Taking on a New Lease? Don’t Just Think Short Term

There are two areas where, as an office occupier taking on a new lease, you can ‘win’ or ‘lose’ – the immediate commercial terms, and the commercial terms that bite or benefit in the future, writes Hannah Rodgers, leasing and acquisition graduate surveyor at Campbell Gordon

The immediate commercial terms

Most occupiers are pretty familiar with the idea of getting a great deal in terms of rent and rent-free. Historically a three-month rent free period was granted ‘for a fit-out period’, now as most occupiers know, it is a fundamental part of the commercial deal. If a tenant takes on a new lease for say five years without a break, often occupiers can secure 6 to 12 months rent free. It is important to stress however that it does vary a great deal, and for some buildings and in some circumstances even bigger rent frees can be secured. Some occupiers however, make the mistake of assuming they can always get a big rent free. That is not the case. For higher quality in-demand offices rent frees can sometimes be much lower. It varies, and keeps changing – in response to the immediate supply and demand position for each micro market across our Thames Valley region.

There are other ways to secure immediate commercial benefit. For example, occasionally some landlords will allow early access for aspects of fit-out works prior to the commencement of the lease, thereby securing in effect extra rent free. This is unusual however and is not without risk

Future commercial position

Often we find occupiers focus very heavily on the immediate commercial deal. In other words the rent they are paying and the rent-free period, but it is important to look well beyond that. Agreements reached in relation to alienation provisions, ie the ability, and character, of subletting and assignment provisions, can have a profound impact years down the line.

Alienation is not the only area of impact. Break options are often considered as part of the ‘immediate’ commercial terms. However, occupiers don’t then consider the details. The length of a notice period on a break option can have a very significant impact on a commercial negotiation in the future. An occupier may be approaching their break date and be considering whether they want to leave or stay in the space. They may consider they would stay, but only for the right deal. If the occupier then seeks to renegotiate the terms in advance of the break date it makes a very big difference to be able to do this will ahead of any notice date, so they are not forced to serve the Notice and jump one way or the other.

There are many other apparently minor matters that are negotiated at either the commercial negotiations stage, or between solicitors, that can have a big impact in the future. Perhaps the biggest is whether a lease benefits from the protection of the security of tenure provisions of the 1954 Act. There are many aspects of this protection and its impact, but maybe the most significant from a purely practical point of view is the ability to continue occupation of a space beyond the lease expiry. This fact can have a very significant impact on the posture of a landlord and tenant in a renewal negotiation.