For more established businesses that are looking for exclusive occupation over a longer term, leased office space may be the best option. Here’s everything you need to know about leasing office space in one simple guide.
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What is a leased office?
When renting commercial office space, the contract between the landlord and tenant, or tenant and subtenant, forms either a lease (including subleases and assignments) or a licence.
A licence is a simple, short contractual agreement that outlines the terms upon which a tenant (licensee) is permitted to occupy the property. A licence can be agreed and put in place within a short period of time and typically does not require a tenant to seek legal advice.
On the other hand, a lease is a longer and more complicated legal agreement that also permits a tenant to occupy the property. A new lease can take anywhere between a couple of weeks to a few months to complete and usually requires specialist advice regarding its drafting from a real estate lawyer. The process of drafting a lease commences once heads of terms, outlining the key terms and components within a lease, have been negotiated and agreed between the landlord and tenant.
Fundamentally, a lease provides a tenant with a greater amount of legal protection than a licence.
What is the difference between serviced office space and leased office space?
Serviced offices typically provide “plug and play,” fully fitted out and often furnished workspace for organisations ranging from startups to publicly traded companies. These offices permit flexibility via shorter, often rolling contracts that can be agreed and sourced quickly. The main benefits of this type of office are transparency via all-inclusive monthly costs, flexibility, and lower set up costs in comparison to leased accommodation.
Serviced offices are comprised of private offices, fixed desks, hot desks and coworking space.
Leased offices are slightly more complex, as a lease can be granted either direct from a landlord or from an existing tenant via a sublease or an assignment.
A new lease direct from a landlord is typically taken for a five to ten-year commitment with flexibility being achieved through the inclusion of break options within a lease. Unlike serviced offices, many leased offices are delivered in “Grade A” condition. This means the premises require a tenant to furnish the premises and install their own internet connection, cabling, and partitions for meeting rooms, kitchen areas etc. The initial set up costs are higher for leased offices when compared to serviced offices. However, given that most leases direct from a landlord are taken for a five to ten-year term, leased offices do tend to be more cost effective and deliver bespoke private offices for a business which is very much their “own space.”
Subleases and assignments are granted by a tenant in possession of an office lease. A sublease is a separate contract that largely reflects the terms of the original lease, whereas as an assignment is the transfer of the original lease to a separate party. Put simply, an assignment involves changing the names on the original lease contract, meaning the incoming tenant (assignee) agrees to all the terms under the original lease.
Subleases and assignments typically allow a tenant to acquire leased premises on a shorter, more flexible basis. The initial setup costs of acquiring leased space under these agreements are reduced as existing fit out and furnishings can be inherited. Subleases and assignments also provide opportunities to find cheaper, more affordable office space when the rent under the existing lease is less than or more than the market rent. Both subleases and assignments require the landlord’s consent.
Our tenant advisory team have years of experience advising teams on the best course of action for them.
What are the benefits and disadvantages of leased office space?
|Leases tend to be for a longer term and serviced offices a shorter term.Leased spaces tend to be more expensive to set up but once established are often more cost effective.You get exclusive occupation – your own, private office.They give you more control over costs and internal culture.Leased offices tend to suit more established businesses that are able to predict their headcount.||Leased transactions typically take between three and six months from commencement to completion. A serviced office option agreement can be reached within 24-48 hours subject to availability and the provider.Leased spaces are not offered on an all-inclusive basis. Rent and service charges are paid to the landlord and the majority of other costs are paid separately.Most offices available to lease do not include the amenities offered by serviced offices and require a tenant to furnish and build their own breakout areas, meeting rooms, kitchenettes etc.Leases are less transparent than serviced office agreements.|
How much does leased office space cost?
The cost of leasing an office is dictated by the size of the requirement (sq ft/sq m), location, and lease length.
These fundamentals are worth bearing in mind:
- The larger the office, the more expensive it is
- The more prime the location, the more expensive the rent and business rates
- The longer the lease, the larger the discount and rent-free period
There are three main costs associated with leasing office space:
- Business rates (council tax for commercial property)
- Service charge
These costs will reflect approximately 70-90% of the total outgoings on an office.
However, it is also important to bear in mind the below to avoid any unpleasant surprises when acquiring leased office space:
- Tenant fit out/furnishing works – payable when leasing “Grade A” (new) office space direct from a landlord
- VAT – payable on the rent, service charge, and deposits in all buildings that are elected for VAT
- Utilities – the service charge will often include utility bills for the common/shared parts of an office building but not the accommodation occupied exclusively by your business. Utility bills for individual office units are normally paid separately
- Building insurance – paid by the landlord and charged back to a tenant. Sometimes included within the service charge
- Agency fees – if required. Typically 10% of the annual headline rent for the 1st year of the lease.
- Legal fees
- Deposit – often required when a tenant does not pass the “Profits Test.” The Profits Test requires a tenant to possess accounts that demonstrate their net profit is 3x the annual rent for the property for the previous three consecutive years. If a tenant does not pass the Profits Test, a landlord is likely to request a deposit equivalent to 6–12 months’ rent
- Dilapidations – at the end of a lease most landlords require a tenant to return the premises to the condition in which they found the premises. This involves removing all furniture and any partitions installed over the duration of the lease
How do I find leased office space?
Realty CP offers free consultancy to anyone looking for leased office space.
Our in-house property experts are here to guide you on everything you need to know when it comes to finding a leased office, from advising you on strategy, to independently sourcing bespoke options, to negotiating the best deal on your behalf.
Can small commercial properties be available for lease?
Yes. Properties from 100 sq.ft. to 1 million sq.ft. are available and capable of being leased.
Are there different types of office leases available?
Yes. You can either take a lease direct from a landlord or from a tenant via a sublease or an assignment.
What is the minimum term for a commercial office lease?
There isn’t one. If you are taking a lease direct from a landlord, most would expect and wish for a tenant to sign up to a five to ten-year lease depending on the property.
With a lot of available accommodation, most landlords will be willing to grant:
- A ten-year lease with a tenant break option at the end of year 5
- A five-year lease with a tenant break option at the end of year 3
- Anything over ten years
- Shorter term leases are available and must be negotiated
It is important to bear in mind that all the above vary with each building and landlord. For example, a landlord is less likely to grant a five-year lease with a tenant only break option in year three on a brand-new landmark development.