Corporate Occupiers - Key terminology guides
A list of key terminology and concepts relevant to corporate occupiers of UK real estate with their plain English explanations.
- 1954 Act
- AGA & GAGA
- Break Clauses
- Business Interruption Insurance
- Cap and Collar
- Capital Allowances
- Capital Goods Scheme
- Cat A / Cat B
- Construction Industry Scheme
- Fitwel Certification
- FRI Lease
- Green Lease
- Holding Over
- Lease by Reference
- NABERS UK
- Net Zero Carbon
- Option to Tax
- Quarter Days
- Rent Review
- Reversionary Lease
- SDLT Overlap Relief
- Section 25, 26 and 27 Notices
- Smart Buildings
- SmartScore Certification
- Swing Space
- Telecoms Code
- Turnover Rent
- Uninsured Risks
- Vacant Possession
- VAT on Landlord Contributions
- WELL Building Standard
- WiredScore Certification
- Yield up
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.
AGA & GAGA
Leases are, on the whole, restrictive as to a tenant’s ability to assign or transfer their interest in a lease to a third party. Where assignments are not absolutely prohibited the lease will usually require the landlord’s consent. Often the landlord’s consent will be predicated on a number of conditions, which will be set out in the lease, but where a landlord’s consent is required, it may ask for any condition which is reasonable to require.
One common condition of a landlord giving their consent is that the outgoing tenant agrees to guarantee the incoming tenant’s obligations under the lease. This is known as an “authorised guarantee agreement" or an AGA. An authorised guarantee agreement will only remain in place for as long as the assignee remains the tenant under the lease.
Where a lease has a guarantor another condition that may be required is that the guarantor enters into a fresh guarantee of the tenant's obligations under the AGA. This is sometimes called a sub-guarantee or a GAGA.
It is usual for leases to contain provisions which restrict tenants from dealing with their interest in the lease. For example, assigning the lease to a third party, underletting the premises demised under the lease to a third party, or even sharing occupation with third parties and/or companies within the same corporate group as the tenant. The term alienation encompasses the examples given here as well as charging the lease and any other dealings that the tenant may propose during the length of term.
In the case of assignments and underletting, if these dealings are not absolutely prohibited they will usually require the landlord's consent. It is common for the parties to agree that such consent will not be unreasonably withheld or delayed, subject to certain pre-agreed circumstances and conditions. It is not unusual for landlords to permit tenants to share occupation with group companies without the need for consent, provided that the arrangement does not create a landlord and tenant relationship.
Assignment is a form of alienation, which transfers your lease to a third party (an assignee), releasing you from your obligations in the lease (subject to any AGA you are required to give). It is not possible to assign to your current guarantor, which will be void at law. An alternative to assignment, is to underlet.
Assignment of the whole is usually permitted, subject to the landlord’s consent, whereas assignments of part are usually prohibited. It is common for the landlord’s consent to be conditional on certain pre-agreed conditions and circumstances.
The most common pre-agreed condition to an assignment, is that the outgoing tenant must provide an AGA. If the outgoing tenant has a guarantor, the same entity cannot act as a guarantor for the assignee, however, they maybe required to give a GAGA .
Typical pre-agreed circumstances, subject to which the landlord may refuse consent, include:
- arrears of rent;
- a material breach of a tenant covenant in the lease; and
- the assignee being of insufficient financial standing.
Pre-agreeing conditions and circumstances will not prevent the landlord from withholding consent under any other circumstances where it is reasonable to do so, or from imposing additional reasonable conditions.
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.
Launched in 1990, the Building Research Establishment's Environmental Assessment Methodology (BREEAM) is an established method for evaluating, rating and certifying the environmental performance and sustainability of buildings, infrastructure and projects.
There are a number of different technical BREEAM standards that are designed to assess the environmental performance of buildings at various stages, from planning, design and construction through to operation and refurbishment.
An independent licenced assessor will carry out a certified BREEAM assessment and provide the project with a BREEAM certificate and rating (unclassified, pass, good, very good, excellent or outstanding).
A BREEAM rating is determined based on the weighted score of credit points from the following sustainability categories:
- Health and Wellbeing
- Land Use
Each category is sub-divided into a range of assessment issues, each with its own aim, target and benchmarks.
BREEAM aims to provide a credible, environmental label for buildings and raise awareness of the benefits and value of buildings with a reduced life cycle impact on the environment.
