Head of Lease Terms - Ten Steps to a Successful negotiation

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1 Imperial College ThinkSpace Leasing Terminology Head of lease terms The principal terms upon which the lease will be drafted are detailed within a single document, entitles the Heads of Lease Terms. These terms are negotiated between the landlord s and the tenant s agents and, once agreed, they are forwarded to the parties solicitors to be reflected in the lease documents. The Heads of Lease Terms will contain the key financial, occupational and principle legal terms, but they are not normally legally binding on either party. Lease Term Lease Terms are dependent upon the particular are occupied. Incubator lease terms are commonly for 1 year and are renewable for up to 3-4 years. Other facilities will issue lease terms for 5 years with a 3 year break. London office occupiers most commonly agree leases for 5 to 15 year terms, with options to break the lease no earlier than the third year. Some larger occupiers may sign leases of 15 to 25 years, but these have become increasingly rare. Full repairing and insuring (FRI) lease This is the standard form of lease which an office tenant generally signs and it places the burden of cost for repairs and maintenance upon the occupier by way of a service charge. In addition, the tenant will be liable for the cost of insuring the property. Rent review The rent will be subject to an upwards only review, typically at every anniversary of the lease commencement date. The rent review mechanism should seek to establish the Open Market Rental Value of the demised premises, as if vacant and available in the market place and adopting an agreed set of assumptions. If the parties are unable to agree revised rent, there will be a default provision in the lease providing the rent to be determined by a third party. Break clauses These can be either Tenant Only, Landlord Only or Mutual break options. A Mutual option gives both the tenant and the landlord the right to break and vice versa for the Landlord Only option. The

2 mechanism and any conditions which must be adhered to, to operate the break successfully, will be detailed within the lease. The two key conditions will specify the timing of the Break Notice on the other party and the obligation for the tenant to provide vacant possession on the break date. Rent London office rents are quoted GBP per Square Foot per Annum. This rent is exclusive of Business Rates, Service Charge, Insurance and any other charges or taxes, such as VAT, unless otherwise stated. Incentives / rent free periods A rent free period is the principle inducement offered by landlords to tenants for the amount available will depend will depend upon various factors, such as term of lease the size and location of the unit, financial covenant strength of the tenant and the prevailing market conditions. It is important to note that during the rent free period, the tenant will still be required to pay any other outgoings, charged or taxes applicable. Should the tenancy include a tenant only option to break the tenant, a landlord will frequently structure an additional rent free period over this break option to incentivise the tenant to remain in occupation. Alienation assignment and subletting The ability of a tenant to assign or to sublet the premises, in whole or in part, is a very important element of the lease and will be considered in some cases however it is not typically granted for shorter lease terms however. The provision of these rights to a tenant is common in the UK office market but the conditions and mechanism are open to negotiation between the parties. In general, a landlord will be more restrictive with these rights is tenants are seeking to take a shorter term lease, or those with perceived weaker financial covenants. Dilapidations / reinstatement obligations The obligation on the tenant to reinstate the premises forms an important element of the Full Repairing & Insuring lease. It is normal for the occupier to return the premises to the landlord in a state agreed at the commencement of the lease. The tenant can either undertake the reinstatement works itself, or seek to agree the cost of the works required (known as Dilapidations ) with the landlord and pay the landlord the appropriate sum as compensation. Incubator Offices and Labs For tenants who are accepted into the incubator program require greater flexibility, Turn-key labs and offices provide a cost-effective alternative to traditional office space.

3 Step-by-step leasing procedures Each tenant s requirement is unique but the steps involved in securing premises are typically as follows: Step 1: the brief / search criteria Imperial College ThinkSpace will conduct a detailed discussion with the client to determine the core elements of their occupational requirement, which will include: Size of space required through space audit Anticipated growth of the business and its timing Location transport links, local amenities and neighbouring occupiers Culture, style and type of building Budget Competitor and affiliate trends Facilities and specification required (e.g. Labs, equipment, M&E, IT, telecoms, and occupational density) Corporate Social Responsibility and environmental considerations Specific requirements Step 2: Reporting and initial selection Once the occupational requirement has been defined, Imperial College ThinkSpace will provide information on a range of potential options for consideration, sourced from: Current availability Internal and external databases Development pipeline planned future new buildings and refurbishments for which a preleasing agreement could be available Lease events Tenant breaks and expires In consultation with the tenant, a list of potential property options will be drawn up, together with an indication of the likely achievable leasing terms. Step 3: Inspections Based on the initial selection made by the tenant, Imperial College ThinkSpace will arrange for accompanied site inspections. Simultaneously, it is advisable for the client to employ the services of a fit-out contractor or project manager, to provide initial test fit plans and technical input or potential fit-out for use.

