Legal briefing | |

Things to think about when considering an HQ move

Things to think about when considering an HQ move

Overview

As working practices change and the shape of business adjusts to the events of the past 18 months, enquiries and appetite for relocating offices have picked up pace. 

Office relocation can be a complicated logistical exercise and a huge decision for any business. We set out below some of the key factors to consider from a real estate perspective on any potential HQ move:

Terms of existing occupation

Before you can move anywhere, what are your options for exiting your current premises? If the property is held under a lease, when does that lease expire and (if the expiration date outside of your required timeframe) do you have any options to terminate the lease more quickly, e.g. by exercising a break right?

Break rights

Be aware that successful exercise of break rights usually depends on compliance with strict notice provisions and conditions relating to the physical condition and/or occupation of the premises. Make sure these are reviewed and advice sought well in advance. You will typically need to make sure that both you and any other occupants of the premises have vacated by the break date. 

In addition, make sure that you consider the repairing and reinstatement obligations under your current lease well in advance. The property will either need to be put back into the condition specified by your lease or (and this is more frequently the case) you and the landlord will have to agree a figure for what is known as 'dilapidations' – essentially an agreed estimate of the cost of those works.

An alternative, if your lease is not expiring and does not contain any break rights, is to assign or underlet the premises. Your lease will set out whether either are permitted and the terms that need to be complied with if so. Both will typically require landlord's consent.

Assignment

An assignment is almost always required to be of the whole of the premises, and the landlord will want to ensure that the assignee can comply with the terms of the lease before granting its consent to assign. An outgoing tenant will usually be asked to provide what is known as an 'authorised guarantee agreement' (an "AGA") to guarantee the performance by the assignee of the tenant covenants in the lease until the assignee is itself released on a further assignment or at the end of the term. It is therefore important to scrutinise the accounts of any potential purchaser of your lease.

Underletting

Conversely, an underletting creates a new lease between you as tenant and a third party as undertenant. It leaves the relationship between the current tenant and the landlord in place, meaning that you (as the current tenant) will still be ultimately responsible for complying with the leasehold covenants for the remainder of the term. This gives you the opportunity to underlet at a lower rent than you are currently paying. There may be circumstances where this commercially makes sense, although note that leases frequently specify that underleases cannot be at below open market rent so it will be important to consider this carefully.

New build or existing office

Taking a pre-let of a building yet to be developed allows you to have a much greater input into the design and specification of your new premises. Employees and management can really influence the design and facilities that are most important to them, and for many businesses high-specification grade A space is an essential proposition as they ease employees back into the office. Careful construction advice will be required to ensure that the timescale for development is properly managed, and that all appropriate warranties are procured, but a new-build office can be an exciting proposition.

On the other hand, an established office premises is usually less likely to have any construction or snagging issues, and is usually available for occupation within a shorter timescale.  In this case, you will likely be seeking more of a cosmetic overhaul or smaller scale refurbishment. If the property is leasehold, early engagement with the landlord will be essential to check what alterations are permitted by the lease and to agree the necessary licences to allow works to go ahead in good time for occupation.

For either new or existing premises, you will also want to check the terms of any lease to ensure that ongoing repairs and reconfiguration can be carried out when required. As work practices evolve, can floorplates be reconfigured for your ideal way of working? Will you need individual offices, or a combination of open plan with break-out spaces or meeting rooms? It is fairly standard for leases to allow non-structural partitions to be moved around without requiring a landlord's consent, but will you also need flexibility to make internal structural alterations too? Are there any external alterations that might also be required e.g. to install more cycle parking and storage, or shelters for external meeting and socialising space?

Whole or part of a building

Taking occupation of the whole of a building gives a tenant the largest degree of control. Even if the property is held under a lease, it is likely that the tenant will be given significant freedoms in how it runs and operates a premises.

Conversely, if a premises is only part of a building, it will usually be held under a lease, and there are likely to be many provisions that control how the premises is used and operated. This is typically for the benefit of the property and all of its tenants and ensures that common areas and services – e.g. receptions, lifts, car parking areas – are operated equitably. 

Taking occupation of only part of a building necessarily means that you will be sharing occupation of the building. For some businesses, the identity of other tenants is very important e.g. if two businesses have strong but conflicting principles, they might not wish to be located physically alongside one another. Conversely, direct market competitors might be relatively aligned in their principles but could be equally averse to having the same physical address.

In some buildings, tenants might be granted a say as to the identity of other new tenants. However, even at the most basic level, a new tenant will typically want to investigate the identity and conduct of the other occupiers sufficiently to ensure that they are likely to be good neighbours who can and will comply with their leasehold covenants. It is also important to ensure that leases of part of a multi-let building oblige the landlord to enforce the terms of neighbouring tenants' leases if there is a problem during the lease term.

