Incubator spaces, such as those offered at the Alba Innovation Centre, TechCube, BioCity and the various Universities amongst others, can offer a fantastic opportunity for startup businesses to get off the ground within a nurturing and supportive environment.
By offering a full range of services and utilities for a set monthly fee, they provide both certainty on costs during those difficult early months when finances are stretched while also allowing flexibility to take on or reduce the space used without a significant fixed time commitment.
There comes a time, however, when incubator space is no longer appropriate and new premises are needed to move the business forward and/ or allow for expansion.
Serviced office accommodation outwith an incubator environment is available, but often at a premium, so it is likely that businesses looking to move on will be entering the commercial rental market.
At that stage, I would recommend that advice is sought on the terms which are being agreed as these can vary dramatically from those which were offered by the incubators, whose interests and goals are vastly different to those of a commercial landlord. Not understanding what liabilities are being taken on can ultimately be fatal for a business if the resources are not there to meet them.
Below is a brief summary of areas where commercial leases will differ significantly from the terms of an incubator licence, but this list is far from exhaustive and consideration should be given to all aspects of the lease:
TERM & BREAK OPTIONS
- Unlike an incubator licence, which may be rolling and terminable at any time on giving only a short period of notice, a lease will be for a fixed term and only be terminable at the end of that term on giving formal notice of at least 40 days (failing which it may run for up to a further year).
- Landlords will generally seek the longest term possible, so think about whether the premises are going to meet the requirements of the business long term or whether the business would like the flexibility of being able to ‘break’ the lease part way through.
- Unlike serviced or incubator accommodation, it will be the tenant’s responsibility to arrange their own supplies of electricity and telecommunications etc and the cost of these should be factored into any calculations.
- If the necessary connections are not in place, consideration should be given to the cost of installing these, whether any consents would be required and any lead in time for workmen to come out and do the works.
- If letting within a multi-occupancy building, it is important to query whether there are any service charges which are payable over and above the rent and if so, what these are likely to be.
- These costs can be substantial (e.g. where a landlord is looking to charge the costs of roof repairs or new air conditioning systems etc) so significant care should be taken and, if possible, advice sought on ways to limit liability.
- In a competitive rental market, businesses can often negotiate low starting rents but beware of any rent review provisions in the lease - the market may change in favour of the landlord and these may lead to a lift in the rent which was not anticipated and may not be affordable.
- Consideration and advice should be given on ways to limit or make uplifts more manageable.
- Unlike an incubator space, which simply has to be returned in similar decorative condition to that at the beginning, commercial leases will often place significant repairing burdens on to a tenant (usually referred to as ‘full repairing and insuring’ or ‘FRI’).
- Depending on the term of the lease or the condition of the property at the beginning, these burdens are not always appropriate and should be restricted accordingly.
Understanding the terms of the Lease and negotiating any points of specific concern can bring a great deal of comfort to a new tenant and, by resolving any points of contention before signing up will undoubtedly lead to a much more productive and amenable relationship with the landlord.
Should you wish any advice, or simply a quick chat about the terms of your new lease MBM Commercial’s Property Team would be delighted to hear from you.
0131 226 8224