Quick Guides - Corporate Occupier

Quick Guides - Corporate Occupier

A list of key terminology and concepts relevant to corporate occupiers of UK real estate with their plain English explanations.

More terms added weekly. Last updated: 01 July 2020


1954 Act

The 1954 Act is legislation that gives most tenants of commercial leases a right (a) to stay in the property at the end of the lease and (b) to a new lease for up to a maximum of 15 years, although the parties can agree a longer term. This cycle continues at the end of the next lease as well. If the parties cannot agree the terms for a renewal, the UK courts have the power to do so.

Landlords can only prevent a new lease being granted on a limited number of grounds and in certain cases tenants are entitled to compensation if a new lease is not granted.

The tenant’s rights under the 1954 Act are often referred to as “security of tenure”.

To get the benefit of the 1954 Act a tenant must be in occupation of the property for the purposes of its business when the lease ends.

Parties can agree that a lease will not have the benefit of the security of tenure elements of the 1954 Act but this must be done before the lease is granted and according to a strict process set out in the 1954 Act.

Occupiers seeking new leases should consider whether the rent is likely to go up or down when deciding when to start the process. Once the process for a renewal is started by either a landlord or tenant there are strict deadlines which, if missed, results in the right to stay at a property being lost.

Those relocating to new premises, but requiring more time at the end of their lease, can utilise the 1954 Act to manage the timings of the relocation process.


Break Clauses

Some leases contain provisions by which the tenant (or landlord) can terminate the lease early by serving written notice on the other party. These are called “break options” and the notice is a “break notice”.

Break options often require the party serving the break notice to also comply with other conditions. Common conditions include requirements that there must not be rent arrears on the break date and the property must be handed back free of any occupiers or underleases (rather than with vacant possession, which has a much wider meaning).

A failure to comply with these conditions or correctly serve the notice may invalidate the notice and mean that the lease is not effectively terminated on the break date.

Occupiers should give careful consideration when negotiating a break option as to what conditions they are prepared to accept. When serving the break notice, they should take professional advice to ensure that they use the correct method to serve the notice and that it is served in time – the Courts take a very strict approach to compliance.


Capital Allowances

Capital allowances are a form of tax depreciation which allow businesses to claim a proportion of capital expenditure each year. When carrying out a fit out or refurbishment of a property the expenditure has a long-term benefit for the business and so typically cannot be written-off/deducted in its entirety in the year it is incurred. Instead a proportion of the deduction is claimed over a period of years. The deduction is called a writing down allowance (WDA).

The qualifying capital expenditure is allocated to different categories known as "pools" and then written down annually at a set percentage, with the value written down allowed as a deduction against taxable income. Plant and machinery allowances, for example, can be split into a general pool (regular plant, machinery or fixtures) which is discounted at 18% a year and the special rate pool (typically longer life fixtures) that are discounted at 6% a year, on a reducing balance basis.

Companies also currently have an "annual investment allowance" (AIA) which allows them to immediately offset £1m of capital expenditure. The AIA is due to reduce to £200,000 from 01/01/21. Anything over and above the AIA threshold may only be deducted over time as part of the WDA.


Defects

A patent defect is a defect arising from a flaw in construction materials, design, or workmanship which is detectable by reasonable inspection at practical completion of the works, or during any defects liability period (the period under a building contract during which the contractor is required to make good defects which arise after practical completion and which are notified to the contractor).

A latent (or "inherent") defect is a defect which, while present in the works at practical completion or during the defects liability period, was not apparent or observable from a reasonable inspection. It is often the case that damage caused to a property by a latent defect will only become apparent many years after practical completion. Examples of latent defects might include problems with foundations or damp proofing.

In a construction context, the distinction between patent and latent defects is important because a developer's redress for defects which are identified after the expiry of the defects liability period is likely to rest in an action for damages arising out of breach of the building contract.

The distinction can also be particularly relevant in commercial lease negotiations, and in particular, negotiations over the extent of a tenant's repair covenant. Learn more about inherent defects here.


Dilapidations

'Dilapidations' relates to liabilities to keep the premises in the state and condition required by the lease. Issues can arise both during and at the end of the term of the lease.

Liability for dilapidations generally arises in the following ways:

  • During the lifetime of the lease – if the landlord does not consider that the tenant is keeping the property in the condition required by the lease, the landlord may be able to:
    • compel the tenant to comply with its repairing and decorating obligations in the lease;
    • forfeit (terminate) the lease;
    • claim damages; or
    • enter the premises itself to carry out the necessary works and then recover the costs from the tenant for doing so.
  • Upon lease expiry – if the tenant does not return the property in the condition required by the lease, the landlord can claim damages for the cost of putting the premises into the condition that the tenant should have left the premises in, had they complied with the repairing and decorating obligations in their lease.

Ideally, tenants should budget for any dilapidations liability and forward plan to identify whether it might be more cost effective to carry out repairs during the lifetime of the lease. Early engagement with building surveyors will assist the assessment of potential liability and any required accruals.


