The state of the market
Demand for big out-of-town developments has slackened in some
areas, yet overall demand for office space is high. According to the
latest commercial market study by RICS, commercial demand increased by
10% in the last quarter of 2010, with demand being greatest in London
and the south.
Hotspots include the West End and City of London, where prime space
sells at roughly £1000 and £70 per square foot. Areas such as
Manchester and Reading tend to be closer to the £30-35 per square foot
mark. For a fully air-conditioned office space elsewhere – for example
in smaller towns, cities or in industrial parks - expect to pay around
£15 per square foot.
But it’s a hard market to predict. Unlike the one-way bet of house
prices, the value of commercial property is more volatile and prices
fall as well as rise. In hot areas like the City and West End of London,
rents may be at a premium, but there are still bargains to be had
elsewhere. The trick is to scrutinise each element of the deal:
Leasing: Taking out a lease is normally cheaper in
the long term than opting for serviced accommodation and it gives you
more control over the office environment. Leases typically have
agreements of between three and 25 years and can offer long-term
stability While some leases are inflexible, tying you in to the whole of
the pre-agreed period, many leases today are shorter, with the average
lease lasting eight years. Study this before signing the contract. If
you are committing to a long lease, try to negotiate a low initial rent
or a rent-free period at the beginning. Also check the following: are
you able to assign the lease to someone else? Is the user clause
suitable for your business? And is there a break clause and what do you
get for your service charge?
Rent reviews and break clauses: Rent reviews are
normally included in the agreement. They usually occur every three or
five years and enable the landlord to increase the rent by either a
fixed or index-linked amount. They also give you the opportunity to
challenge the amount you are paying.
A break clause may also be negotiated as part of the lease terms.
This allows you to assess whether you want to continue renting without
having to wait until the term of the lease expires. This may be operable
on specific dates – anniversaries of the term start date, for example –
or at any time on requisite notice. Check the provisions carefully; one
day out and you may be committed to pay for the duration of the lease. A
tenant should look for a break conditional solely upon payment of the
Service charges: Your financial commitments when
renting include rent and business rates, a deposit (usually three or six
months’ rent), stamp duty, fitting-out costs, utility bills and a
service charge. Check exactly what is included in the charge for shared
services like maintenance, security, heating and cleaning.
Similarly, the charges can mount up, so make sure the terms are
spelled out clearly in the lease agreement. A commercial agent can
undertake to find out whether any major refurbishments of your building
are due and if so who will bear the cost. Tenants on short leases can
sometimes negotiate to get the charge capped, so they don’t end up
paying for renovations that will never benefit them. You can also
negotiate with some landlords to share some of the fitting-out costs.
Insurance: Business leases are typically of the
‘Full Repair and Insure’ (FRI) type, which means you as the tenant take
on repair and maintenance obligations and insurance costs for the
premises. It is important to be clear who insures what. If the landlord
insures, will the tenant be noted on the policy?
If the property is damaged by an insured risk, is the landlord
obliged to rebuild it and what happens if it cannot be rebuilt? Is the
rent suspended until the property is useable? The tenant will usually be
required to insure his own trade equipment and insure against public
and employer’s liability.
Ending the rental: On the face of it, the lease
will state a clear end date. However, commercial tenants can benefit
from the Landlord and Tenant Act 1954, which provides the right to ask
the landlord for a new lease when their old one expires, on
substantially the same terms.
But in a rapidly changing economy tenants are tending to move away
from longer rental periods. Leases of 25 years used to be standard, but
not anymore. More than two-thirds of the UK’s top 100 companies want
flexible leases, according to the FraserCRE annual review of corporate
occupiers, with three to five years being the most favoured term.
If the tenant carries out alterations at the property, the lease
may require these to be taken out at the end of the term; the cost of
this “reinstatement” will fall to the tenant and should be budgeted for.
Make sure you get the landlord’s written permission for alterations and
take a photographic record of the condition of the property before you
David Jackson, of Fernie Greaves, who represents both landlords and
tenants, offers this final word of advice. “Renting a building is
rather like a boxing match but without the Marquis of Queensbury Rules.
When the bell goes, remember to protect yourself at all times.”