Leasing offices for your business is a huge commitment and expense, and it’s not just the obvious things like the rent and incentives that you need to think about. There are also the things you don’t know about yet,the things that might come back to bite you after you’ve moved in.  Knowing how to negotiate lease heads of terms can save you money, time and stress.

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Here are some key areas to consider:  

Positioning, positioning, positioning

Property is about location, location, location, right? When it comes to negotiating heads of terms, positioning is all-important and making sure you start from a position of strength is crucial to achieving the best possible outcome.

Shortlisting several credible alternative relocation options is the best way to create leverage and a position of strength when negotiating terms.

In a stay versus go scenario, speaking to an existing landlord about a renewal without considering alternative options and possible relocation isn’t likely to achieve the best renewal terms. But this often happens.  

It is important to set out a clear plan to the landlord about the process you intend to undertake. This should include a full review of available alternative properties, the due diligence process and what costs that could incur, disruption risks and what you expect the landlord to take responsibility for under a new lease.

Types of leases: Understand your obligations

If you are negotiating a new lease, there is an opportunity to shape the terms and limit liability. Some landlords will be more flexible than others, but most aspects will be open to some discussion.

However, if you are taking an assignment of an existing lease, you will be taking on the existing terms and obligations with no opportunity to make changes. You will inherit any service charge discrepancies,repairing obligations and potentially, dilapidations liability, so due diligence is essential.

A sub-lease will be based predominantly on the same terms as the head lease, but there is more scope to limit liability than with an assignment.

Be aware that subleases will often be contracted outside the landlord and tenant act, which means you won’t have an automatic right to renew the lease.  

LIMIT YOUR LIABILITIES

When negotiating heads of terms, you need to understand what you may or may not be liable for in terms of costs and how you can limit that. Here are the key areas to consider:

Accurate floorspace measurements

Don’t assume the floor area quoted is accurate.  Ask whether a professional measurement company has measured the building, in which case, you should get a copy of the report. You can also request a letter of reliance relating to this report.  Failing that, make sure the property is measured in accordance with the RICS (Royal Institution of Chartered Surveyors)code of measuring practice.

It is important to check the measurements for several reasons:

1. You may have decided how much space you need based on a certain number of people and the office fit-out you want. If the amount of space isn’t what you thought, it can impact how you use the space – and how many people can work in it.

2. If you are leasing space in a multi-tenanted building,your service charge will be proportionate to the amount of space you occupy.

3. Your rent and business rates will generally be calculated on a per square foot basis.

The importance of due diligence

Whether you are extending a lease or moving to a different property,it’s important to do appropriate due diligence. This helps you understand any potential costs from repairs or refurbishment that you will be responsible for directly or indirectly via the service charge.

Building and M&E surveys

This due diligence usually involves instructing a building surveyor and M&E consultant to review key areas of risk for the term of the proposed lease commitment. They will check things like the air conditioning system, roof, lifts, escalators, and anything else that might be of concern,such as whether there is any planned refurbishment work to communal areas.

It is important to determine whether any issues highlighted from this process are either:

1.     Likely to cause disruption to the business and need to be rectified before moving in or in the case of a renewal, works carefully planned as part of the agreement. A typical example would be if the air conditioning system needs to be replaced.

2.     Unlikely to affect your occupation, and an exclusion of liability will suffice.  For example, some cosmetic damage that may not concern you but you similarly would not wish to inherit responsibility for. This can be recorded and excluded from your repairing liability.  

If you find something that needs repair or reaching the end of its life, you can either ask the landlord to do the work or pay the costs if you get it done.

These costs should be over and above any incentives already offered in your heads of terms. If the repair or replacement work being done delays occupation, that can also be factored in.  

Service charge

Request copies of the service charge for previous years and the budget for the forthcoming year. This may highlight anomalies or concerns that you may wish to investigate further.

You can request a service charge cap which would usually run at a level above the current service charge and increase each year in line with CPI or RPI. This would provide some protection from the larger unforeseen cost risks such as plant or lift replacement.

Understanding your lease break conditions

If your lease is going to have a break clause – an option to leave at a certain point before the end of the lease – it’s important to limit the number of conditions in the clause. For more details on break clauses and the conditions, see Moving offices: Understanding your break clause.

Timing and penalty clauses

When a landlord has agreed to carry out certain works, ensure there is a specified time frame for completion within the lease agreement.Similarly, make sure the heads of terms outline what the penalty is if a deadline is missed.  

Delays may impact your business operation. For example, if a landlord has agreed to upgrade the air-conditioning system before your fit-out contractors start, if that work overruns, your fit-out and occupation may be delayed with overlap costs on your existing premises.

Reinstatement obligations – how you must leave the property when your lease ends

The heads of terms need to be clear about your repair and reinstatement obligations upon lease expiry or termination. As already highlighted, these obligations can vary depending on whether you are taking anew lease, a sublease or an assignment.

Your approach to reinstatement and repair is likely to be influenced by the condition of the office when you lease it and the length of lease commitment.

If, for example, you are taking a new lease for ten years on a new Cat A office (i.e. in an open plan state ready for fit-out), it seems reasonable for the landlord to expect the property to be returned in that same state.

However, if you are looking to take a lease assignment of a 15-year lease with only 2 years remaining, you may well expect the repair and reinstatement obligation to be limited or covered by the assignor.

You can negotiate certain concessions in the heads of terms,such as a capital contribution towards removing the fit-out of the previous tenant.

Alternatively, it is possible to limit the repairing liability by agreeing that a photographic schedule of condition (essentially a report with photographs and description) be prepared and attached to the lease.This should have the effect of leaving the office in no better or worse state of repair than as recorded by the schedule of condition.

Alterations – do you need permission?

There are all sorts of things you might want to do to make your offices as you want, from putting in extra air-conditioning units and cycle racks to adding partitioning or an internal staircase.  

Agree during your heads of terms negotiation what requires the landlord’s consent and what doesn’t. Work can be delayed or prevented if a landlord’s consent is required. Structural alterations are usually only permitted with consent and should be agreed before completion of the lease.

It is particularly important for work where you need to access areas like the roof or basement – putting in additional condensers for fan-cool systems, for example.

Services and facilities – plan and clarify

It’s worth considering important services and amenities –what is supplied and if that could change.

Telecoms are a key area. You may need a wayleave agreement to allow your chosen operator to connect you. A wayleave agreement is part of a legal process, so it may take time to sort out.

If cycle provision is important, check what is available to you and the wording around that provision to ensure you have appropriate rights that cannot be removed during the lease term.

For example, is there a specific allocation of cycle spaces for your business, or is it first come, first served? Is there always going to be a minimum number even if the landlord needs to take back some of the space for something else?

Conclusion

Creating a strong negotiating position and understanding your obligations are key to securing the best terms.  Sometimes you don’t realise whether the terms secured are good until a later date when some of the protection under service charge or repair comes into play.

Related content you might find useful:

Moving offices: Understanding your break clause

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