Business Interruption Insurance
Business interruption insurance covers financial losses suffered by a business as a result of a specified event. The losses will usually be caused by the business being unable to operate as a result of the event or by being forced to incur additional costs. It is designed to put the business back into the financial position it would have been in had the event not occurred, including covering temporary accommodation.
It should not be confused with buildings insurance, which is only designed to cover damage or destruction to a property. Depending on the terms of the lease, buildings insurance may be the responsibility of a landlord to put in place, but business interruption insurance will always be the responsibility of the business itself. It should also not be confused with loss of rent insurance, which is for the benefit of a landlord.
Each policy should be carefully considered against the needs of the business, not all risks will be covered as standard, for example infectious diseases are often an optional add on or sometimes excluded all together.
Cap and Collar
A cap and collar are an agreed maximum and minimum increase. Caps and collars are usually used to limit exposure and provide certainty where a payment is linked to a factor outside of the parties control, such as inflation.
Rent reviews are sometimes carried out by reference to inflation (usually RPI or CPI) and a cap (and sometimes a collar) may be agreed. It is important to understand and agree if the intention is for the cap and collar percentages to apply annually, therefore compound, or once only at the review date.
Occupiers can sometimes negotiate to cap their service charge, as a way of protecting themselves against unexpected or high charges. In such cases it is not uncommon for the cap to be increased in line with inflation.
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.
Capital Goods Scheme
VAT is designed to only be paid by the ultimate consumer - all intermediate suppliers should be able to reclaim the VAT they are charged, as long as they charge VAT on the goods or services they provide.
For long term assets, such as land, the VAT recovery is based on their long term use. The Capital Goods Scheme allows businesses to recover VAT spent on land immediately (including premiums on leases and for fit outs costing £250,000 or more), but only to the extent that the land is used to make VATable supplies.
However, the business must monitor its VATable supplies over the next 10 adjustment periods (normally a year each). If the initial use is 100% VATable then the business must repay some of the VAT recovered if in later adjustment periods the VATable use is less than 100% VATable. If the business uses the land for the same level of VAT supplies across all adjustment periods then it does not need to take any action.
In practical terms, this means where a tenant incurs over £250,000 of expenditure on its premises and continues to use the premises entirely to make VATable supplies, then it correctly recovered all the input VAT originally and will not have to make any repayments of the VAT recovered.
Cap A / Cap B
Category A fit out (Cat A) results in a functional, but empty space including basic finishes to the floors, walls and ceilings and the distribution of mechanical and electrical services.
Category B fit out (Cat B) refers to the complete fit out of the internal space, which has been designed to meet a tenant’s requirements, including final finishes, fixtures and fittings, furniture and the fit out of specialist areas.
Cat A and Cat B works are done after the basic / fundamental infrastructure of a building, including the structure, cladding, base plant and external works. This is known as “shell and core”.
A relatively new category of fit out offers a mid-point. Category A+ fit out (Cat A+) includes all elements of Cat A, plus features of a modest Cat B fit out, creating a space that is ready for occupation.
Cat A, Cat A+ and shell and core works are usually instructed by a landlord / developer, whereas Cat B works tend to be instructed and / or paid for by the tenant.
Construction Industry Scheme
The Construction Industry Scheme (CIS) is a withholding scheme, requiring contractors to withhold tax from payments made to sub-contractors relating to construction works. Construction works can include works undertaken on the property, by either a landlord or a tenant.
A tenant who undertakes works will be deemed to be a contractor if they are carrying on business and at the end of any rolling 12 month period their expenditure on construction operations exceeds £3,000,000. They will need to register as a contractor and withhold tax from the entity which performs the works (unless that entity is registered to receive payment gross). In some circumstances an exemption from withholding could apply if the tenant is using the property for the purposes of its own business and is not sub-letting the space out.
Where a tenant undertakes works that are really landlord works, typically structural works or works that will benefit the landlord's reversionary interest (sometimes called “Cat A Works”) then CIS may apply. If there is a contract for works, which will include an agreement for lease, and works are Cat A Works, the landlord will be a deemed contractor and the tenant will automatically become its sub-contractor. The landlord will then have to withhold tax (30% unless the tenant is a registered sub-contractor), which could cause a cash flow issue for the tenant.
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' 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.
