From start ups to scale ups and beyond: what's in a Lease?


06 March 2019

Cambridge is home to lots of co-working and 'incubator' office facilities, helping make the city a welcoming and nurturing place for start-ups and scale-ups. Companies in their first phases of life have the opportunity to reap the benefits of flexible, open and affordable workspaces, not to mention inevitable and organic networking. 

But if all goes well, a start-up may become a scale-up and even emerge as a company of significant size. Despite the on-going attraction of co-working spaces, expanding companies may eventually fly the nest of the incubator world and seek stand-alone premises to rent (or indeed buy, but that is another story). So, where to start? Here are five key topics which prospective tenants need to consider carefully from the outset.

1.Premises

Ask yourselves: what do we need from our space? It must be suitable, physically, for the business. In location, size, design, accessibility and facilities, it should be appropriate and complementary to the needs, ethos and working patterns of the business, your employees and customers.

The space also needs the necessary permissions in place to allow the relevant use. Title and planning restrictions can both limit what can be done, as might individual landlords. If the use is likely to change over time, the business either needs to know that there is flexibility (or at least potential) to accommodate that change, or be prepared to relocate at the relevant time.

2.Term

How long does the business intend to stay in the same place? This will affect the term of the lease sought.

If the premises are just a stop-gap until something more appropriate is found, or the company cannot commit to the full term offered, you might need the right to break (end) the lease early. If the premises are a long-term solution, statutory and/or contractual rights to renew, and a longer initial term, will be important.

3.Rents and incentives

What budget does the company have for its premises? Of course this is primarily driven by cash flow, but also by how important the space is for the business. If the business relies on agile working, off-site meetings or is not customer-facing, for instance, a smaller budget is inevitable.

Consider whether there are predictable fluctuations and pinch-points in the business’s cash-flow. Does it need a rent free (or reduced rent) period while fitting out? Can a further rent concession be negotiated to apply if a tenant break right is not exercised?

Office lease rents are usually fixed figures, subject to uplifts depending on the length of the term. Future changes in rents might be fixed and stated in the lease, or fall to be calculated at intervals via a rent review regime.

Office rent reviews are typically structured to change the rent (usually in an upwards-only direction) in line with an index or market rents. For non-office sectors, rents could be based on turnover of the occupant and reviews may track other variables. It may be possible to negotiate a maximum cap (and the landlord might add a minimum ‘collar’) for each review. In any event, the assumptions and disregards incorporated into the rent review regime can have a big impact on the financial outcome.

4. Sharing occupation

What if the company is taking space for a long term and anticipates significant growth going forwards or a fluctuating size? Consider whether the landlord will allow sharing of occupation or underletting (particularly of part). Does the lease permit sharing by group companies or affiliates? Is co-working with other companies permitted? Such flexibility could prove invaluable to seeing a business through times of fluctuating resources.

5. Ancillary costs and outlays

Ancillary costs and outgoings include business rates, service charges, insurance rents and costs of utilities. These could be a significant liability on top of the lease rent.

Also factor in costs of fitting out the premises to be suitable for the company’s use (and establishing reliable internet connectivity, if not already installed). Weigh up the pros and cons of investing in the initial fitting out against the length of the term and business requirements.

Tenants may also have responsibility for complying with regulations (for example relating to fire safety, asbestos management and energy ratings) passed down to them. They will inevitably have to repair and decorate during the term and/or pay dilapidations costs on leaving the premises. On all of these fronts, it's important to know (i) where the responsibilities lie and (ii) what state the premises are in before taking the lease, both physically and from a compliance perspective.

Whatever your commercial priorities, due diligence and clear legal advice at the outset (and before a lease is committed to) are key foundations for a successful letting, and can help avoid costly pitfalls going forwards.

The content of this article is for general information only. If you require any advice please contact Gemma Goddard or a member of Birketts’ Commercial Property Team. Law covered as at March 2019.

To keep up-to-date with the latest news, legal updates and seminar information, please register and select the areas that are of interest to you.

Author

Contact

* denotes required fields.