This is the fourth in a series of posts discussing the key points to be considered when negotiating heads of terms. In line with the other three (one, two and three), whilst our discussion is tailored to dark stores, the points raised will be equally applicable across other asset classes.
- Fitting Out - As part of the grant of any lease, the tenant will want to ensure it is able to carry out its fit out works. Typically the restrictions on alterations in the lease will mean that the tenant will require a licence to alter before it can carry these out (ie: a permission (a licence) from the landlord for the works).
A tenant should typically ensure that the licence to alter is completed at the same time as the lease as this will enable the tenant to immediately progress its works.
Tenants should try to negotiate a rent free period at the start of the term to run for an equivalent period to that expected to be needed for the fit out works to be carried out. This will enable the tenant to avoid paying rent whilst it is both not trading and paying for the fit out works.
One point for landlords to be aware of in the context of a turnover lease is that they should be incentivising the tenant to reach practical completion of its fit out works as quickly as possible so that the tenant starts trading and paying a rent as soon as it can. This is usually achieved by including an obligation on the tenant to commence trading within x months of completion of the lease with some landlords including an ability to terminate the lease if the obligation has not been complied with.
Tying the above specifically to dark stores, if a tenant is taking a unit at a Cat A specification, the fit out works may well be lengthy and so a 3 to 6 month rent free period would not be uncommon.
- Alterations - The question of what a tenant is (or isn’t) able to do in terms of alterations will be a key tenant consideration throughout the term of the lease. Firstly at the point of initial fit out, secondly at any point the tenant wants to adapt the unit as its business develops and thirdly at the point of attracting an assignee who will be concerned to make the unit work for its proposed use. The third point is particularly relevant for dark store tenants, where an assignee is unlikely to be a competitor and more likely to be someone operating an entirely different type of business who will need to adapt the unit considerably.
Whilst tenants will typically want maximum flexibility, landlords will be concerned about how a tenant's alterations could affect the residual value of its property. It will therefore want to include controls on what alterations a tenant can (whether with or without consent) and cannot make. In recent years, landlords have also been increasingly concerned about the impact any alterations might have on the EPC rating of the unit and as such, the majority of landlords will want to ensure they have absolute discretion to prevent any alterations being made that might have an adverse impact.
The most usual commercial position agreed between parties is that structural and external alterations are absolutely prohibited. Internal, non-structural alterations (and alterations to any shopfront) are permitted with the landlord's consent, not to be unreasonably withheld or delayed. The erection of internal, non-demountable partitioning can be made without consent.
- Yielding up - A point very much linked to alterations is that of yielding up (or reinstating) at the end of the lease. It may be in the interests of a landlord to ask the tenant to leave in situ any alterations which increase the residual value of the property; but insist those that are specific to the tenant's business (ie: shelving, etc) are removed. Conversely the tenant will likely want to leave its alterations in situ in order to avoid paying contractors to remove the alterations.
Typically what is agreed is that any tenant alterations must be reinstated at the end of the term, unless the landlord directs otherwise. This is chiefly because it is equitable that the tenant returns the unit as it found it but also in part because there may be adverse consequences for a landlord if there is no full reinstatement obligation - namely that tenants have a statutory ability (in specific circumstances) to demand compensation for improvements to a unit that are left in situ at the end of the term. The risk of this statutory provision biting is not one landlords will accept.
- Repairs - As mentioned in previous articles, the extent of a tenant's obligation to repair is closely linked to the extent of the unit demised. See part 3: https://insights.boodlehatfield.com/post/102hkk8/youve-got-a-deal-heads-of-terms-part-3-dark-stores-focus.
The key point any tenant should be aware of in terms of repairs is that an obligation to "keep" in good repair, includes an obligation to "put" the unit into good repair. Ie: If the unit being taken on is dilapidated then the tenant will be obliged to put the unit into a good state of repair and then maintain that. As such, any tenant would be well advised to carry out a full survey before taking a lease of any unit and, if the unit requires substantial expenditure to put it into repair, the tenant should look to agree with the landlord that the tenant's repair obligation will be limited to the state of the unit as at the date of the lease, with that state of repair being evidenced by a schedule of condition.
Where a landlord is offering a tenant a newly constructed building, parties should discuss and agree how any inherent and latent defects will be dealt with. The tenant is likely to want to carve these out of its repairing obligation on the basis that the landlord has arranged construction and any risk of defects appearing (particularly in the first few years) should properly sit as its risk. Typically what is agreed is that the tenant takes on a full repair obligation with either (a) a contractual obligation on the part of the landlord to enforce the warranties it has from its contractors to procure that any inherent or latent defects are remedied; or (b) the provision of warranties from the contractors to the tenant so that the tenant can pursue the contractors direct for the same.
In our next post, we will discuss service charge and insurance.