This is the second in a series of posts discussing the key points to be considered when negotiating heads of terms. In line with the first, whilst our discussion is tailored to dark stores, the points raised will be equally applicable across other asset classes.
- Term - The parties will need to agree how long the contractual term of the lease is going to be. Typically, a lease term will run in multiples of five years and for commercial leases in the current market the trend seems to be for five or 10 years, with longer terms generally avoided.
Generally a landlord will want to maximise the term length as this lengthens the period of guaranteed income stream and positively affects the value of the property. By contrast, tenants tend to be nervous of tying themselves in to long lease terms and press either for shorter terms, or for longer terms with break options (see below).
Dark store tenants, unsure of how useful a property's location will be to their network of stores, will likely fall into that 'typical tenant' category and push either for a short term or break options. The latter is likely to be the more appealing, particularly given dark store tenants tend to have to carry out an expensive fit-out and may wish to have the option to write down that fit-out cost in their accounts over a longer period so as to make it more affordable.
- 1954 Act - The Landlord and Tenant Act 1954 ("1954 Act") automatically applies to all commercial leases. It gives tenants the right to remain in occupation after the end of the contractual term of their lease and to request that the landlord grant them a renewal lease.
If a tenant stays in occupation after the end of its contractual term then the lease will continue to operate until either a renewal lease is granted or the lease is terminated.
Because of the difficulties landlords can experience in resisting granting a renewal lease and/or terminating a lease to which the Act applies, most leases are contracted out of the Act. This is achieved by a notice and declaration process at the point of completion.
Whether or not a lease is left within the Act, or contracted out of it, will depend on the respective bargaining powers of the parties. Inevitably we would expect a landlord to want the lease to be outside the Act and for a tenant to take the opposing position.
- Rent Review - In our last post, we discussed the different methods of structuring rental payments. If the parties have agreed that the rent is to be open market then they will likely want to include provisions for it to be reviewed during the term.
Normal practice is for rent to be reviewed every five years and the parties will need to discuss what assumptions and disregards are appropriate. The landlord, for example, will likely want it to be assumed that no capital sums are payable by the tenant and the tenant will likely want any improvements it carries out to be disregarded. Aside from assumptions and disregards, the parties should consider (i) the hypothetical term, (ii) whether there should be a break in the hypothetical term and (iii) whether, as is standard, the reviews should be upwards only.
In the context of a dark stores, because the dark store sector is in its infancy period, a tenant might feel that the risk of a big upwards only review at year five is too much.
At that point parties could discuss agreeing an upwards/downwards rent review (unusual) or a more standard compromise position whereby the tenant gets the benefit of a break option immediately before the rent review date, thereby enabling it to get out of the lease if it thinks the reviewed rent will be too high.
- Break Options - A related question to that of rent review is whether either or both parties should get the benefit of a right to break the lease part-way through the term.
As above, a tenant might want a break option to counterbalance the risk of a rent hike on review. A landlord on the other hand might want a break option if it is contemplating redeveloping the property in the near future or if a turnover rent has been agreed and it is concerned that the tenant may not be profitable.
In the context of the dark store market, the expectation is that the sector will continue to see consolidation between competitors - as recently happened with GoPuff and Dija, and Getir and Weezy. Where two consolidating dark store providers have properties in similar locations, it would clearly be beneficial to the consolidated dark store entity to have a break right so that they can absolve themselves of one of the leases and associated rental liabilities.
In our next post, we will discuss the property, the permitted use, planning, rights granted and reservations required by the landlord.