Leasing your first office – what do you need to know?
Things are going well and your business is growing. You are now considering leasing your first office. What potential costs do you need to factor into your decision?
Rent / Service Charge / Insurance
The obvious cost is rent, in addition to which you will also be required to pay insurance and a service charge.
In respect of insurance, you will usually be obliged to pay a fair proportion of the costs of the landlord insuring the building against specified risks and the total cost of the landlord insuring the premises for three years loss of rent.
Where you are taking a lease of part of the building, it is normal for the landlord to be responsible for maintaining the structure and exterior parts of the building. The landlord will recover these costs through a service charge. A well advised tenant should look carefully at the costs which can be included within the service charge. For example, one common point of contention is whether the costs of improving and promoting the building should be passed down to the tenants. A tenant with strong bargaining power will often introduce a service charge cap to ensure that its liability to the landlord in respect of the service charge is limited.
Often tenants have some help from an agent in finding premises and in negotiating a good deal with the landlord. As such, you will need to factor in the agent’s fee and also the fee of any solicitor you instruct to act for you in documenting and advising you of the lease terms.
A tenant is often well advised to have the premises surveyed prior to the grant of the lease and as such you should also budget for survey fees.
Registration Costs and Taxes
If your lease will be longer than 7 years, then it is compulsorily registrable at the Land Registry. There is a small fee (currently no more than £305) for making this registration application.
In addition, you may need to pay stamp duty land tax to HMRC on any premium that you pay for the lease and the rent payable pursuant to the lease. HMRC provide a calculator on their website which allows you to work out what is due in your particular circumstances: Stamp Duty Land Tax Calculator.
You may also be required to pay VAT on rent and any other payments made to the landlord. This depends on whether the landlord has “opted to tax” the premises. Further information on this should be available in the landlord’s replies to enquiries and a copy of the option should be included in the landlord’s sale pack. If VAT is payable, this is currently at 20%.
It is usual for relatively new businesses or special purchase vehicles to be required to provide the landlord with a rent deposit. This is normally equivalent to 3 to 9 months’ rent (inclusive of VAT, if any).
When you take a serviced office, the premises are often “plug and play”. This tends not to be the case when you lease office premises for a term of 5 or more years.
In carrying out your fit out works, you will no doubt have budgeted for building contractor fees, architect fees and building materials, but have you factored in the costs of obtaining the landlord’s consent to the works (assuming the works are prohibited or permitted only with landlord’s consent)?
If the works you are proposing doing are absolutely prohibited, you might need to pay the landlord a premium in order to obtain their consent. Where works are permitted with landlord’s consent, provided they are improvements, the landlord cannot request a premium as a condition of giving their consent.
In either circumstance the landlord is likely to require that any consent it gives to the works is documented in a licence to alter. Such documents are normally drafted and negotiated between solicitors. You will not only be responsible for your own legal costs, but the landlord is likely to require you to pay its legal costs too.
Assigning Your Interest in the Lease
It is a similar story should you wish to sell on your leasehold interest where assignment is either prohibited under your lease, or permitted only with landlord’s consent. If assignment is absolutely prohibited, the landlord could ask that you pay a premium for their consent. As for alterations, consent for the assignment of the lease will need to be documented in a licence to assign which is usually negotiated through solicitors. You, as the tenant, will be responsible for both sets of legal fees.
It is also worth noting that the lease may contain a requirement that, as a condition of the landlord giving its consent, you act as a guarantor for the lease obligations of the incoming tenant (i.e. the person to whom you sell your leasehold interest). If the incoming tenant defaults / becomes insolvent, you will be responsible for all the tenant obligations and in addition, could be asked to take a new lease of the premises for the balance of the term.
Perhaps an obvious one, but whilst the landlord of serviced office premises may lease premises to you on an all-inclusive basis, in more traditional lease arrangements tenants are responsible for all utilities and business rates.
In addition, if you require a new telecommunications line to be installed in the building, your service provider will likely require permission from both you and your landlord. This will be documented in a wayleave agreement. This wayleave agreement is normally negotiated through solicitors and you will be responsible for the landlord’s solicitor’s fees (in addition to your own solicitors’ fees).
And finally, the lease will prescribe the state in which you are required to hand the premises back. Usually, this is in good and substantial repair with all alterations reinstated. If you do not hand the lease back in this condition, then the landlord can serve on you a schedule of dilapidations detailing how much you are to pay them in compensation for not having delivered on this contractual obligation. This figure is normally negotiated between parties and a figure settled upon.
If you want to maintain some control over costs, it is worth considering complying with this obligation at the end of the term and having your own contractors carry out the necessary works.
To download our Lease Budgeting Guide, please click here.
Sophie Henwood is a Senior Associate in the Commercial Real Estate team at Boodle Hatfield.