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Factors to Consider for Start-ups When Taking Leasehold Premises

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Many start-ups are run from the back bedroom or office of an entrepreneurs home, however as the business starts to grow it is never too long before a commercial premises is needed.

The main priorities for a start-up include the following:

  • Flexibility of commitment;
  • Certainty of costs;
  • Freedom to adapt the premises physically; and
  • Excellent connectivity.
  • Term commitment:

Start-ups often obtain seed funding from annual grants. Due to the reliance on external funding and limited cash flow of the start-ups itself, the company is unlikely to want to commit to a 10 /15 year lease without having the relevant provisions to be able to terminate the lease without incurring significant penalties. One way around this is to offer a much shorter lease term i.e 5 years with a right to renew on similar terms or a longer lease term with regular breaks.

Certainty of costs:

Start-ups need to be able to budget to manage their cash flow. The ideal scenario for a start-up tenant is a lease with fixed rent without rent reviews. The lack of rent review does suit a much shorter lease term. Another area of uncertainty in relation to taking a leasehold premise is in relation to the service charge. Where a tenant is taking a lease of part of a larger building, the tenant could negotiate for a fixed service charge contribution or a capped service charge which although allows for increases there is a maximum percentage increase. This still gives the tenant some certainty to budget for the maximum increase and anything less is a bonus.

Adapting the premises:

Start-ups in specific sectors such as IT and science may need to fit out a premises in order to make it fit for their proposed use. Any works that a tenant is proposing to undertake need to be authorised by the landlord before completing the lease. Once the tenant is in, and only able to rely on the alterations clause within the lease, it may result in less flexibility on what the tenant is able to do to the property. The tenant will be unable to influence the speed of consent easily and will have to pay the landlord’s costs for any consent.

Start-ups also need to think ahead about the cost of reinstatement. Landlords will wish to ensure that, at the end of the lease, the property is left in a state that which will easily allow an incoming tenant to take occupation straight away.

Ability to connect:

In this modern day it is vital for business to have good broadband and telephony. It is on the tenant to check whether the services in the proposed property are sufficient to meet their requirements or whether they can be enhanced to meet their requirements. Enhancing the current utilities can be problematic if the property has an exclusive supplier or there may be physical constraints on the amount of available space in the property to install additional service media. It is worth noting that even if a tenant is taking a lease of an entire building, the telecoms provider may need permission from other for the cables to run over their land. Therefore, this is another item which should be checked prior to completing the lease.

Given the tenant friendly market at the moment, the tenant has more pull to negotiate the lease on terms more favourable to the tenant. This should be done prior to completing the lease as it is good to get the finer details agreed at the outset to ensure a swift and seamless transaction.

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