From 1 February 2021 occupiers should also budget for paying VAT on top of any dilapidation liability. HMRC have issued revised guidance that dilapidations are not compensation (which are outside the scope of VAT), but rather further consideration for the use of the premises. Forsters LLP, like other advisers, have joined with the British Property Federation to object as their reasoning is flawed, but for the time being dilapidation will include VAT, where the landlord has opted to tax.
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.
ESG stands for ‘environmental, social and governance’ criteria, which are a set of standards used to assess businesses on how environmentally and socially conscious they are.
Commitment to an ESG strategy is fast becoming of critical importance to the success of businesses as employees, investors, lenders, clients/customers and regulators all increasingly demand businesses to be environmentally and socially responsible:
- Environmental covers the business’s impact on the environment (climate change impact, air and water pollution, energy efficiency etc)
- Social relates to how businesses engage with and treat their employees, clients/customers and communities (gender equality, health and safety, human rights etc)
- Governance is how a business conducts itself (board diversity, tax strategy, ethics and culture, executive pay etc)
For many occupiers, particularly those in the professional services, their premises accounts for a large proportion of their carbon emissions. Ensuring a building has a good ESG profile will often form part of a business’ strategy to achieve its own net-zero carbon commitments and can be a key criterion on a relocation.
Operated by the Center for Active Design (CfAD), Fitwel Certification is a global accreditation standard that aims to support the adoption of health promoting strategies within the built environment. It applies to multiple-dwelling residential buildings, commercial buildings and commercial and mixed use sites.
Certification is measured by reference to a tailored scorecard of at least 55 design and operational strategies split across seven ‘health impact categories’. These categories are:
- impact on surrounding community health;
- reduces morbidity and absenteeism;
- supports social equity for vulnerable populations;
- instils feelings of well-being;
- enhances access to healthy foods;
- promotes occupant safety; and
- increases physical activity.
Each strategy is given a point allocation, based on the strength of associated evidence and the demonstrated impact on occupant health. Based on the number of points achieved (subject to a necessary minimum) a one, two or three-star rating is awarded.
Projects are able to pursue a ‘design certification’ or a ‘built certification’ depending on the phase of construction and level of occupancy.
A Fitwel Certification is valid for three years, after which recertification is required to maintain a Fitwel status.
You may also be interested in WELL Building Standard.
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.
A green lease contains provisions that encourage or require the owner and occupier of commercial premises to consider the sustainable operation of the property and in some cases adopt measures in order to reduce its environmental impact.
Green lease provisions will vary depending on the parties involved and the type of property in question, but they will nearly always include obligations on an occupier relating to recycling, energy and water efficiency, and restrictions on occupier works which may have an adverse effect on the environmental performance of the premises. In all cases the success of a green lease will depend upon the co-operation between the owner and occupier, which may include sharing data relating to energy efficiency.
Whilst occupiers should ensure that they fully consider the practical and financial implications of complying with any proposed green lease provisions, they may present an occupier with potential advantages, including:
- savings through reduced energy costs;
- improved public image; and
- higher productivity and better occupant health as a result of a better working environment.
With sustainability becoming ever more important occupiers are increasingly looking for buildings with strong green credentials.
Global Real Estate Sustainability Benchmark (GRESB) is a certification which assess the ESG performance of both real estate and of infrastructure funds and assets.
Real estate assessments focus on three core components:
- Management: this measures the strategy and leadership of the entity, its policies and processes, and its engagement with stakeholders
- Performance: this measures the entity’s assets performance, including gathering information on energy consumption, greenhouse gas emissions, water consumption and waste
- Development: this assess the organisation’s efforts to deal with ESG issues during the design and construction of buildings
Each entity is awarded a rating of between 1 and 5 stars, with around 20% of applicants achieving a 5-star ranking.
GRESB subsequently provides analysed data to capital markets around the world to help funds, trusts, companies and developers to assess real estate and infrastructure investments and monitor portfolios.
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.
Leadership In Energy and Environmental Design (LEED) is an environmental certification system that assesses the design, construction, operation and maintenance of a building. It was developed by the US Green Building Council, but is increasingly used worldwide.
To achieve LEED certification commercial buildings must meet certain standards set by the Green Building Certification Institute. These include:
- Energy use and whether energy efficient lighting is deployed
- Indoor air quality and use of natural light
- Innovation in design
- Location and the sustainability of its immediate environment
- Water conservation
- Use of sustainable materials (during construction)
A commercial building that achieves LEED will be rated either Platinum, Gold, Silver or Certified.
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.
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.