EPC

An energy performance certificate (EPC) is a theoretical assessment of the energy efficiency of a given space, rated on a scale from A to G.

Landlords are required by law to provide an EPC to a tenant before granting a new lease. In a multi-let building, a landlord may rely on an EPC that applies to the whole building or one that is specific to space that is being let.

As an occupier, you would also need an EPC if you wanted to underlet space, or assign your interest in the lease. In this scenario, an occupier may rely on an EPC commissioned by the landlord. It is now often the case that a lease will contain restrictions on an occupier obtaining its own EPC, to prevent a tenant from registering an EPC with a low rating, which may in the future render the landlord in breach of the MEES regulations.


FRI Lease

An ‘FRI’ lease is a full repairing and insuring lease. It means that the tenant is, directly or indirectly, responsible for the full cost of repair and insurance.

In a single let property, the costs of repair are usually paid directly by the tenant and, for multi-let properties, are paid directly by the tenant for the space they let and recovered via a service charge for the common parts, exterior and structure.

In relation to insurance, the landlord will usually take out the policy itself and, via an insurance rent, charge the cost back to the tenant(s) (including the costs of insurance revaluations and loss of rent).

Having an FRI lease could involve putting the property into a better state of repair than it was at the start of a lease, as it does not matter whether the disrepair was pre-existing. It is therefore important to undertake a building survey before committing to an FRI lease.

Common ways of mitigating the financial risks of an FRI lease include limiting the repairing obligation to the condition at the start of the lease (ideally by reference to a detailed photographic schedule of condition) and through service charge caps and exclusions.


Holding Over

If a lease is protected by the 1954 Act and no section 25 notice, 26 request or 27 notice has been served bringing it to an end on its contractual expiry date, it will not determine then, provided the tenant remains in business occupation of the property on that date. If that is the case, the tenant will have the right to remain in occupation of the property on the same terms as before the contractual lease expiry; this is known as "holding over".

If either party does want to bring the current lease to an end during the period of holding over, it can serve either a section 25 notice, section 26 request or section 27 notice at any time.


Lease by Reference

A lease by reference is a lease which, rather than setting out all of the terms in the lease itself, states that the lease is made on the same terms as another lease, save for specified changes.

A common example would be a renewal lease (which may also be a reversionary lease) that states that its terms are the same as a prior lease, other than certain terms, for example, the rent amount, term length, and the date of any rent reviews.


MEES

It is unlawful for a landlord to grant a new lease to an occupier of space that falls below a minimum EPC standard. This means premises have to be rated E or higher, unless the landlord has an exemption, or the lease otherwise falls outside the scope of the relevant regulations. This is known as the minimum energy efficiency standards or 'MEES'.

From April 2023, it will be unlawful to continue to let space with an F or G rated EPC. MEES will also bite on any underletting, so an occupier should not simply see MEES as a “landlord problem”. The minimum standard is set to increase, and the government is currently consulting on implementing a minimum standard of B by 2030.

As a consequence of MEES, leases will now often have clauses to protect the landlord. For example, the landlord may want to restrict the ability of the occupier to carry out any alterations to the space that have an adverse effect on the energy performance / EPC rating. In addition, some landlords may look to shift the burden of compliance, perhaps seeking to pass on the cost of any future energy improvement works to an occupier. With the minimum standard set to rise, occupiers should take careful note of the relevant EPC / MEES clauses in their lease.


Reversionary Lease

A reversionary lease is one that commences in the future, after the lease has been signed and dated. There is a delay between completion of the lease document and the date on which the tenant can take occupation of the premises.

For example, the lease is completed in May but the term of occupation does not start until August. This usually occurs either when a landlord and tenant want to enter into a lease which will start after an existing lease has expired, or as a way of extending an existing tenant’s lease term.


Section 25, 26 and 27 Notices

Section 25, 26 and 27 notices are notices that may be served towards (and after) the end of a tenancy protected by 1954 Act to bring the tenancy to an end. The earliest date the tenancy can end is the contractual expiry date.

A section 25 notice may be served by the landlord, either proposing a renewal of the tenancy with new terms or giving notice to terminate the tenancy, relying on one of the statutory grounds set out in the 1954 Act.

A section 26 request may be served by the tenant to request a new tenancy. The landlord then has two months to serve a counter-notice if it wishes to terminate the tenancy (on one of the statutory grounds).

A section 25 notice or section 26 request must give the receiving party between six and twelve months' notice of the serving parties' intentions for the tenancy.

A section 27 notice may be served by the tenant, giving at least three months' notice, if it wishes to terminate the tenancy and vacate the property.

If none of the above notices are served, a tenancy protected by the 1954 Act will not end at the expiry of its term; it will continue to run on the same terms as before. This is known as holding over.


