The language of leasing – a jargon-busting guide

All businesses need a home, and for most that means an office. Somewhere that is a suitable professional environment for your staff, that sends out the right message about who and what you represent as a business. It needs to be accessible, and importantly, it needs to be affordable. There isn’t a one size fits all solution – different offices, with different financial implications, suit different companies.

At the outset, the prospect of leasing an office can seem daunting, but it doesn’t have to be. As in any specialised environment, there’s a certain amount of jargon – this guide should help to demystify the whole process and give you greater understanding of the world of commercial property.

Heads of terms

A ‘Heads of terms’ agreement is a document that sets out the main points of any lease or licence. Essentially, it sets out and formalises all the items and points you’ve reached agreement on in the course of discussions, e-mails or written correspondence to that point.

Conventional leases

Most commercial property is let on a ‘conventional lease’ basis. This means a full formal lease is negotiated between both parties, with the use of solicitors on each side of the agreement. Leases are used for areas of space that grant exclusive possession to the tenant and usually include incentives based on the length of the commitment and covenant strength, ie the financial strength of the proposed tenant.

According to how strong a landlord judges a potential tenant’s covenant to be, they may ask for a deposit covering a certain number of months’ rent and service charge, or they may ask one of the tenant’s directors to act as a guarantor.

Conventional leases are usually used for tenancies for any period beyond six months, for any length of time up to 25 years. Sometimes the landlord will give an option to ‘break’ the lease at a given time – with the first break usually coming after three or five years – and in some cases the landlord will also retain the right to break the lease, such as when a building is due for refurbishment.

Break options

Should you choose to exercise your break option, there will be a Notice Period and some conditionality, meaning you have to notify the landlord of your intention to leave at the break date. The Notice Period can be of anywhere between 3 months and a year, and it’s vital you are aware of its date – if you miss it, you will not be able to exit and will be liable for the remainder of the lease.

You should make sure you aren’t in arrears of your rent, and also be aware that some break clauses include a ‘rent penalty,’ to be payable either at the notice date or the break date.

Rent reviews

Rent reviews are common in longer leases, largely so that landlords can ensure their rental income keeps pace with the market and inflation. Five-yearly reviews are the norm, although rent reviews can occur as often as every three years. Any increase has to be justified, ie backed by evidence, such as a similar office in the same area letting for considerably more. Most lease agreements allow for ‘third party determination’ by an independent expert or arbitrator.

Licences

Usually, a serviced or managed office tenancy that does not grant exclusive possession will be documented on a shorter, more simplified agreement called a licence. Usually, licences are deliberately worded in a user-friendly way, cutting out the need for legal advice. This should allow a tenant to take occupation more quickly – it’s an ‘easy in, easy out’ agreement, if you like.

These types of offices often suit companies looking for flexibility and rents are usually paid monthly rather than quarterly. Understandably, it’s the most popular route for a new start-up business or partnership. It’s also a method used by larger organisations setting up an off-site operation for a special project or joint venture.

Managed offices and serviced offices

There are subtle but important differences between managed and fully serviced offices. Managed, or all-inclusive, office suites cater for companies who already possess the infrastructure of a business – office furniture, IT and telecoms equipment, storage – and also have enough human resources that they don’t require secretarial services. The all-inclusive rate usually includes the rent, service charge, business rates, building insurance, and, sometimes, energy bills.

Serviced offices can be seen as catering for the smaller end of the SME market, in a broad sense. They usually cater for companies with a smaller number of employees and less in the way of their own equipment. Fully serviced space often makes sense for start-ups or smaller businesses as they offer fully furnished space with additional services, such as phone and IT equipment, within the monthly rental rate. They also often include trained reception staff, providing tenants with a professional image. Generally, the monthly rent includes property with items such as business rates, service charge and utilities. The minimum term for this type of space can be as low as three months.

This isn’t a comprehensive guide, by any means – but if you’re starting out on the road of finding the right office for your business, it should help you on the way.