National Australian Built Environment Rating System (NABERS) UK is a system for rating the energy efficiency of office buildings.
Two ratings are currently offered:
- Energy: this measures the energy efficiency of an office building, rating its performance by comparing the actual energy consumption against benchmarks
- Design for Performance: this is a process where the developer or building owner commits to achieve a specific Energy rating by the design, building and commissioning of a new development or major refurbishment
NABERS UK uses a star rating system, from 1 star (poor) up to 6 stars (market leading).
Currently limited to energy, if NABERS UK expands to cover the same areas as the Australian original, we are likely to see ratings for water, waste, indoor environmental quality and carbon neutrality. Similarly, currently only available for office buildings, the Australian scheme covers office tenancies, apartment buildings, data centres, shopping centres, public hospitals and hotels.
Net Zero Carbon
Net zero carbon is achieved by reducing greenhouse gas emissions, so that the amount of carbon dioxide produced is balanced by the amount removed from the atmosphere. This is similar to being carbon neutral, which also requires a balance between carbon dioxide produced and removed, but importantly does not require a commitment to do so by a reduction in greenhouse gas emissions and can be achieved by off-setting alone.
For a building to be net zero it must address the carbon produced from in-use energy, by supplying services from renewable sources. However, the embodied carbon in the building must also be considered. A building’s embodied carbon is the sum of all of the carbon emitted during its construction, including that released throughout the entire supply chain, for example, the mining of raw materials, transport, processing and assembly.
Ensuring a building is net zero will often form a core part of an occupier’s strategy to achieve its ESG commitments.
Novation is a means of transferring a party’s rights and obligations under a contract to a third party. It involves a three-way contract which extinguishes an existing contract and replaces it with a new contract on duplicate terms. The third party assumes the rights and obligations of one of the parties to the original contract.
Novation requires the consent of each of the three parties to be valid. It also requires some form of consideration to be provided, unless the novation contract is executed as a deed.
Novation is often confused with assignment. An assignment, however, only transfers a party’s rights and benefits under a contract (and not its obligations) to a third party.
Novation is frequently used on construction projects in the context of design and build procurement. The consultants that have carried out the initial design of the works often enter into novation agreements with the client and the contractor. This transfers the design risk to provide a single point of design responsibility so that the client is only required to bring a claim against the contractor (and not each individual consultant) in the event of any defects in the design.
Option to Tax
The default position for property is that it is VAT exempt. Land owners do not have to charge VAT on supplies of land (with some exceptions), but which include lettings. However, this means that they may be unable to recover input VAT they incur, for example on renovation works or fees relating to the land.
Land owners may opt to tax the land (sometimes known as “electing”), requiring them to charge VAT on supplies they make from the land, but enabling them to recover VAT that they are charged. An option is personal to the entity that opts (unless they are in a VAT group, where it can affect all current and potentially future members), it does not pass on a transfer of the land.
An option to tax is often required if the land is to pass as a Transfer of Going Concern whereby no VAT is paid as the acquirer takes over the same type of business as the seller.
An option to tax must be notified to HMRC within 30 days of being exercised. HMRC have no ability to prevent an option unless specific anti avoidance provisions apply.
Quarter Days are commonly used as dates for rent payment in modern commercial leases.
They are the four days marking the beginning of each quarter of the year, which in England are:
- 25 March (Lady Day);
- 24 June (Midsummer Day);
- 29 September (Michaelmas); and
- 25 December (Christmas).
They are typically referred to as "the usual quarter days".
Traditionally, these days were significant in society as dates of religious festivals, the beginning of school terms, and for the settlement of debt and conflict.
Whilst the traditional quarter days are still widely used as the accepted quarter days, in recent times alternative quarter days of 1 January, 1 April, 1 July and 1 October can sometimes be found in leases. They are referred to as "the modern quarter days".
Business rates are a form of property tax, which is due to be paid by the party who is entitled to possession of a non-domestic property. Rates are a significant occupational cost, which can be as much as 50% of the rent. Responsibility to pay rates will usually fall on the tenant, but the benefit of any relief is a point open for negotiation and should be recorded in the lease.
After a period of letting, if the premises are empty and unoccupied, an entitlement to a limited period of “empty rates relief” may arise. For example, if a tenant were to vacate a rented property prior to the end of their lease they may be entitled to claim this relief. However, after the end of the lease, their landlord may not have a new tenant ready to move in and would become responsible for paying the rates themselves. The landlord would only be able to claim rates relief to the extent that the tenant had not used up the allowance.
