08 June 2009

UK/USA office leasing: Checklist


The United Kingdom and the United States of America have enjoyed a long and productive commercial relationship. Through increased business and trade many UK based firms have invested in the US and many US businesses have crossed the Atlantic to the financial markets of London and use the UK as their stepping stone into Europe. In recognition of this and the resultant real estate requirements of such international businesses, international law firm Withers LLP and Equipe Real Estate Advisors have compiled a check list of key issues for reference, designed to assist clients in understanding and reconciling each market’s common practices, particularly when they are entering markets for the first time.

Category: Article

Item

UK

USA

Item

Length of leases

UK

Landlords generally want a minimum of 10 years without breaks. However, this depends on the size of space and market conditions.

USA

A 5 year term is feasible, but for larger units - 10 years is more likely (varies according to city).

Item

Floor areas

UK

For offices, measurements are based on the Net Internal Area of the space, in accordance with the Royal Institution of Chartered Surveyors’ Code of Measuring Practice i.e., columns, common parts, WCs are excluded.

USA

Areas are based on the Rentable Square Footage (‘RSF’) of the space which is similar to the gross area i.e., including common areas, cores, lifts and the structure, sometimes to the building line. A loss factor of approximately 25-27% is then quoted to provide a guide to the space’s efficiency. There are general guidelines for areas set out by the Building Owners and Managers Association and sometimes locally i.e., the Real Estate Board of New York.

Item

Rent & other costs

UK

The rent is paid to the landlord net of all other outgoings. Additional costs include: (1) Value Added Tax (VAT) at the standard rate on the rent if the building is ‘elected’ by the landlord. The tenant will be able to recover VAT, if it charges VAT on its services; (2) Rates (the local property tax); and (3) Service Charges (a proportion of the cost of maintenance of building by the landlord). For smaller spaces, the landlord may roll the service charges into the annual rent,

USA

Rents are based on the RSF and multi-tenanted buildings generally include: (1) The rent; (2) Local real estate taxes (similar to rates); and (3) Building operating expenses In many cases leases will also provide for an annual proportionate increase in operating expenses and taxes over the base year of the lease. Alternatively, for a single occupancy of a large property, an occupier might pay a net rent and take responsibility for the other outgoings separately.

Item

Rent-free/free rent periods

UK

A rent-free period is when the landlord agrees to suspend payment of the net rent as an incentive. All other outgoings are still payable. The rent-free period generally occurs at the start of the lease and its duration is subject to negotiation and market conditions.

USA

A free-rent period in the US is similar but may include the suspension of the Real Estate Taxes and Operating Expenses for the period.

Item

Options to extend or break clauses

UK

Contractual options to extend are rarely granted but a lease will benefit from statutory renewal rights unless the parties agree to exclude those rights. Breaks are subject to negotiation and market conditions.

USA

Options to extend are common. Breaks (or ‘kick outs’) are less common and are subject to negotiation and market conditions.

Item

Repairing obligations

UK

The tenant is responsible for the cost of the maintenance of its office space and a proportion of the cost of maintenance of the building as a whole via a service charge.

USA

The situation in the US is equivalent.

Item

Condition of office space

UK

The landlord typically hands over the space already fitted out to its ‘Category A’ specification. This includes the suspended ceilings, A/C and heating in a general lay-out lighting, basic decoration, raised floors and a carpet or carpet allowance of c£2.50 psf. If the building is new, it can be leased in a shell and core condition with a capital contribution from the landlord of c£40 psf.

USA

Unless the space has already been fitted out by a previous occupier, it will be handed over in shell condition with the A/C ducting and cold water at the core. The landlord will typically contribute a tenant’s improvement allowance of about $40 psf towards fit-out (depending on market conditions). The tenant will have to pay for the rest of the ‘Category A’ works (in the region of a further $40 psf).

Item

Tenant’s fit-out / build-out

UK

The tenant pays the full cost of his ‘Category B’ fit out i.e., the creation of his office - layout, meeting rooms, kitchens and modifications to the space. The landlord may be willing to provide a ‘turnkey’ solution to the tenant’s ‘Category B’ fit out, but ultimately the cost is recouped through the rent. The tenant is usually required to obtain a ‘Licence for Alterations’ from the landlord. Tenant’s alterations should be disregarded at rent review unless the landlord has paid for them.

USA

The tenant pays the full cost of its ‘Category B’ fit out or ‘build out’ and otherwise the situation reflects that in the UK.

Item

Dilapidations / reinstatement

UK

At the end of the lease term (or the earlier exercise of a break option), the tenant is responsible for reinstating the space to open plan, redecorating, replacing carpets and reinstating any changes to the base building specification.

USA

Most leases have a restoration provision but this is rarely enforced, particularly where landlord sees value in the fit out. The tenant will not be responsible for re-carpeting and redecorating.

Item

Rent review

UK

Rents are normally reviewed on a 5 yearly basis, with the new rent being negotiated between the parties, with the option to refer the deal to an arbitrator or expert.

USA

Increases in rent are normally agreed at the outset. On renewal, rent is negotiated at market value.

Item

Insurance liability

UK

The landlord normally insures and is reimbursed by the tenant. The tenant insures its contents and takes out its own public liability and business interruption cover.

USA

It is usually the landlord’s responsibility to insure the property with the tenant bearing a percentage of the cost as Operative Expenses. The tenant is required to insure its contents and have public liability and workers’ compensation insurance.

Item

Agent/broker fees

UK

Usually based on a percentage of the annual rent, plus often a percentage of savings negotiated from the asking terms. This is a ‘one off’ fee no matter how many years the lease is for.

USA

Landlord usually pays all commissions, which are based on a percentage of the rent for the years of the commitment. Sometimes this is also based on a $ rate psf.

Item

Landlord insolvency

UK

If the landlord holds an interest with a capital value, the tenant’s interest is essentially secure. However, the insolvency of a landlord who pays a rent to a superior landlord will severely jeopardise the tenant’s interest. In increasingly changing times, this ia an area of serious concern for tenants. (The liquidator of a tenant can ‘disclaim’ the lease).

USA

In the event of the landlord’s insolvency, the tenant’s, the tenant’s rights are generally secure. (The tenant can ‘reject’ or terminate the lease if it becomes insolvent.) It is sometimes possible to obtain a ‘Non-disturbination’ or ‘Recognition Agreement’ from the superior landlord(s) to protect the sub-tenant’s interest should the immediate landlord fail.

Item

Security deposits/guarantees

UK

It is common for the tenant to give the landlord a deposit of 6-12 months’ rent or a guarantee from one or more individuals or from a parent company to secure its performance. A rent deposit will be repaid with interest after an assignment or, less deductions, after the lease has ended.

USA

The situation is similar in the US with landlords taking deposits or a ‘letter of credit’ from the tenant’s bank. A rent deposit is often repaid net of interest.

Meet the team