Exit Series part 2: Consolidating satellite offices into one HQ

You’ve made your decision to leave. You’ve made your decision to take a shiny new office. So what’s next?

This article explores the key things you should factor into vacating your current offices.

What have you got?

Firstly, you need to know your legal position. You’ll fall into one of two categories:

1. A protected tenant under the Landlord and Tenant Act 1954; or, rather unsurprisingly

2. An unprotected tenant.

It does matter, for reasons that will become clear. Unless the lease was contracted-out at the outset, it’s likely to be a ‘protected lease’. To be a protected lease, the following must apply:

1. The tenant must have exclusive possession;

2. The tenant must occupy for business use only and pay a rent; and

3. The lease must be granted for a fixed term.

If you have a protected lease, then at the expiration of the contractual term, the tenancy itself continues (“holding over”) on the terms of the expired lease until either landlord or tenant serves notice to bring it to an end. For a tenant, this notice period is three months, unless it is still within the contractual term, in which case it can just vacate at the end of the term (though this isn’t quite as simple as it sounds). Whilst this may not be as important to a relocating tenant, it can buy vital overlap time to ensure the business can continue to operate as the new premises are being fitted out. It may help the tenant avoid needing to take temporary overlap space or pay for items to go into storage.

An unprotected lease, by contrast, doesn’t afford a tenant the right to remain at the end of the lease, nor to demand a new one. More often than not, leases are contracted-out and so are unprotected: landlords want more control over their assets and to ensure that they can recover it or renegotiate the terms at lease expiry.

Whether you hold over, agree a short lease extension, or take some temporary space, chances are that you’ll need some premises during the fit-out period. Covid-19 has taught companies how to be more agile and to work remotely - so this issue may be less acute nowadays - however it’s likely that you will still need physical premises for core-staff, including IT, and to house servers and other key operational equipment. Depending on the nature of the business, client meeting space might be essential too.

Consolidating

If, like many other businesses in recent years, you are consolidating all offices into one HQ, you need to be even more alive to the complexities. A good project manager, whether internal or an external consultant, will be worth their weight in gold. Your lawyers will also be able to analyse your existing tenancies and create an exit strategy. The likelihood is that your landlord will be different across your different locations and, unless you have had the foresight to plan for this years before, your leases will have different expiration dates. Depending on the lead time for the new headquarters though, there may still be an opportunity to align your leases. Some of this may be in your control: perhaps you have a tenant-break right for example. If not, you’ll need to engage with your landlord and discuss your options. The most common ways of exiting office premises are:

1. Lease surrender: this brings the lease to an end by the tenant ‘surrendering up’ its tenancy to the landlord. Unless there’s particular value in the lease, or the landlord is very keen to take the premises back (perhaps it wants to use the premises itself, has a high-value tenant waiting in the wings, or wants to redevelop the building), the tenant may have to pay a surrender premium. The amounts will vary depending on the term remaining, the rent payable and the bargaining strength of the parties amongst other things. Surrenders are a neat and tidy way of exiting space – but you’ll probably have to pay. You’ll probably have to factor in dilapidations too – see more on this below.

2. Assignment: this transfers the lease to an incoming tenant who takes over the balance of the lease’s term. In the majority of cases, an outgoing tenant will need to give an authorised guarantee agreement (AGA) to guarantee the incoming tenant’s performance of the lease obligations until either the lease ends or that tenant subsequently assigns its interest.

3. Subletting: similar to assignment, you’re no longer in occupation of the premises, however you’re still the tenant and are still liable to pay the rent to your landlord. Your subtenant should reimburse you for all, or most of this, however. If it’s particularly valuable, you may be able to charge a higher rent than you pay under your lease. The downsides are that your subtenant may fall away, leaving you on the hook and potentially paying rent for surplus space, and also you still have an obligation to reinstate the premises at the end of the term. In the case of the latter though, your sublease should impose obligations on the subtenant to reinstate, but it is still an added complexity and requires forethought.

4. Licensing your space: similar to a subletting, but instead of creating a formal tenancy, a licence to occupy is created. These are more common amongst group companies or business associates working on projects together, but can be a quick, inexpensive and effective short-term solution to bring in capital while relocating.

Your own situation may be a combination of the above and different landlords will hold different positions. The earlier you start to map out your way forwards though, the better.

Consider your reinstatement

While reviewing your exit strategy, you should also consider your reinstatement obligations, and factor in both the time and cost implications across your offices. Most leases, other than very short ones, or ones that have a limited repairing obligation, will require a tenant to leave the premises more or less as they found them – sometimes in a better condition. This reinstatement obligation often leads to a dilapidations claim being brought by the landlord as a result of the tenant having failed to comply with these lease covenants (i.e. to repair, redecorate and to reinstate).

Broadly, a tenant has two options:

1. Do the reinstatement work itself; or

2. Negotiate a settlement with the landlord in lieu of carrying out the work.

Whichever option, the tenant should consider contacting a specialist dilapidations surveyor to analyse the underlying document(s) and to cost the different items of repair in a report, known as a dilapidations schedule. This dilapidations schedule can be used to negotiate the settlement sum with the landlord in an effort to limit or minimise the tenant’s cost-exposure.

Timings-wise, to avoid being left without option one, you should proactively assess how long the works might take to carry out yourself (say six to nine months out depending on the type of property) and getting your costings. This then puts you in control of your own destiny. You should also set aside sufficient funds at the earliest stage, so you are not left scrabbling around for the pounds and pence.

Anything else?

Yes. Three main things.

1. Supplier contracts: there may be a number of these to terminate, vary or transfer to your new premises. Some contracts may have fixed terms and so require an early exit payment. Others may be vital to the operation of the business and so will come with you. Either way, considering each and getting organised will help.

2. Existing wayleaves: most commonly, wayleave agreements deal with the provision of fibre to a tenant’s premises. They are governed by the Telecoms Code; legislation which heavily favours the operator, providing them with rights to remain in situ even after the subscribing tenant has vacated. In our experience, these aren’t addressed early enough and can lead to some fraught negotiations, or ongoing liabilities. Plan ahead. If you’ve contracted to take your new HQ already, you may be able to negotiate with your operator to bring the current wayleave to an end in exchange for signing up to a new one.

3. Stocktake: you need to work out what’s coming with you and what isn’t. To do this, you need to know what you have. Being organised will help when it comes to packing up and disposing of surplus kit, but also at the other end. Colour-coding and clear labelling is a must.

We’ve got extensive experience in guiding businesses through this process and have found that the companies that have spent time thinking things through in a considered manner are invariably the ones who achieve the best deal, incur the lowest legal spend and avoid the nasty surprises.

Click here to read the next article in this series which focuses on subletting; a flexible solution for corporate occupiers.