There are a variety of other exceptions and reliefs available for business rates, so each property should be assessed on a case by case basis.
Some leases contain provisions which allow for the adjustment of rent during the term, known as rent reviews. It is almost universal that these rent reviews will be upwards only, meaning the rent will either go up or stay the same. It is usual for rent reviews to be on a 5-yearly cycle, meaning they will not usually be relevant for shorter leases.
There are different types of rent review, but the most common is the “open market” review, which brings the rent into line with current market levels. The lease will set out various assumed and disregarded terms for the purposes of the valuation, which should be reviewed by a rent review specialist. In the event that the parties cannot agree the new rent, the lease should provide for a third party to assess and determine the new rent.
An alternative to open market is to link the review to an indexed measure of inflation, such as RPI or CPI. It may also be agreed that indexed reviews apply a cap (and sometimes a collar)
Regenerative Ecological, Social, and Economic Targets (RESET) is a certification program which aims to standardise and improve sustainability data in the built environment, using continuous monitoring and cloud software.
In order to be certified, projects must employ monitoring tools that meet minimum technology and data processing standards. This is assessed through the analysis of continuous monitoring data and site audits. RESET aims to implement a benchmark against which the quality of monitoring data can be compared.
RESET certification is available for each of the following aspects of the built environment:
- Air: monitoring particulate matter, volatile organic compounds, carbon dioxide, temperature and humidity;
- Materials: evaluating the health, safety, and ecological performance of building materials and products in projects (currently in pilot phase);
- Water: monitoring the use, efficiency and quality of water (under development);
- Energy: monitoring the carbon cost of energy usage (under development); and
- Circularity: monitoring the input, output, generation and consumption of waste (under development).
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.
SDLT Overlap Relief
Stamp Duty Land Tax (SDLT) is payable on both any premium paid and the rent payable by a tenant taking a lease.
There are many cases where a landlord and tenant may agree to surrender and re-grant a lease, such as on a re-gear. Without a relief, rent attributable to the overlapping period would attract SDLT twice.
Overlap relief therefore allows for a partial or total relief from an SDLT charge when a surrender and re-grant occurs. There are a number of conditions for the relief to apply:
- The surrender and re-grant must be between the same parties;
- The tenant must have paid SDLT (not stamp duty) on the original lease and not claimed an exemption from SDLT; and
- The re-granted property must be the same or substantially the same premises as was surrendered.
Overlap relief operates by reducing the rent on which the SDLT calculated. The relief takes the new rent and subtracts the old rent, that SDLT was originally paid on, from it for every "overlap year". Care must be taken to ensure that the correct rental deduction is made, and the deduction cannot result in a negative number.
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.
Smart buildings are those which seek to optimise user experience through the use of technology.
Smart buildings provide tools which can allow them to be run in a more cost effective and sustainable way and therefore may help achieve ESG
There is no one measure of what makes building ‘smart’, but factors include:
- Digital connectivity: fibre and 5G infrastructure to support the current and future needs of occupiers
- Sensors and use of data: microchips within the building’s systems can be used to pre-empt problems and optimise service delivery, for example facilities management can provide cleaning services more effectively and more cost efficiently if they know which areas of the building have been used most (or not at all)
- Automation: the ability for a building to automatically react to new circumstances, for example moving lifts to where there are likely to be needed, before the button is pushed
- AI and machine learning: this allows the decision making process within automation to be updated without human input
SmartScore Certification is a standard used to categorise and distinguish between smart buildings. It was launched in April 2021 by the same team that set up the WiredScore accreditation for digital connectivity. There are four levels of certification: Platinum, Gold, Silver and Certified buildings.
There are six areas in which a building must deliver, to achieve SmartScore Certification:
- Community and services: communication with users to provide the ability to access external services, such as deliveries
- Health and wellbeing: monitoring and adjustment of air, light, temperature and ventilation as well as maintenance reporting systems
- Individual and collaborative productivity: automation and data sharing, such as occupancy detection, building check-in and desk allocation
- Maintenance and optimisation: availability of detailed performance data in real time
- Security: access controls, building security, fire alarms and compliance management
- Sustainability: management of the consumption of water, energy and light, electric vehicle charging points and waste disposal / recycling
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.