For specific concerns, e.g. if sharing facilities is problematic for confidentiality reasons, there may be scope to set up a 'building within a building' so that selected lift lobbies and entrances are operated for one occupant only. 

Taking part of a building only may also give more flexibility as a business expands or contracts. It is common to see businesses take individual leases of different floors of the same building so that they can be terminated independently if required. Rights to offer individual floors or parts of floors back to a landlord can be included in lease drafting. Conversely, rights of pre-emption for other floors in the building can be negotiated in anticipation of future business expansion. Given the recent upheaval in working arrangements, and the lack of certainty as to balance of office-based vs remote working in the longer term, these kinds of arrangements can give a business significant flexibility.

Services and management

If the property is leasehold, will the services be managed by the landlord in return for payment of a service charge or will you, as tenant, be responsible for procuring and managing the necessary services yourself? 

If the property is multi-let, then the landlord will almost always be responsible for providing the services, at least to the common parts, in return for each of the tenants paying a service charge. On the one hand, this gives each tenant less control over the various services and they may be less personal and/or aligned with each tenant's particular corporate culture. On the other hand, it is typically a lower hassle option, and you may benefit from economies of scale and the expertise of the landlord or its management company. 

If a landlord is providing services, a careful review of the service charge provisions and previous years' accounts will be required. This is essential, both to ensure that the services are comprehensive enough for your requirements, but also that they are controlled enough so that the landlord is not recovering more than is equitable from any one tenant or more than is appropriate given the nature of the building. It will also be important to find out whether there is a sinking fund and whether any large-scale improvements are planned during the term of the proposed lease.

HQ branding

Headquarters typically require exterior signage and branding. You will need to ensure that there are no title or planning restrictions that will prevent this, and also that the terms of any lease also permit the kind of signage that you require.

A lease may restrict external alterations, particularly if it is a lease of part, but even leases of whole buildings may strictly control signage if the building is part of a wider estate controlled by the landlord.

In addition to the building itself, are there any other external areas that you would like to display branding or directional signage in, for example, in any car parks? You will need rights to install these and potentially connect to an electricity supply for lighting. How will these be kept cleaned and maintained; will you need to pay a fee for this?  If the building is occupied by more than one tenant, does each tenant have a right to display their signs and branding and how is the relative location and interplay between them governed? 

Green leases/carbon footprint

Whether you take the whole or part of a building, and whether it is freehold or leasehold, buildings contribute significantly towards the UK's total carbon footprint, and many developers, landlords and tenants are now factoring in a building's energy performance and its eco-credentials into their decisions. There are several industry certifications that measure sustainability and 'green' credentials – one of the best known being BREEAM. When choosing a new headquarters, a good rating is likely to be a matter of importance for businesses, employees and clients, although it will typically be the landlord who dictates the green credentials of a property rather than the tenant.

If your new office will be held leasehold, there are a variety of 'green' lease provisions that might be included in your lease by the landlord, or that you could request if absent. These include provisions around sustainable energy use, efficiency measures, waste reduction and management, and water efficiency. They might also relax requirements on repairing with 'new' materials, and instead permit or encourage reclaimed or recycled materials.  If a lease does include green provisions, it will be important for you as tenant to consider whether you are happy with them on a practical level, and also to ensure that they apply to and that the costs are equitably apportioned between all leases in a multi-let building.

On a more practical level, is there provision for cycle-storage with associated lockers, showers and changing rooms? Are there electric vehicle charging points? Will there be sufficient storage and other facilities for recycling office waste like paper and printer cartridges, and food waste from canteens?

Location

Do you want to stay near to your current office, or are you looking for somewhere new? Sticking near to your current location may allow you to more easily retain existing clients and staff who are already used to either living near or traveling to that office. However, moving to a new location can be exciting and refreshing and potentially help to shift or update the 'brand' of your business, particularly if the new area has a strong reputation in a particular business sector, or the building itself is well-known.

Whichever location you choose, thorough investigation into the local amenities will be vital. Are the transport links good? Are there places to eat and socialise nearby? Are there established services, particularly good internet, in situ? Are there any major (and potentially disruptive) works planned in the vicinity? Much of this data can now be publicly accessed for free in advance of submitting any formal property searches, so several locations can be easily considered in detail at an early stage.

Final word

These seven points are key factors in any relocation decision, from a real estate perspective, but undoubtedly any business will have additional parameters and considerations specific to them. Making the decision to move office, and particularly making the decision to move headquarters, is a huge undertaking, but one that, with careful thought and advice, can be very exciting and profitable in many ways.

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