Swing Space

Often a construction project will require a complete floor or floors of a building to be vacated in order to provide sufficient space for the contractor to set up a site office, as well as to carry out works. Swing space is the name given to a temporary environment created to facilitate the refurbishment or restacking of commercial premises. It may be housed in the same building as the proposed project or in other premises nearby. The primary aim of swing space is to enable a business to continue with the least amount of disruption possible during the project period. The location and layout should aim to replicate as closely as possible the working practices of the staff who will occupy it. Careful thought needs to be given to the proximity of swing space to the project site to ensure that it is not adversely affected by noise, dust or other interference.

Swing space may also be needed when relocating as the availability of the new premises may not align with the required move-out date. From a practical point of view this will require two moves, so the cost and disruption implications should be carefully considered.


TOGC

A transfer of a going concern (TOGC) is a tax treatment which means that the sale of land and buildings do not attract VAT.

Typically the sale of land is an exempt supply, but owners of commercial property may choose to waive this exemption by "opting to tax". They must then charge VAT on rent (and sale proceeds), which allows them to recover VAT charged to them e.g. on refurbishment works. If a sale is a TOGC opted land will not attract VAT on the purchase price and the buyer will also inherit the seller’s Capital Goods Scheme position.

For a sale to be a TOGC the fundamental principle is that purchaser should acquire the assets of a business and continue that same type of business e.g. a property letting businesses.

TOGC status is dependent upon the facts, strict observance of various conditions, careful drafting and not falling foul of anti-avoidance rules.


VAT on Landlord Contributions

When a landlord makes a financial contribution to works on a property that its tenant is undertaking the tenant has to decide whether it needs to charge VAT on the works. The position will depend on whether the tenant is deemed to make a supply for VAT purposes, and this hinges on how to properly categorise the works.

If the works are landlord's works (typically structural works, works that will benefit the landlord's reversionary interest, or works that the tenant will not have to remove at the end of the term) then the tenant is making a supply by providing the service of performing these works for the benefit of the landlord and VAT should be charged. Where however works are purely tenant's fit out works then there is no supply as there is no direct benefit or service provided to the Landlord, in this case VAT does not need to be charged.

The line between landlord and tenant works can be a fine one and can be very fact specific, for example in some cases the installation of floorboxes and carpets can be viewed as tenants works and in others as landlord works. If in doubt specialist advice should be sought to ensure the correct VAT treatment.


Wayleave

A wayleave is an agreement which permits electronic communications providers ("Telecoms Providers"), to install equipment, such as broadband cables, within land and buildings. The agreement will govern where the equipment can be installed, how it is to be maintained and any fee to be paid by the Telecoms Provider to the owner of the premises.

If you are taking a lease of premises which does not have a broadband and telephone connection, or if you wish to use a different provider or install your own dedicated supply, a wayleave will likely be needed to permit your Telecoms Provider to install their equipment in your premises and (where relevant) through the wider building.

Building owners will usually want to be party to any wayleave e entered into with a Telecoms Provider. As tenant, you may be asked either to enter into the wayleave agreement itself, or into a separate side agreement with the owner of the premises.

You should be aware that wayleaves can have very long lead in times and should be explored and arranged as early as possible to ensure that your use of the premises is not compromised.


WELL Business Standard

Launched in 2014 by the International WELL Building Institute (IWBI), the WELL Building Standard is a global accreditation framework for assessing ‘wellness’ within the design of buildings and interior spaces. It assesses how design supports the physical, mental and social wellbeing of its occupants. The standard applies to all commercial and institutional buildings.

The aim for businesses is that, in providing buildings that invest in wellbeing, they can boost staff morale, increase productivity and reduce absenteeism – as well as attracting and retaining the best talent.

The accreditation is based on seven categories of building performance - air, water, light, nourishment, fitness, comfort and mind; measured across 100 ‘features’. There are three levels of certification; ‘silver’ requires all applicable ‘precondition’ features to be met. By also satisfying further non-compulsory ‘optimization’ features, ‘gold’ or ‘platinum’ certification can be achieved.

IWBI is currently piloting WELL v2, which has ten categories of performance - air, water, nourishment, light, movement, thermal comfort, sound, materials, mind and community, and seeks to build on and consolidate previous iterations and pilots, and serve as a single framework to apply to any type of building.


WiredScore Certification

WiredScore Certification is a standard used to categorise and distinguish between the relative digital connectivity of buildings. There are four levels of certification: Platinum, Gold, Silver and Certified buildings.

  • Platinum: the building is “best in class” across all the key areas of connectivity and is able to support the current and future needs of occupiers with even the most demanding of technological requirements
  • Gold: the building will have high quality connectivity and infrastructure which will support the needs of most current and future occupiers
  • Silver: the building will have a fibre connection and the infrastructure will meet the current requirements of most occupiers
  • Certified: the building archives the minimum connectivity standards required for accreditation and will support the needs of most current occupiers

Certification is valid for 2 years or, if later on a development, when the building is 2/3 occupied.


Podcast - Corporate Occupiers

Miri Stickland talks to Glenn Dunn, head of Forsters’ corporate occupiers sector group, about the current central London office market, key considerations when planning an office relocation and the recent move to agile working for the Forsters’ Commercial Real Estate team in our new offices at Berkeley Square House.

A bright modern office space


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