The Electronic Communications Code (also known as the Telecoms Code, or just “the Code”) governs the rights of designated electronic communications operators to maintain infrastructure on public and private land. The Code was updated in 2017 to make it easier for operators to install telecoms equipment. Only those operators which appear on the official Ofcom list receive protection from the Code.
The new Code applies equally to all equipment, whether cabling running through a riser or a large-scale mast. The Code rights in respect of installation, sharing and assignment only apply to equipment installed after the introduction of the new Code. However, the protection relating to termination retrospectively attaches to equipment that was installed prior to December 2017, other than by way of a 1954 Act protected lease.
Code protected equipment can be challenging to remove. The new Code introduced a strict 18 month notice period to terminate the Code rights, which can only be exercised in limited circumstances and by the grantor of the wayleave. Any application to terminate is dealt with by the Land Tribunal and the grantor must show the tribunal that the damage caused to them by the equipment remaining in situ outweighs the benefit to the public.
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.
Turnover rent is payable to a landlord based on a percentage of the tenant’s gross turnover received from trading at a property (subject to specific exclusions) and is mainly found in leases of retail premises.
Turnover rents are seen as a way of the landlord and tenant sharing some of the risks of the tenant's trade.
Historically tenants would usually be obliged to pay a base or “minimum” rent (to provide certainty to the landlord) along with a turnover rent top up (if the tenant’s trade surpassed an agreed amount).
Due to recent uncertainty and government enforced closures due to COVID-19, it has become more common for parties to negotiate turnover rent only leases, whereby the rent payable by the tenant is simply an amount equal to an agreed percentage of the tenant’s gross turnover.
Underletting is a form of alienation, which creates a new lease that sits below your lease. You will remain liable to your landlord for the obligations in your lease, however responsibility for most of these covenants is typically passed down to the undertenant. An alternative to underletting, is to assign.
Underletting of whole is usually permitted, subject to landlord’s consent, whereas it is less common for underlettings of part to be permitted.
Leases usually include the following requirements for an underlease:
- the annual rent must not be less than open market rent;
- if a rent-free period is granted, then it must be no longer than is usual in the market;
- rent reviews must typically take place on the same terms as under the lease;
- depending on the term, there may be a prohibition on further underlettings; and
- it must be contracted out of the 1954 Act.
The term of the underlease must expire at least a few days before the expiry of your lease, otherwise the underletting will take effect as an assignment.
An uninsured risk is, in its simplest sense, a risk against which a property has not been insured under its buildings insurance policy. The main reasons that a given risk has not been insured against are usually because cover is not available in the market or only at uneconomic rates. Common examples of these risks include terrorism and flooding.
Where an FRI lease is silent the liability for damage or destruction caused by an uninsured risk will fall on the tenant. A well advised occupier will seek to ensure that their heads of terms specify that the lease will include “Uninsured Risk provisions”, which mean uninsured risks are treated more like insured risks, making them the responsibility of the landlord.
Giving a property back with vacant possession is often a pre-condition to a break clause in a lease. This is a particularly onerous condition, and one that should not be taken lightly by tenants.
In order to comply with such a condition, the property must be given back to the landlord free of people and belongings. This includes, but is not limited to, bags of rubbish, workmen carrying out repairs, and security staff. The courts take a strict approach when determining whether vacant possession has been given, and so before agreeing to a condition to give vacant possession, tenants should be clear on what will be required of them. An alternative (and less onerous) break condition, which most landlords accept, is to hand back the property ‘free of any occupiers or underleases’.
Giving a property back with vacant possession differs to the requirement placed on tenants to yield up. Yielding up is much less onerous than giving vacant possession as tenants are only required to demonstrate their desire to bring the lease to an end.
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.
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 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 Building 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. Recertification is required every three years to remain accredited.
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.
You may also be interested in Fitwel 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.
The “yield up” clause in a lease sets out what will be required of the tenant when it returns the premises to their landlord at the end of the term. Usually this requires the tenant to return the premises in the physical condition that it would have been in had the tenant fully complied with its repairing and decorating obligations under the lease. A failure to comply with this clause will result in the landlord bringing a claim for dilapidations, which is a common approach allowing tenants to maximise their time in occupation.
Yield up may also govern what the tenant is required to do with any alterations, signs, fixtures, fittings or chattels which may have been added to the premises during the term of the lease. For example, the clause often requires the tenant to remove these items, unless otherwise required by written notice from the Landlord. Occupiers should ensure that they have not started these works of reinstatement, if the landlord still has a right to require them to be retained.
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.