We recently considered the increasing commercial necessity for landlords to understand a start-up’ priorities. We now look at the first (and perhaps most important) of these: cost certainty.
Budget restrictions makes it important for new businesses to plan overheads. They will look for fixed rents without review, which plays well with a shorter lease term. Bearing in mind the heavy burden of business rates, the tenant may also want to fix its rates with an all-inclusive rent. Obviously this leaves the landlord with the risk if rates rise, so this strategy must be weighed up carefully.
If they are taking part of a larger building, or one building on an estate, a start-up tenant will be more comfortable with a fixed service charge contribution. Landlords could meet this by offering an all-inclusive rent or a fixed or capped service charge. All options are risky if the landlord has let the rest of the building or estate on a conventional service charge scheme because they leave the risk of a deficit on the start-up’s unit. However, landlords may find that they can negotiate higher headline rents as a result.
Repair liability is another area where start-ups may try to limit costs. If there are areas of concern with the building, the tenant may ask for clauses to soften the repair burden, e.g. excluding fair wear and tear, a schedule of condition or removing items from the repair obligation altogether. The last of these is usual on new build schemes, where tenants may want to exclude their liability for damage arising from inherent defects in design or construction.
Instead, landlords traditionally offer collateral warranties from the contractor and professionals. This is not attractive to a start-up as it involves delay and legal costs without relief from repair costs in the meantime. Where a landlord has carried out successful projects with its contractor previously, this may be an area of risk it can absorb, again justifying a higher headline rent.