By Giles Knapman, Director of Space Property Consulting
Leasehold office property costs are frequently the third highest expense component for typical business space users. Given that the standard of offices occupied by some the larger law firms is of premium/ A grade quality, with consequential rental levels, this cost element may even be the second highest after personnel.
Key Issues to Consider
1. Volume of space
Property cost components
Below are the principal (certainly non exhaustive) components that you need to discuss in any premises stay/ go exercise:
- Rental - is it net or gross? Is it fair and comparable to other options
- Outgoings - what is included, comparison to others, ensure capital cost items are excluded. Part floor occupiers take particular care on common areas
- Incentives - these are highly market dependent and can take the form of contribution to fit out, rent free or rental abatement or a combination. Landlords typically negotiate more on incentive than the 'face' rental.
- Lease term - ensure the desired term reflects the right balance between amortisation of fit out cost/ longevity V the risk of an extended lease liability
- Premises area - ensure it is measured to NLA
- Option terms - should ideally be shorter than the initial term. Example: 3 + 3 years following a 7 year term
- Rent reviews - typically fixed increases per annum with a market review (on equitable terms) at option!
- Fit out - is the existing fit out exhausted? Is there churn space available in the existing building? Are there external premises available with a fit out and how usable is it? How much should a new fit out cost (this varies enormously but a sensible range for a reasonable to good quality is $1000 to $1800/sqm)
- Reinstatement - inheriting an existing fit out, length of term taken and option terms all have an impact on the extent of liability which should be agreed to. A full 'make good liability' at lease expiry currently ranges from $150 to $300/sqm for a more intricate fit out. Different markets have different expectations on this liability.
- Fair and unrestricted alienation clauses
- Expansion and contraction rights
- Access period for fit out/ allowance for delays
- NABERS rating
- Redecoration clauses.
Dangers to Avoid
My experience of over 13 years acting for tenants tells me that the most significant dangers to for firms to avoid when negotiating leases are:
- Leaving things too late
- Not being represented
- Taking 'advice' from landlord agents when not represented
- Failing to ensure that the right internal person is dealing with the issue
- Not keeping matters confidential.