This article looks at the differences between the two primary methods of taking office space. The historical and more traditional method of taking space via a lease is compared with the more modern serviced office arrangements using licenses.
The pros and cons of leasing office space are reviewed and the specific benefits of Serviced Offices over traditional leasehold arrangements are considered in an attempt to give the reader an informed opinion when acquiring office space for their organisation.
A conventional (or “Traditional”) office arrangement is essentially any office space that is leased for a substantial period of time normally via a lease. On average, leases are around five years in length in the UK but could be substantially longer (20+ years) and may or may not have break clauses within them.
With substantial commitments being required, these types of arrangement are typically suited to businesses that require long-term office solutions rather than those that require flexibility.
Leases require the payment of a rent to the owner of the property (or their managing agent) which is normally set by the local market value for the accommodation. In addition to the rent which normally payable quarterly in advance, the Landlord is likely to recharge the cost of insuring the building to ensure their investment is protected at all times.
With the leasehold interest of the space being granted to the tenant via a lease, occupiers are given the freedom to decide on the layout of the space, how it is decorated, what equipment they install and how it operates (assuming the appropriate permissions are provided by the Landlord).
Leasehold arrangements often require their tenants to commit a substantial amount of capital in order to create their workspace. Arrangements of this nature are found throughout the UK and have historically been the way in which office space was always let.
Conventional office lettings have a number of advantages over premises rented under a license (common in the Serviced Office industry). A leasehold arrangement provides the tenant the exclusive right to the use of the space, whereas licensed office space provides the tenant with limited rights.
A leased office space also provides the occupier a handful of ownership rights for the term of the lease. One of those rites is often the ability to carry out alterations and modifications to the space (having obtained the appropriate permissions from the Landlord), which is not normally possible with licensed office space.
Although leases require long term commitments, it is often possible to assign the lease to a third party (again having obtained the appropriate permissions from the Owner/Landlord).
Once a lease has been established it may not be terminated by the Landlord unless certain conditions are not met by the tenant and in some situations, tenants are granted “security of tenure” which provides them with certain rites when it comes to renewal and operation of the lease.
These aspects of a lease that make it attractive to larger organisations that want to be sure they can operate from a particular property unimpeded by the Landlord.
Leaseholders are normally responsible for all maintenance and upkeep of a property. In the event of a lease covering a whole property the tenant is often responsible for repairing and insuring all aspects of the building before returning the property back to the Owner in either the condition provided to them or in a condition that meets with current regulations at the time of being returned.
Where leases are provided for part of a building the overall management of the property tends to be undertaken by a third party and the costs of managing the property shared amongst the occupiers via a “Service Charge”. Under these arrangements, there is less of a responsibility when running a property such as an office.
Leasehold arrangements do require the tenant to take on the actual running and maintenance of the space which will often involve dealing with utilities, managing cleaning, undertaking repairs, looking after data and telecoms, testing and maintaining the equipment in the space to ensure it remains safe from a health and safety perspective. These responsibilities can be onerous and take time to manage.
Service charges are a fair way of apportioning cost across the occupiers of a multi-occupied premises but there is always a management fee that has to be picked up in the costs.
There are normally “budget” service charge figures so that tenants know what the likely annual costs will be in the forthcoming year but from time-to-time significant repairs can have a dramatic effect over and above the budget and produce surprises from a cashflow perspective for tenants.
License based arrangements which are common in the Serviced Office sector tend to be on a fixed basis which means the Operator/Owner takes the responsibility for any adverse costs rather than the occupier.
Leases and their ongoing management often require the involvement of solicitors as the arrangements can be complex.
With the Landlord and Tenant Act providing the basis of regulation around leasehold arrangements, its interpretation and application to real life situations can require a significant amount of legal advice which tends not to be cheap. Leases are also renown for placing the cost of all professional fees including those incurred by the Landlord during the lifetime of the agreement on the Tenant which again can prove to be costly.
The final consideration when taking a leasehold property is to understand what the dilapidation responsibilities will be at the end of the agreement. Occupiers of leasehold properties are sometimes caught out by the cost of the reinstatement works when leaving the premises at the end of the lease.
Stamp duty is sometimes payable on the establishment of a lease with a tenant and there are often fees charged by solicitors and property agents when involved in the lease transaction.
Business rates a rarely included in the terms of a lease and it will not only be the responsibility for the tenant to settle the business rates invoices raised by the local council but also deal with any rateable valuation discrepancies that may arise. This can be a complicated process and require professional advice.
We have already covered how service charges work but in addition to these there are normally facilities management costs that the leaseholder will incur when operating the space. These costs are likely to include utilities, cleaning, waste management, security, general repairs, servicing of equipment such as air conditioning along with health and safety related testing and management.
Office space was historically let purely on a leasehold basis where an occupier would be granted a tenancy from a landlord in exchange for paying a rent, and perhaps a service charge and building insurance premium. The occupier would simply be granted access to the office space through the provision of keys and left to their own devices in terms of fitting out the space, providing furniture, installing telephone lines and data connections.
The concept of a serviced office developed in the 1960s in the US where a landlord kitted out their office space with furniture and provided reception services, telephone lines and meeting rooms for its occupiers.
This concept remains the basis of serviced office provision today space is provided on a fully fitted out basis with a variety of services supplied to support its occupiers.
With all furniture and equipment being owned by the landlord, the overall arrangement could be made more flexible with the ability to move in quickly (due to not having to wait for telephone lines to be connected and removals to take place) and out quickly for the same reasons.
Serviced office space tends to be provided these days via a license (rather than a lease) which can be for as long or shorter time as suits the owner and occupier of the space and provides both parties with greater flexibility which forms the crux of the serviced office model.
Serviced office occupiers come from a range of industry sectors and use the space in a variety of ways. The extent of how serviced the office space is also varies considerable across the properties being marketed on this basis.
Operators often use different models to differentiate themselves from each other but in general you would expect the following to be included within a serviced office occupiers license fees:
Business rates which are payable to the local council are normally dealt with in two different ways. Either the serviced office operator has had all of the individual office suites individually rated by the valuation office or they have one assessment for the whole centre.
If the centre is individually rated, it is most likely that the operator will ask the occupier of the space to pay the business rates directly to the council.
If the occupier qualifies for any business rates relief due to being a charity or occupying accommodation of a certain size they may benefit from discounted business rates or not actually need to pay any rates at all.
If the centre is rated as the whole site, the operator will be responsible for settling the business rates which is likely to be based upon the large business multiplier and the cost will be passed on to the occupier via the license fees charged. It is also likely that VAT will be charged on the whole license fee (including the business rates element) making the overall arrangement more expensive.
If a centre is rated as a whole, it is unlikely that the occupier will be able to benefit from any business rates relief. It is also worth pointing out that when grants were provided by the Government to occupiers of business premises at the start of the first COVID related lockdown, those business where the centre was rated as a whole rather than individually, they struggled to obtain the funds due to the overall arrangement.
Other facilities and services that could be included or provided.
The following items that may or may not be included depending on the centre/operator:
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