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 basic rent.

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 proceed.

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.”