LONDON OFFICE LEASING
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OFFICE LEASING GUIDELINES
Leases in the United Kingdom are typically for longer terms than in continental Europe. Large occupiers commonly commit to leases for more than ten years. It is standard for a tenant occupying more than 5000 sq ft in a multi-tenanted building to sign a 10-year lease with a break clause after five years.
Leases in pre-let deals tend to extend to 15 years or more.
Shorter leases are available either for a rent premium or through the serviced offices sector where more flexible office solutions are offered.
Negotiable. Law gives tenant right to renew, but this right can be waived.
Options to break dependent on market conditions.
Negotiable. Typically every 5 years. Sometimes to market, usually upward only.
Rents are quoted in United Kingdom pounds (£/GBP) per square foot per year, typically on a net basis; i.e., excluding service charges, insurance, and property taxes. Rent for serviced offices normally includes these charges.
Rents are normally payable quarterly in advance.
Rents are normally reviewed and adjusted to open market level every five years, usually upward only. Between reviews, the amount payable is fixed. Some commercial landlords offer tenants more choices of lease terms and basis for rent review (e.g. inflation-linked).
Value Added Tax (VAT):
VAT is payable on rent if the building is elected for VAT. The current rate is 20%.
Where the property forms part of a large estate, such as Canary Wharf, a tenant may be liable for estate charges, which contribute toward the maintenance and operation of the estate's common parts. The estate charge does not form part of the service charge and is apportioned depending on the amount of space a tenant occupies on the estate.
Rent-free periods are negotiable and a common incentive, which depend on market conditions, the quality of the tenant taking the lease, and the length of the term. Rent-free periods can be substantial. In London on a ten year lease between 20 and 24 months rent-free is typical and currently achievable. Elsewhere in the U.K., the current rent-free period ranges between 6 and 30 months on a ten-year lease depending on the market.
Tenants pay a service charge that usually covers:
- Common costs of running the building, if multi-tenanted.
- Proportional costs of structural and repairs to common areas.
- Building insurance is usually, but not always included within the service charge.
- Management Fees: Seven to ten percent of the service charge expenditure is recoverable from a tenant as part of the service charge in multi-let buildings.
- Full Repairing and Insuring Leases (“FRI”): Most leases in the UK are FRI leases. In which a new tenant may become liable for items of repair to the building or replacement of a redundant plant, so tenants should exercise due diligence as to the condition of the building prior to signing a lease.
Security Deposit and Guarantees
The standard rule is that if a tenant is unable to provide three years worth of accounts in which operating profit is at least three times the annual rental liability, then the landlord may require a rental deposit (typically 6–12 months rent) and/ or a parent company/ bank guarantee. Standard practice is for a rent deposit to be held in an escrow account, and returned with interest after a tenant has fulfilled all its obligations.
Business Rates(i.e. occupational property tax) are payable by tenants / property owners. The Rates liability is calculated based on the rental value at the time of the last rating revaluation multiplied by a Government issued Rateable Value multiplier that is agreed upon annually. Business rates vary considerably but usually amount to 25–50% of the rent dependent on market/ geography.
VAT is always payable on rent, service charges and fit-out costs, but not on business rates. However, depending on the nature of a tenant's business it is sometimes possible to reclaim part or all of the VAT for the service charge.
Transaction taxes are payable by tenants on the acquisition of interests in land, both freehold and leasehold. In England, Wales and Northern Ireland this tax is known as Stamp Duty Land Tax (SDLT), whilst in Scotland the equivalent is Land & Buildings Transaction Tax (LBTT).
The tenant pays for its actual consumption of electricity, based on metered usage directly to the utility company. The cost of electricity used to run the building is included in the service charge.
Commonly, the cost of utilities such as water usage will be included as part of the service charge that a tenant will pay unless they have a significant water usage.
Car parking is usually included in the office rent, particularly outside Central London. In Central London, and in some major regional centres, tenants pay for car parking as additional rent, which can range from £2,500–6,000 per annum per space. Car parking may be part of the lease or arranged as a separate licence.
