National Business Space Partner Matthews & Goodman
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Property lease negotiations: How finance leaders can benefit

To most management teams, the opportunities presented by a property lease break or end are often overlooked. Mark Tillson examines how finance leaders can use this chance to improve their business’s bottom line.

4th Sep 2019
National Business Space Partner Matthews & Goodman
Columnist
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Offices to let
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As a lease nears its end, the managing director or CEO usually starts to dream of moving to smart new premises which reflects their organisation’s branding, culture, ambitions, self-perception and ability to attract and retain talent.

However, for most finance directors or CFOs, a lease end usually means a move – which translates into lost revenue, increased costs and business development disruption.

While a lease break window may be less disruptive, they often slip away because more pressing operational matters take priority.

Lease breaks or lease ends are, in fact, golden opportunities for hard-pressed finance leaders to squeeze more value from their existing workspace, reduce costs and review how their office could be a catalyst to achieve a desired culture change.

Lease break opportunities

Lease breaks are an opportunity for tenants to negotiate, with no contingent risk, because significant potential benefits include:

  • Reducing the space occupied: a major consideration for many in these uncertain economic times
  • Using the ‘break’ to negotiate more space in the same building – especially attractive to acquisitive companies where ‘cultural harmonisation’ between the acquiring and acquired teams is a desired/necessary outcome
  • Renegotiating lease terms
  • Negotiating a service charge holiday
  • A significant bonus to your bottom line, if you secure it.

In particular, the opportunity to review the service charge should never be missed as it could either fix the rate for the next five years, or new lease length, or be part of the negotiation to secure a rent-free period.

New work practice opportunities

Who would have thought that technology advancements and even GDPR could create opportunities to make significant lease-related cost savings from an office move or redesign?

Technology-inspired savings include:

  • Mobile technology advancements enable employees to work remotely. Desk sharing is now the norm and not every employee requires a dedicated desk. In 2019, 100 employees do not equal 100 desks. Spare desk space can be redeployed into informal meeting areas.
  • Smaller, slimmer screens mean smaller desks, which means either increasing the number of desks in the same space or, opting for a smaller workspace.

Recent GDPR legislation has led to many firms adopting a ‘clear-desk-at-night’ policy. This has brought the much-heralded paperless office predictions closer to reality, as documents are now routinely scanned and held electronically. This, in turn, has led to a shrinking need for filing cabinets and reduced workspace requirements.

Culture change

In addition, the evolution of office provision has changed how we use our workspace.

Today, there are fewer of the expensive, individual offices so beloved of yesteryear’s senior leaders, with their need to have walls built and services reconfigured.

The replacement of private offices, first by open-plan desks and subsequently by shared hot desks has had a profound impact on space utilisation and the resulting (space) cost reductions.

Obvious savings come from reduced desk footprints, as well as lower lighting and air conditioning costs as these can be reconfigured to increase their overall efficiency.

Communal areas have also changed. Gone are kitchens with just a kettle, a cupboard and a sink. Today, the millennial-led workforce expects kitchens with microwaves, oversized fridges and Zip Taps, as well as facilities like showers and cycle storage. Quite often, there is still an overall space-saving and a subsequent cost reduction.

New office lease opportunities

Perhaps one of the smartest things every organisation should consider before it starts to look for new premises is investing in a ‘space audit’. This allows the management team to make informed decisions about desk numbers, desk sizes and desk locations and also helps create a plan for greater social and informal breakout spaces – which usually translates into smaller spaces being leased.

Audits replace guesswork about how much space is needed and how it will be deployed. A space utilisation analysis also provides an accurate understanding of how to introduce efficiencies into everyday work practices – challenging established protocols often accepted as gospel.

In addition, the rapid rise of the serviced office sector has changed how people think about their workspace-related financial commitments.

One perception about serviced offices is that they are often used by startups and microcompanies but today, even large national and multinational corporations choose this option when project teams demand an immediate workspace, for a short-term or indefinite period.

Although more expensive than a long-term solution, the serviced office option offers greater flexibility whilst minimising expensive liabilities.

Everything is negotiable

Let me close with a little bit of free counsel. From experience, I know that tenants either do not serve their break clause notice or are slow to start negotiating their lease-end terms.

If tenants start the process 12 months or more before those notable periods, the negotiation pendulum will sit squarely in their favour. Leaving it until six months or less means the negotiating whip hand will lie with the landlord.

Remember, the best lease terms amounts to more than just the rent you negotiate. Service charge rates can also be negotiated. If, for example, your new office is on the ground floor, why should you pay for the maintenance and repair of the lift?

Never accept the landlord’s opening terms and conditions. Make a well-reasoned counter bid, based on empirical comparables and suddenly rent-free, service charge cap and dilapidations concessions can become a reality.

To quote famed business guru Gavin Kennedy, “everything is negotiable”.

Replies (3)

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By Brend201
05th Sep 2019 15:48

I'm neither a lawyer nor a property professional but the most significant item that I have come across in this area relates to the break clause notice from the tenant. A court case held that a notice of intention to avail of a break clause was not valid because the estate agent sending it on behalf of the tenant had its standard disclaimer "Subject to contract" on the letter. The court held that the notice itself would have been sufficient because it was already part of a contract and that the notice was meaningless. I was amazed that the pros could make such a simple error.

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By C.Y.Nical
05th Sep 2019 20:49

I was a chartered surveyor specialising in the in-house management of very large retail estates. In addition to the dangerous "Subject to Contract"one of my pet hates was "Without Prejudice". It's utterly meaningless unless a dispute has arisen which may lead to adjudication of some kind, but you often see it chucked in for good measure. Of course its misuse rarely has a financial impact so I'm just indulging my penchant for pedantry here (but my pedantry earned me a very good living for many years because I could spot things that lazier more careless people missed).
As to break clauses, my heart misses a beat every time I see those words. I woke up one morning with a sense of dread and when I got to the office I dug out the property management diary. The date for giving notice of our wish to break the lease of one of our biggest loss making shops had been incorrectly entered by one of the junior staff and we had missed it. Break clause notice deadlines are always "time of the essence" - I never came across an example of an extended notice period being allowed. Almost as bad as missing the deadline for response to a s.25 notice which I saw a solicitor do once, thereby locking their client into accepting a renewal of a lease of a profitable shop on terms which no court would have awarded if the matter had gone to trial.
If there is a message here it is to make sure you have the advice of a lawyer and/or a surveyor who specialises in commercial leases. You don't want someone who does mostly probate or family law or house sales, and a bit of commercial property work on the side. This is a game for specialists, and they typically eat amateurs for breakfast.

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Replying to C.Y.Nical:
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By Brend201
06th Sep 2019 09:51

"My pedantry earned me a very good living for many years because I could spot things that lazier more careless people missed"

Without starting a mutual admiration society here, this is music to my ears. Me too.

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