4 Step 4: Short-listing Having inspected the selected options, a short-list of favoured properties will be drawn-up and these can be assessed by modelling the financial terms on offer for the lifecycle of the available lease. Step 5: Negotiation The key financial, occupational and legal terms are then negotiated between Imperial College ThinkSpace and the landlord s agent. During this process Imperial College ThinkSpace will be acting on the client s behalf providing impartial advice and information on offers received and any responses can be reflected in the financial model to arrive at like-for-like comparison of the bottom line terms for each short-listed property. Step 6: Heads of lease terms The agreed principal terms negotiated between the landlord and the occupier form the Heads of Lease Terms. A document that is forwarded to the parties solicitors to form the basis of lease for the premises (see Leasing Terminology) Step 7: Building survey A full structural and mechanical / electric survey should be carried out and can be undertaken by Imperial College ThinkSpace. The head of lease terms will specify this as a condition of the agreement. Step 8: Legal due diligence Solicitor s tent to take a number of weeks to agree the terms of the new lease, following which engrossed documents will be sent to the occupier and then the landlord for signature. Once signed and exchanged the lease forms a binding contract and the occupier will generally receive possession of the demise on the day of exchange. Step 9: Fit out new offices It is important to ensure fit-out contractors, and/or project managers, are involved from an early stage in the proposed fit-out of the demise. The consultants/contractors should provide drawings, plans and a Scope of Work, in order to obtain the landlord s approval and therefore be in a position to start on site at the earliest opportunity. The Project Management & Fit-out works sections provides additional detail on the fit-out process for an occupier. Step 10: Taking occupation / reinstatement of previous premises When the fit-out works have been completed, the premises should be ready for occupation. If the tenant is relocating from other premises, the previous premises may need to be reinstated in line with the previous lease provisions.

5 Project management of the fit-out and relocation process Imperial College ThinkSpace Project Management Team provide a seamless extension to our agency team service, to guide the client through the entire project lifespan. Our project management approach brings with it a total commitment to enhancing operational efficiency and encompasses the following key tasks. Design team selection As specialists in SME and corporate fit out projects, we are able to identify the most appropriate design team members for our clients projects and, through competitive fee bidding, interview and analysis, ensure that our clients work with the right teams and achieve best value. Design management Acting as the bridge between the client and the contractor, the Project Management team translate the client brief, gathered at the needs analysis stage, into a working technical design that can be understood by contractors. This ensures that the design is progressed from concept ideas through to detailed construction package. Closing out the project This stage of a project can be as important as the development of the initial brief. Closing out of the construction works must be carefully monitored to minimise defects at completion, check that all technical information and user manuals are in place and that the transition between construction and occupation is as smooth as possible. There are numerous procurement routes which can be selected to achieve the client s fit-out requirement; each has a different programme and timescale but to ensure quality and best value is achieved, it is necessary to start the process approximately 3-6 months prior to commencing work on site. Landlord s approval Landlords will be very conscious of works proposed by tenants and Imperial College ThinkSpace Project Managers will make sure that the design is fully communicated to and understood by the landlord s representatives and ensure that necessary approvals are in place before works commence. Build out Through rigorous monitoring and administration of the fit-out construction works we ensure that the client brief continues to be at the forefront of the project team s mind, the technical detail and quality is achieved, costs are carefully managed and reported and the timeline is maintained.

6 Occupier s do s and don ts Do s Re-Examine your business plan to ensure all aspects the company s future growth trajectory are considered. Factor in anticipated head count growth process and work place changes to your business during the lease term Involve a team of specialists (whether internal or external consultants) to consider IT, other specialist equipment, fit-out and other technical elements of your requirement from the outset Consult and involve key staff both on administrative, operational, scientific and technical level, not just C levels excess. Consult and brief your staff about the move to ease the transition process Prepare evidence of the lessee/guarantor s financial covenant strength and discuss the implications of its relative strength with your leasing advisor at an early stage Prepare the initial decision making procedure and structure needed to ensure the key decisions makers are aware of the process and are ready to participate when necessary Don ts Look at only the Rent Per Sq Ft; it is better to compare buildings on their overall costs Leave the relocation until the last minute, as it will certainly limit your options and may cost your company financially Be afraid of asking for advice and assistance. Imperial College ThinkSpace are here to help your company throughout the whole process Base the size of your requirement on the amount of space you currently occupy; base it on your future needs Perceive the relocation only in the short-term but in relation to your long-term business plan

7 Imperial College ThinkSpace specialists to make your move easier There are several facets of a relocation for which an occupier will benefit from the specialist advice and Imperial College ThinkSpace are able to offer this advice through the following services Project management The Imperial College ThinkSpace PM team are able to advise on a range of occupational issues, including an audit of your existing premises to ascertain the quantity of space currently needed, advice regarding costs for fitting out and furnishing new premises and either full projectmanagement of the fit-out or assisting as Tenant Representative with a Design & Build contractor Dilapidations An occupier s liability to reinstate its premises at the end of a lease is detailed within the yielding up provisions within the document. Our specialist dilapidations team will ensure the works (or financial settlement) required to meet your reinstatement obligation do not exceed those reasonably required. Service charge Each building has an individual Service Charge regime and, from an occupiers perspective, it is important to know what items are, and are not, contained within the budget. Rating Business Rates are the UK tax on commercial accommodation and are commonly the second largest occupational cost after rent for a tenant. Capital allowances Capital allowances are the only means of providing tax relief for capital expenditure (including fitting out or refurbishing leased space) incurred by both UK and overseas taxpayers on commercial property. Imperial College Thinkspace s multi-disciplinary approach utilises a combination with the required specialist skills, coupled with a proven track record with HM Revenue & Customs to ensure that our clients tax saving position is constantly truly maximised.