Holdover by Tenant
Where a lease is protected by the Landlord & Tenant Act 1954, either party is entitled to initiate the procedure for renewal within 12 months of the expiry and to then apply to the Courts to decide the terms of a new tenancy. Where this process has not been initiated or is delayed, the tenant has a right to hold over and the landlord cannot secure vacant possession unless the tenant decides to vacate or the Court agrees to the landlord's opposition to renewal.
The principle law governing renewal of office leases is the amended Landlord and Tenant Act 1954 (not applicable in Scotland)
The act provides security of tenure to a tenant and the right to apply for renewal of the tenancy. It requires compensation to tenants from landlords who refuse a tenant's request to renew. It limits the way in which a tenancy can be terminated to those specifically set out within the Act. Tenants must comply with several strict notice procedures to maintain the protection of the Act.
Option to Expand & Right of First Refusal
A right to expand within a lease is rare but negotiable. A right of first refusal for other space within the building is more common.
Right to Sublet
Where practical, tenants normally have the right to sublet in whole or in part, or assign in whole, although this right is restricted and subject to the consent of the landlord. Leases normally restrict the total number of separate occupancies within the space or building.
Termination or Break
Break options may be negotiable depending on market conditions for tenants to break at specified points in the tenancy, typically after five years.
Most leases contain covenants obligating the tenant to return the premises to the landlord on expiry in the same condition as it was delivered at the start of the term. This normally means removing fit-out partitioning, furniture and fixtures, and making good if appropriate.
Signage and Naming of Building
It is normal for a tenant occupying part of a building to have their name included in the building's reception tenant board. Where a tenant occupies the whole building, or a significant part of it (say 80%-plus), an agreement to have naming rights may be negotiated and inserted into the “Heads of Terms” and the lease as a binding agreement.
The landlord typically delivers space with ceilings, lighting, mechanical and electrical installations (including HVAC), raised floors and restrooms.
Tenant fit-out usually includes adaptation of the ceiling, mechanical and electrical installations, lighting, cabling and partitioning. Tenant fit-out generally needs the landlord's consent and must be done with licensed professionals, especially when moving or upgrading the landlord's mechanical and electrical equipment.
The tenant pays fit-out costs, although the landlord typically contributes with a rent-free period or capital contribution toward carpets, floor boxes, etc. Tenant fit-out costs for Class A or Prime buildings in major cities normally range from £50–150 per sq ft including construction, wiring, design fees, etc. but excluding furniture.
Legal fees are typically up to 5% of the annual rent.
Each party normally appoints and pays its own representatives.
- Disposal fees that landlords typically pay their agents equal 7.5–10% of the gross annual agreed rent, exclusive of incentive. They depend on sole/ joint agency and on building size and the number of agents involved. The fees quoted are typical of market rates.
- Acquisition fees are negotiable and variable. The industry standard is in the region of 10% of the gross annual agreed rent, exclusive of incentive. As well as a fixed percentage, there are a variety of other fee bases employed by acquisition agents including but not limited to: a base fee, base fee plus discretionary bonus, percentage of savings achieved and a performance related fee. The fee basis and amount depend on the market and the size of the instruction.
- Lease renewal fees: (1) Fees on behalf of the landlord are generally a fixed fee and percentage of net income achieved until next lease event. They vary significantly depending on the scale of the instruction and rent level. (2) Fees on behalf of lessee tend to be fixed fee plus percentage of savings achieved, and vary based on the scale of the instruction.
- Lease surrender fees tend to be a fixed fee and percentage of savings achieved against total liability, and depend on the scale of the instruction.
No standard office building classification exists; although the following specifications are used:
Grade A is the best space available, usually brand new, or best secondhand space, with top specification and prominent market image.
Grade B tends to be average quality secondhand space with a lower specification.
Grade C is poorer quality space, typically older and non-air conditioned with a lower standard of amenities and services.
Office measurements are normally based on the net internal area.