Richard Henry & Co - Chartered Surveyors

Frequently asked questions

Below are some frequently asked questions, if your question is not answered here, then please feel free to call or email us.

• Our company needs to move offices; how much space will we need?
• How long will relocation take?
• What are serviced offices?
• Should we rent or buy?
• How long a lease should we sign?
• Why does the landlord want a deposit?
• What is the relevance of the lease being "outside the Act"?
• What is a "FR & I" lease?
• The rent is quoted "pax". What does this mean?
• Why is VAT being charged on the rent?
• We are taking over an existing lease, but are being asked for a premium; what is this?
• The new landlord wants us to pay his legal costs for granting the lease; is this fair?
• Can we carry out alterations?

Our company needs to move offices; how much space will we need?

There is no fixed rule here and it will very much depend upon the nature of the company. For example, a call centre will have a much higher density of staff than an executive office. As a rule of thumb, the British Council for Offices suggests an occupation density of 150 sq ft per employee as a benchmark, allowing for a workstation area of 75 to 95 sq ft per employee i.e. the area taken up by the employee’s desk, chair and filing cabinet, plus circulation space, reception, kitchen and meeting rooms etc.

How long will relocation take?

Again, there is no hard and fast rule, and it can be done in a matter of days if moving into serviced offices. However, it is wise to plan for a period of three to six months to take into account the search for the right property, negotiation of acquisition terms, surveys, legal formalities, fitting out and the physical move itself.

What are serviced offices?

Serviced offices provide a solution for companies needing accommodation at short notice or for short term projects that would otherwise not justify the signing of a traditional lease. Suites are usually available on all-inclusive licence fees that include rent, rates, electricity, heating, reception staff, furniture, 24 hour access 7 days a week, daily cleaning, building insurance and maintenance. Most centres can also provide secretarial and telephone services and meeting rooms.

Should we rent or buy?

The answer to this depends upon the company’s accounting strategy and tax position and appropriate professional advice should be taken. However, whereas a lease is a wasting asset, buying a building has historically provided an asset that appreciates in value, avoids the restrictions that are normally imposed by a lease, and can be used as security for borrowing or held in a pension fund.

A leased property on the other hand may provide more flexibility and requires less capital to be tied up.

How long a lease should we sign?

Up until the late 1980’s, the 25 year lease with five yearly upwards only rent reviews was common. However, landlords have had to accept that tenants want more flexibility and five year leases are now achievable. Alternatively, longer leases may be granted with tenant only or mutual break clauses and rent reviews at five yearly intervals. In some cases, five year leases with a break option at the end of the third year may be negotiable.

Why does the landlord want a deposit?

A landlord may require a rent deposit if he perceives that a potential tenant is not a strong enough covenant, for example, where the rent would be a disproportionate amount of costs. The deposit will therefore be available to the landlord to draw on if the tenant is unable to pay the rent.

The amount of the deposit will generally be determined by negotiation, and can range anywhere from a couple of month’s rent up to a year’s rent depending upon the property concerned.

Deposit money must not be available to a landlord to be spent freely, but will normally be held in an escrow account with interest accruing to the tenant and will be returnable either at the end of the lease, assuming that all of the tenant’s covenants have been complied with, or when profitability can be shown to have reached a pre-determined sustained level.

Alternative arrangements may be considered such as bank guarantees or specialist insurance policies. Both will have a cost, but avoid the necessity to tie up capital that could otherwise be used in the business.

What is the relevance of the lease being "Outside The Act"?

The Landlord & Tenant Act 1954, Part II gives business tenants security of tenure when the lease expires with the right to a new lease on the same terms as the old lease other than rent which will be adjusted to open market value at the date of renewal. The Act sets out grounds for opposition to renewal such as the landlord requiring the property for his own occupation or redevelopment, but if these apply, he is bound to pay the outgoing tenant compensation based upon the rateable value of the property.

Excluding the lease from the Act removes the automatic right to a new lease on the same terms at the end of the term and the obligation for the landlord to pay compensation if it is not renewed.

However, it is unlikely that if a tenant has complied fully with the terms of his lease and has paid rent promptly that the landlord would be unwilling to grant a new lease unless he wants to redevelop or wants the building for his own occupation, but all of the terms would be then be negotiable and not just the rent.

What is a "FR & I" lease?

FR & I refers to full repairing and insuring. In the case of a property occupied by one tenant, the tenant will be responsible for structural repairs and regular redecoration throughout the course of the lease, and for insuring the property.

In the case of larger multi-tenanted buildings, the landlord will normally assume responsibility for maintenance and insurance, but will recover the costs from tenants via a service charge, liability for which is assessed on the basis of floor space occupied.

The rent is quoted "pax". What does this mean?

"Pax" refers to per annum exclusive. In addition to the payment of rent, the tenant will be liable to pay local authority rates and, if applicable, a service charge.

Why is VAT being charged on the rent?

A landlord may elect to register a commercial building for VAT at the standard rate. This will enable him to recover VAT on, for example, maintenance work carried out in the building, but VAT will then have to be charged on rent. Although there are exceptions, most tenants will be able to recover the cost in their own returns.

We are taking over an existing lease, but are being asked for a premium; what is this?

A premium may be asked for several reasons. The most common is that the lease was granted several years ago and the rent payable is now below open market value, so the tenant will enjoy what is known as a "profit rent". This is obviously a benefit and has a value that the tenant seeking to assign the lease will try to realise.

The value of any alterations carried out as improvements will also be reflected within the premium, assuming that they have use to an incoming tenant. If not, there will be a cost for removal and reinstatement and this should be reflected in any terms agreed between the parties.

Finally, the premium would also reflect demand if a number of potential occupiers are competing for the same property, for example, a retail unit in a fashionable shopping street where vacant units are rare.

The new landlord wants us to pay his legal costs for granting the lease; is this fair?

In general, the answer is no, but this will be a negotiating point dependant upon the market at the time or the strength of the parties involved.

Can we carry out alterations?

Most modern commercial leases prohibit alterations to the structure of the building, but allow non-structural alterations with the landlord’s consent, for example, partitioning for individual offices or the installation of air conditioning. Granting of consent may include an obligation to reinstate the premises to their original layout at the end of the lease, but obtaining such consent is vital to avoid the landlord benefiting by being able to rentalise unauthorised alterations during rent review negotiations.