The way we use space in the life sciences sector has changed beyond recognition in the last 20 years. The more astute asset owners have been able to not only identify and articulate the needs of the sector, but also respond to the changing requirements of users from the commercial business sector, and the clinical and academic world.
The outcome has been an excitingly broad spectrum of offerings for occupiers, in many cases far removed from the old model of the full repairing and insuring long term lease. But is there a price to be paid for all this flexibility?
Lease and licence: security vs flexibility
In choosing among the various letting strategies, one of the key things to consider is the needs of the business in respect of space requirement over the short to medium term, and how that translates into a need for capital or revenue funding.
Established companies with a steady and predictable growth curve are more likely to consider longer term leases, where high initial capital costs in fitting-out specialist space and installing complex equipment can be comfortably amortised over a number of years.
For more embryonic companies whose growth trajectory is more uncertain, the last thing they want is heavy initial capital outlay or long term inflexible space arrangements with potentially significant exit costs, or having to underwrite the covenant strength of anyone who takes their place if they exit before the fixed term has expired.
Long term leases come in all shapes and sizes, but are usually for a term of at least five years. The benefits they offer include a high degree of security and privacy based around the exclusive right to occupy and the right to exclude the landlord and other third parties, except in strictly defined circumstances.
Subject to landlord approval, there will also be rights to adapt the environment to suit the occupier. That process can be costly (the cost of the landlord's legal and technical advisors need to be factored in) and can drag on interminably, so it's not an exercise to be undertaken lightly. While a full repairing obligation allows the occupier to maintain its environment to a high standard, the potential for sizeable service charge bills can prove to be a topic for heated debate when the lease terms are being settled.
For SMEs, whose success in early life can be highly volatile, flexibility is at a premium. Licences to occupy may come with less scope for personalising or adapting the space for the individual occupier but the vast majority of what the occupier requires is paid for and set up by the building owner from the outset. This can be extremely attractive if costly technical equipment or a highly conditioned environment is needed and the occupier has no desire or little ability to allocate precious equity or raise debt to fund that in the short term.
Short term leases represent a "half-way house" between the two options mentioned and are usually anything from around six months to two years, allowing tenants to grow but without tying them for the long term.
A break right or rights can create additional flexibility in either a lease or a licence arrangement, allowing the occupation to be brought to an early end. However, great care needs to be taken, particularly in the context of leases, to ensure any conditions to the exercise of the break are reasonable. Poorly drafted clauses can trap the tenant and deprive them of the exit they thought existed.
Alternatively, leases can often contain rights of first refusal (concerning additional space that may become available within the building) or options to renew the lease which help protect initial capital expenditure. It's often much more cost effective to expand in an existing location than relocate to an entirely different one.
However, tenants need to bear in mind that up-front costs are not confined to fit-out expenditure. Where a lease is being entered into, there is also a question of the time and professional costs of documenting the parties' rights and obligations and ensuring that the due diligence process uncovers the entire picture.
It's also important that tenants think not only of their obligations during the term, but also the potential cost of exiting the relationship at the end of the period (eg dilapidations). Professional surveys and schedules of condition are often de-rigueur.
While licences are not entirely free from these costs and concerns, the nature of the relationship between building owner and occupier, and the rights and liabilities, are often such that the occupier can take a more relaxed approach to these issues.
Regardless of the letting strategy chosen, it is crucial for businesses to plan ahead and engage professionals at an early stage (ideally at the heads of terms stage) in order to secure the most advantageous position.
