If you’re an innovative business taking commercial lab or office space, you need to consider budget, power and flexibility.
You should not assume that the sole costs involved in taking a lease are the annual rent and outgoings. Where the business is just occupying part of a building or taking an internal-only space, the landlord will require a service charge towards the upkeep of the common and external parts of the building along with a contribution towards the cost of insuring the building too. Additionally, if the building is on a science park, research campus or estate, there is usually an estate service charge payable. Without capping provisions, these can be significant.
Start-up or SMEs in the innovation sector are often asked to provide security in the form of a rent deposit, equivalent to three to six months of the annual rent. It is held by the landlord throughout the duration of the lease, so this also needs to be built into the budget.
Hidden costs include dilapidation payments requested by landlords either during or at the end of the lease period. Think about what state of repair the business must keep the property in during the term of the lease, and in what condition it must hand it back in as repair costs can be substantial.
Tax calculated on the level of rent, plus any VAT that is payable on it, is to be paid to HMRC within 14 days of the grant of a lease in the form of Stamp Duty Land Tax.
Increasingly, commercial lettings to technology and life science companies have fallen through because of the lack of sufficient power to the prospective property. When taking a new space, it is crucial for the ingoing occupier to check that it will have adequate power to successfully undertake its business, projects and research.
Demand for space for these types of businesses has been high over the last few years, resulting in offices, labs and other buildings being built quickly without thought given to the infrastructure to support tenants’ needs. The shortage of immediately available fitted lab space has resulted in landlords across the UK considering retrofitting existing office stock and delivering speculatively fitted lab space, which may not be sufficiently powered for the bespoke research or development needs of the tenant.
With blackouts also becoming a possible issue, ingoing tenants should check that there are back-up generators in place, particularly if business research involves uninterrupted storage at extreme temperatures. If there isn’t sufficient power, there may be an opportunity for the tenant to generate its own off grid power such as installing solar panels, for example. This could save costs and assist with a company’s environmental performance targets.
You should also think about the length of time you may need to operate from a property, whether there is sufficient space to grow and/or whether you may need a different type of space as the business’ outlook changes. Thought should, therefore, be given to how long the lease should be granted for, whether break rights should be included within it and whether the landlord can grant an option to the tenant to be able to take more space should it be needed.
It is advisable for prospective tenants to prepare a budget, undertake thorough due diligence on a property and consider the company’s evolving needs before moving forwards with taking commercial space. This will also speed up the legal process of the letting and minimalise the possibilities of pitfalls along the way.