Legal considerations when moving into a new office
Welcome back to our series on how to prepare for an office move. Last time we were looking at the considerations you need to make when leaving your current lease. This time we’re going to be looking at the legal considerations you need to take into account when moving into a new office.
Yet again we have been lucky enough to partner up with our friends at Knights PLC who have provided some invaluable information in the paragraphs that follow.
There are effectively two ways you can acquire a new office: the first is in purchasing your new office and the second is in leasing a new office to rent. Below Knights PLC breakdown how to approach both scenarios.
Purchasing a new office
In the same way as purchasing a house, a business can purchase its premises outright. This does not happen too often, as there will be a lack of flexibility. As for leases, the tenant’s solicitors will need to investigate the title and carry out searches. SDLT and Land Registry fees will apply.
Leases and renting a new office
Perhaps you’re moving into a rented office, if that’s the case, you’ll likely fall into one of the following three scenarios.
Signing a new lease
In other words, a completely new lease arrangement with the landlord of vacant premises. Terms for this will usually be negotiated between agents acting for the landlord and the tenant and the agreed terms will very much reflect what is the usual market practice at the time. The landlord will want to settle a fully repairing and insuring lease for a reasonably long certain term, whereas the tenant will often want more flexibility.
The following areas are often points for negotiation with a new lease on an office:
- Length of term – leases with a term of over 7 years require registration at the Land Registry.
- Rent – a more ‘tenant friendly’ lease may result in higher rent. Any rent-free period to reflect the cost of the tenant’s fit-out works may be negotiated.
- Repair liability – this will depend on the existing condition of the premises and if the condition is poor at the outset the parties might agree to a lower standard of repair e.g. ‘good repair’ or agree that the repair liability is limited by reference to a schedule of condition which the parties will agree and attach to the lease.
- Service charge – it is important to get clarity on what can be charged for and to obtain historic accounts. Sometimes the parties might agree on a cap.
- Rent reviews – timings, basis (open market, RPI or other), could be SDLT implications if there is a rent review in the first 5 years
- Security of tenure – is the lease within or contracted out of LTA 1954? Landlords often require contracting out so that they are in control of new lease terms once the current lease expires.
- Break clauses – it is often useful to have one at the same date as a rent review so that the tenant can break the lease if the rent is going to increase greatly on the review date. As discussed in our last article, care should be taken with conditions for a valid break notice and in particular, a condition requiring ‘vacant possession’ should be avoided if possible.
- Assignment / subletting – the tenant will want the ability to do this with as few conditions as possible. Conversely, the landlord will want some control and in particular, will want to be able on assignment to receive evidence that the incoming tenant has sufficient funds to meet the lease obligations. They will also want to be able to impose conditions such as an AGA, rent deposit and personal or parent company guarantees etc.
Once the main heads of terms are agreed, the solicitors are instructed and the new lease documents will be agreed upon and completed. This will usually require the tenant’s legal adviser to investigate the title, carry out searches and negotiate some drafting points in the lease. This can often be time-consuming and the solicitor may need clarification or instructions on some points (especially if there is a disagreement) so sufficient time should be built into the programme for all this to be done.
Assignment of an existing lease
In other words, you are ‘stepping in’ as a tenant under an existing lease. This is in some ways the most straightforward way to take on a new property as the terms of the lease are already settled and are (presumably) in successful operation.
One of the main points to note is that the assignee will take on the breaches of the tenant. So if the property is in poor repair it will be the assignees’ responsibility to put it right.
There is however some scope to negotiate a variation of terms with the landlord as part of the licence to assign. This will very much depend on the bargaining power of the parties.
In this situation, a formal licence to assign with the landlord is required. This will incorporate the terms and conditions that the landlord will wish to impose on the assignee and the grounds on which the outgoing tenant may exit.
Subletting of an existing lease
This is perhaps most common where only part of the relevant building is being underlet. Similar parts apply to the assignment. However, a completely new lease (underlease) will also need to be negotiated which often will need to follow the terms of the existing lease. The landlord will need to approve the term of the lease the tenant takes in a formal licence. This option can prove expensive and should future consents for alterations be needed then consent will be needed from more than one party.
Other documents that might be required
a) Agreement for lease – this would be needed if for example there are pre-conditions to the grant of the new lease. These might be the completion of the landlord’s works (reinstating dilapidations by a previous tenant), the securing of planning permission by the tenant for its proposed use, the surrender of a sitting tenant’s lease and so on.
b) Rent deposit deed – to govern any rental deposit required by the landlord.
c) Licence for alterations – needed if the tenant needs to carry out fit-out or other works to the property. This will usually say that the landlord can require reinstatement of the original condition at the end of the tenancy. The tenant may want this document (and perhaps also the lease) to require reinstatement ‘where reasonable’ – so that for example if the tenant’s works will add to the letting value or ease of letting for the landlord (or other reasonable ground) they can seek the landlord’s agreement to leave the works in place at the end of the term. It is important to get consent for any fit out prior to taking the lease.
Other Legal costs when moving office
As mentioned above the party going into the lease should want to carry out property searches via their solicitor, they will typically cost £500-600. Searches will reveal whether the property can be used for its intended purpose without restriction, that there are no unforeseen liabilities (e.g environmental clean-up) and the property has all necessary rights such as access.
Following the completion of the lease or purchase, there may be SDLT to pay. This is calculated as a percentage of the net present value of the rent over the lease term. SDLT on a purchase is based on a percentage of the price. For a Lease, this should be considered at the heads of terms stage as it can amount to a hefty sum. If the lease is over 7 years it will need to be registered at the Land Registry, again the fee depends on the rent.
From a legal perspective depending on the route taken moving premises can be time-consuming and costly. That said time and money invested in legal services and advice at the outset can avoid a lot of difficulties later on.
Up next
Next to come in our series on moving office is everything you need to prepare for the move day.