The HQ move FAQ – Tom Merrick comments for Estates Gazette

Originally posted in Estates Gazette Magazine November 2023 edition.

Businesses across the country are re-evaluating the suitability of their existing space. Many are choosing to downsize to make savings or to cater for more flexible working, while others require a bigger footprint to allow for growth. In some cases, existing space is just tired, so a more modern and collaborative workspace is needed to help retain and attract the best talent and to allow employees to thrive.

Businesses also need to consider what their long-term business plan is and how long they want to commit to space. Many businesses need a degree of flexibility which would enable them to exit space easily if circumstances or priorities change (even if such flexibility comes with a higher price tag).

What are some of the key things that businesses need to consider when looking for new space and who can help?

A property agent can help find the right space by taking into account the market, supply and demand, and the type and location of the building, and these will all have a bearing on what incentives a landlord may offer (whether it be rent-free periods, financial contributions to fitout costs or flexible terms). An experienced property agent will also be best placed to negotiate the optimum deal.

Location – businesses will need to decide whether they want to remain in their existing locality or move elsewhere. This could mean moving in or out of the city or splitting operations between several locations. Consideration should be given to where employees live and what transport links are available to them. The goal should be to encourage people back to the office by making it a destination with a purpose, so businesses should pay close attention to what amenities and social facilities are available in the local community. Cafés, restaurants, bars, fitness facilities, shops, parks and other outdoor space should all be factored in when considering a move.

Type of premises – this will largely be dictated by an occupier’s business needs, brand and budget. Many businesses are now committed to improving staff wellbeing and productivity and so a modern building with a contemporary look and state-of-the-art connectivity may be attractive (although such space will come at a premium). For others, their budget may only allow for refurbished space, which would still tick many boxes. An office interior specialist can help design the right space for the business and manage the fitout process.

Either way, the infrastructure and facilities a building has to offer whether that be smart technology, parking spaces, cycle stores, on-site café or a fitness wellbeing offering have become increasingly important in creating an environment which strikes a balance between hard work and promoting a healthy and happy workforce.

ESG, sustainability, wellbeing – there is now a greater focus on what environmental credentials a building has (including its energy and resource efficiency and whether they align with any ESG strategies and sustainability ambitions that a business (or its employees) may have.

How can a business exit its current space?

The starting point is to check the lease. The lease term may be due to expire, which may tie in nicely with any proposed move. It may be that a business needs to remain in occupation beyond the term expiry date to help facilitate a move and the landlord may be open to a short-term extension.

There could be a break option that can be exercised. If so, the lease will confirm how much notice would need to be given to the landlord to exercise the break, and any break conditions would need to be analysed carefully and complied with. Negotiating with the landlord to vary a break date could also be a solution.

If the lease term is not coming to an end or there is no suitable break option, an occupier could try to negotiate an early surrender of the lease back to the landlord (this would likely come at a price). Alternatively, the premises could be marketed for sale/letting, if permitted by the lease, and an application for landlord’s consent to assign/underlet would need to be made once a buyer/undertenant is found. Such an application would need to be submitted to the landlord in accordance with the terms of the lease to avoid delays in the process.

A legal adviser can assist with all aspects of a lease exit. This could include reviewing the terms and advising on dilapidations, break rights (and ensuring any break notice is validly served) and rights to assign or underlet (including what conditions and/or requirements are attached to such rights). For example, on a lease assignment, an outgoing tenant may be required to provide an authorised guarantee agreement to the landlord to ensure the incoming tenant complies with the lease (leaving the outgoing tenant with an ongoing liability). The terms of the lease will dictate what a landlord can and cannot require as a condition of providing consent.

A legal adviser can also negotiate and advise on the transactional documents that will need to be entered into. This may include a deed of surrender, a deed of assignment or an underlease (including an agreement to enter into such documents) as well as a licence to assign or underlet with the landlord (and any superior landlord, if required).

It can also negotiate the lease of the new premises (including any agreement to enter into the lease, which may be conditional on the landlord completing works) and any ancillary documents (such as a rent deposit deed, licence for alterations and/or wayleave agreement) with the landlord’s solicitor and carry out due diligence (such as investigating the landlord’s title, carrying out appropriate property searches and raising enquiries and reviewing replies). Once the lease has been completed, it can then deal with HMRC and Land Registry requirements.

What other practical things need to be considered when making the move?

The following steps should also be taken into account:

Discuss dilapidations with the landlord – dilapidations generally cover breaches of the tenant’s covenants relating to the physical state of the premises (such as the repairing, decorating, reinstatement and yielding-up covenants). The terms of the lease will need to be checked and consideration given to ways that any dilapidations liability could be minimised. Obtaining appropriate advice from a lawyer and/or dilapidations surveyor is recommended.

Get paperwork in order – an EPC, health and safety file service charge information, fire risk assessment, asbestos management report, landlord’s building insurance policy, business rates information, copies of service contracts, air-conditioning inspection reports and/or warranties/guarantees may all need to be made available. Also, undertake a new fire risk assessment and other appropriate safety assessments needed prior to or immediately following occupation of the new space to ensure compliance with all legal requirements.

IT and connectivity – identify as early as possible what telecommunications infrastructure is in the new building, work out the logistics of relocating any IT equipment with existing network providers and establish whether new equipment will need to be installed. Lead-in times for new telecommunication service connections can take several months, as can negotiating any wayleave agreement that may be required.
Utilities – close down existing accounts, establish available connections at the new premises and set up new accounts with the relevant suppliers.

Finalise key dates – the exit date for the existing space, the access date needed to start any fitout works in the new space and the date when employees can move in will all need to be thought through carefully. The programme for completing any landlord’s works and any tenant fit-out works will also need to be mapped out. Potential delays to the programme (e.g. due to supply chains) should also be factored in. One approach would be to set a target date for actual occupation of the chosen space and then work back, calculating the build time for any works and a lead-in time for appointing contractors, allowing four to eight weeks for the legal work, and then build in slippage for delays.

What costs should be borne in mind?

The following costs should be identified and a realistic budget set accordingly:

Potential dilapidations liability – this will largely depend on the condition of the space being vacated.

Premiums and other payments – there could be a surrender premium or break penalty payable to the landlord as a condition of surrendering an existing lease or exercising a break option. A reverse premium or other financial incentive may be payable to an assignee for taking the lease. There may be a rent deposit due back from your existing landlord, although this may need to be allocated to a rent deposit payable for the new space.

New premises costs – relocation costs, costs to fitout the new space and upgrade or install IT equipment, rent, service charge and other payments due under the new lease, business rates, stamp duty land tax (England)/land transaction tax (Wales) and any rent deposit required by your new landlord would also need to be considered.

Professional costs – budget for the cost of those professionals involved in the process. A project like this can quite easily put pressure on any budget, so it is also sensible to allow for potential overspend.

Worth the effort

The way we work is evolving rapidly, as businesses and employees strive to work in a better, smarter and more sustainable way. While an office relocation can seem daunting, a new office environment can help improve staff wellbeing and productivity and reinvigorate the workforce at a time when they need it most. Being organised, focused, well advised and communicating effectively with all parties involved is therefore key.