Moving premises is a requirement of modern corporate life, especially if your business is growing. Few companies can afford to pay rent on more space than they need, which means that they may need to move if they grow by even a handful of new staff. Similarly, when businesses are slimming down it is essential to trim property costs wherever possible.
But, because company boards often lack the relevant skills and experience, they run the risk of incurring significant costs and long-term liabilities for even the simplest move. Directors generally have to learn quickly how to negotiate the right lease.
In the case of business owners based elsewhere in Europe, getting it right with their UK operation is even more important because they will not always be on hand to head off any difficulties. Mistakes can be very expensive and their effects far reaching and long lasting.
Seeking formal legal advice on a property move is vital. And while it is understandable that business managers are concerned about leaving themselves open to unnecessary professional costs, instructing a lawyer to review the lease and assist in the negotiations with the landlord will save money overall.
Agreeing to an onerous lease will have serious implications. This is particularly true when unreasonable obligations are imposed by the agreement. Of course, before hiring a solicitor you must get recommendations from others who have been through the process and agree a fee basis that keeps the costs under control.
Rent deposits and personal guarantees present a particular problem. Any deposit must be kept to a minimum to preserve valuable working capital. Owner managers should also make sure that they understand fully what steps they will have to take to get back their deposit when they move out and then plan accordingly.
Otherwise they may incur an unnecessary cash flow problem at what is usually a stressful time for any business. Equally owner managers should think very carefully before agreeing to provide a personal guarantee. It can be difficult to get such an undertaking released and it negates the benefit of running a business under the protection of a limited liability company.
It may be more suitable – if at all possible – to provide a bank guarantee. This offers the landlord better quality security and they may be prepared to settle for a lower figure. A landlord will often demand a bank guarantee if the owner is based abroad.
Regardless of the length of the lease, it is important to have a break clause part way through, allowing the firm to move out earlier if space requirements change. Most landlords will concede this, but they may not offer it at the outset, so managers must be firm on this point and demand one. Having to pay for both their old and new premises is a significant contributor to the problems of some of the businesses we try to rescue.
In one case, a firm needed to downsize to smaller offices, but was faced with the almost insurmountable problem of rent obligations for the next fifteen years totalling nearly £2 million. They had agreed to an excessive rent in the first place, so re-letting was extremely difficult.
It is inevitable that capital costs will be more than anticipated. The way to offset these is to ask for a rent-free period at the start of the lease, which will ease the cash flow pressure considerably at a key time. Although these are common, again landlords may not offer them initially.
An unexpected problem can lie hidden in the detail of the terms of most UK property leases. Firms will often find themselves liable to re-instate any damage or alterations to the premises. These claims, which can come out of the blue, will generally be sizeable.
I have dealt with quite small businesses brought to their knees by dilapidation claims of £50,000 or more for damage caused by previous occupants. Often these will stem from a failure to agree and document the state of the premises with the landlord before moving in.
This is another good reason to use a lawyer, and even a chartered surveyor, particularly when negotiating to take over an existing lease. Be warned that not only are there adverse cash implications from dilapidations, but reaching agreement on them can be very time consuming and distracting if you try to do this yourself. In many cases a lower figure can be negotiated, but this is best left to the experts.
Above all, the question business directors should ask themselves is whether the move is really necessary. The disruption to the running of the day-to-day operations will be worse than your most pessimistic assessment. Relationships with customers, suppliers and service providers will be affected and you may well lose important staff in the process.
Documentation or stock can be moved offsite, if they are what prompted the need for more space. Equally, if the problem is too many people, how about offering some the opportunity to work from home and “hot desk” when they need to be in?
There have been huge advances in space-saving furniture recently and it can free up the space for more people to work in the existing offices. No manager, being aware of the trauma and potential pitfalls, should ever consider an office move while there are reasonable alternatives available.