facilitate new business relationships or a strategy to green the building. Those are both items which can be simple and cheap but are quite impossible if the tenants do not talk and that is hard to achieve if the landlord does not facilitate it.
• Does the landlord plan to provide a service or will the landlord be very difficult even to contact? The office lease can also establish the right communication channels between landlord and tenant and that can make all the difference in any business relationship.

Use An Expert

It is therefore important, especially for tenants who may be dealing with the property industry for the first time, to choose advisers who have a deep experience of the entire property industry and can therefore efficiently solve problems on time and budget and who can provide support for the entire lifecycle of the office lease: the initial heads of terms, the lease itself, fit-outs and refurbishments to the property (by either or both the landlord or the tenant), expanding, insolvency, renewing the lease or preparing the exit (well in advance). Contact Neil Williamson or call us on 0203 637 6374 if you would like to enquire about any aspect of an office lease.