Office occupation costs

Office relocation guide: chapter five

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Chapter five: office occupation costs

As well as the project costs, you should not overlook the long term occupation costs associated with an office. These will vary materially depending on the building, area and the commercial deal reached with the landlord. Having a good understanding of the types of charges you will need to meet is vital to avoid surprises later on and for the business to budget effectively.

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Chapter one: preparing to move

Ensuring that you have a detailed plan in place at the outset of your project is vital to ensure success.

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Rent

Usually payable by four equal quarterly payments in advance on the usual quarter days (25 March, 24 June, 29 September and 25 December). Rent free periods are a negotiable and a common incentive depending on market conditions. Rents are normally reviewed and adjusted to the open market level every five years. These reviews are almost always upwards only. Between reviews the amount of rent payable is usually fixed. In some leases the basis for rent review is inflation-linked.

Sometimes an ”all inclusive” rent can be agreed, such as where the term if very short or when entering into a sub-lease, but more commonly other charges are made on top.

Unless taking a lease of the whole, a service charge should be expected, which is payable in addition to rent. The charges relate to the common costs of running the building or estate of which the premises form part and landlords should not be seeking to make a profit on the service charge. Usually payable on account by four equal quarterly payments in advance on the same day as the rent, with a balancing exercise to occur at the end of the relevant service charge year. Consider seeking exclusions from your obligation to pay towards items you will get no benefit from. You should always consider seeking to negotiate a cap on your annual service charge liability (any cap which is agreed will usually increase annually linked to inflation). A cap is of particular relevance for a lease granted for a relatively short lease term (such as five years or less), except where a building is brand new and warranties are provided.

The landlord will usually insure a multi-let building or estate and frequently even a single let building, against damage or destruction by standard insurable commercial risks and also loss of rent (usually for 3 or 5 years) caused by such damage or destruction. The full cost of such insurance (or a fair proportion of the cost in the case of a multi-let building or estate) will be recoverable from the tenants. Again, this will be payable in addition to the rent and landlords should not be seeking to make a profit on the insurance charges.

Taxes

Business rates

Due to the local authority, these will usually be payable by tenants and you should establish what these are likely to be prior to lease completion. The rates liability is a calculation based on the rental value at the time of the last rating revaluation multiplied by a standard rateable multiplier that is agreed upon annually. Business rates vary considerably but can amount to 50% of the rent. On leases of very short terms or sub-leases, a rent inclusive of business rates may be appropriate.

VAT is usually payable on rent, service charges and fit out costs. Depending on the nature of the tenant’s business the tenant should ensure that it is VAT registered and consequently be able to reclaim this VAT from HMRC.

Utilities

The tenant pays for its actual consumption based on metered usage to the relevant utility company (or to the landlord where there is a single supply to the building which is sub-metered for tenants). The proportion of the cost of utilities that relate to the common areas of the building or estate of which the premises form part will usually be included as part of the service charge. Increasingly, common utility costs are being excluded from any service charge cap which has been negotiated, given the unpredictability of utility costs.

Most leases contain covenants obligating the tenant to return the premises to the landlord at the end of the lease term in good and substantial repair, irrespective of the condition they were in at the start of the lease term. The tenant may elect to carry out the required works itself, provided it does so before the lease ends. However, in the event it does not, then the cost and liability for these works is usually settled by what is known as a dilapidations payment, made by the tenant to the landlord. The payment will be recorded in a settlement agreement and your chosen lawyer can assist with this. Depending on the state and condition of the premises this payment can be significant and budgetary provision should be made for it. The subject of dilapidations is complex and notoriously contentious, so it is crucial that you work closely with your agent, lawyer and fit out company to ensure that you are absolutely clear about your responsibilities and liabilities.

In central London and in some regional centres, tenants pay for car parking as additional rent which can range in price depending on location.

In addition to the cost of doing any works or adaptations to your premises, where required under the lease you will also need to pay for the cost of securing the consent of the landlord, which will mean meeting their legal, management and, if relevant, surveying fees. The same applies where you seek to assign the lease or sublet the premises. These payments are typically the subject of undertakings given by your lawyer to the landlord’s lawyer and may require you to place the amounts in question in an escrow account held by your lawyer.

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