Occupation Options – Serviced, Conventionally Lease or Purchase? 

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Serviced Offices

Serviced offices or workspaces offer tenants an all-inclusive rent, usually calculated on a monthly rate per person or desk. Rent, business rates, services charges and utilities are wrapped up into a single charge. Often the offices are offered with internet, phone lines and furniture so companies can commence work soon after agreeing terms.

Benefits of Serviced Offices

Flexibility

Most tenants are able to agree to monthly, 3 month, 6 month or 12 month terms. As a comparison, most central London landlords of conventionally leased space will require tenants to commit to a term of at least 3 – 5 years.

For start-ups and smaller companies that are growing rapidly, serviced offices can readily cater for expansion, with providers moving tenants to larger offices whenever the space becomes available.

Speed

Serviced office contracts are often short licence agreements illustrating basic terms of use. If the terms are agreeable a tenant can be in occupation the following day.

No professional fees

Serviced office brokers and agents are often used by serviced office providers, but fees are usually paid to the agents by the providers. Unless an occupier wishes to take the precaution of having an agent, surveyor or solicitor review their licence agreement there are likely to be no professional fees. The licence is usually a simple document that can be signed once the rent, term and possible rent free period has been agreed.

Great onsite amenities

The amenities on offer will vary from one serviced office provider to another, but it is not unusual to find buildings offering large break out areas, shared kitchen facilities, onsite cafes and bars plus a staffed reception. Larger providers will often put on events and seminars for their tenants, depending on the size of the building. Common meeting rooms can be booked as and when you need them, albeit usually for an additional cost.

No large up front capital expenditure

In most cases a serviced office tenant will take a furnished and decorated unit with installed telecoms and internet connections. It is unlikely the tenant will have any significant capital outlay at the start of the term, unlike conventional offices where most tenants will have to undertake some fit-out works.

No long-term liabilities

As serviced offices are generally taken on a 3 – 12-month term, tenants that find themselves wishing to grow or contract rapidly will not have to worry about disposing of a long-term lease, which might be difficult to do when the economy is performing poorly.

Collaborative and Co-working Environment


Serviced office buildings tend to house numerous small and start-up companies. Many will have large common areas and they can be a great environment to network and share ideas.
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Disadvantages    
 
Overall Cost

Serviced offices tend to be reasonably cost effective for smaller companies, but become incrementally more expensive as companies become larger, especially when you analyse expenditure on a £ per sq. ft. basis.

Reduced Physical Presence

Serviced offices usually comprise large floorplates that have been divided up into numerous small private office units or collaborative work areas. In most cases, you are unlikely to have your company name visible on the outside of the building or at the main reception.

Branding and Company Identity

It can be difficult to establish a distinct company identity or brand, particularly for smaller companies as fit out options will be limited and you will one of numerous companies situated on a single floor.

Privacy

Some offices are divided into glass ‘boxes’ placed next to one another, others may be divided up by poorly sound proofed partition walls. Privacy can be an issue for companies where confidentiality is a must.

Shared amenities

You are unlikely to have your own WCs, kitchen and breakout areas in serviced offices. This will not work for some companies.

Short notice periods

Most licence agreements give both the landlord and tenant rights to terminate the licence with a short notice period. This can leave tenants exposed to having to seek alternative premises at unplanned and inconvenient times.
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Leased / Conventional Office Space

Still the most popular way to occupy office space. Most Landlords in central London will expect commitments of at least 5 years, although it is not uncommon to negotiate break options at the end of the third year, particularly for smaller requirements. Key costs such as rent, business rates and service charge are usually quoted separately on a £ per sq. ft. basis.

Benefits

Cost


While the upfront cost of acquiring a conventional lease can be high, the overall annual cost is usually much cheaper than serviced options when calculated on a £ per sq. ft. basis. This is especially the case for larger floorplates.

Fit-out Flexibility and Branding

While office fit-out can be an expensive undertaking, it gives tenants the flexibility to create an office environment tailored to their specific needs. A tenant will have full control over office design, branding and furnishing so that the space can reflect their business identity and culture.

Own Choice of Services

Utilities are usually paid for separately and any special requirements, such as fibre optic internet, can be installed if the tenant requires that particular service. As a conventional office tenant, you will have far greater choice over the services you use (e.g. internet provider, telecoms provider etc.), this will allow you to choose the right and most cost-effective services for your business.

Control over Space Management

Employers and employees can tailor work spaces to suit their personal or activity needs. As an example, some teams may require movable desks for projects, other departments might prefer rows of desks. Senior management may require private offices and meeting spaces. This flexibility of choice over space management allows occupiers greater control over their work, time management and productivity.


Budget Occupancy Expenditure in the longer term

Usually the rent (unless negotiated otherwise) will remain static until the end of the term or an agreed pre-determined rent review. Service charges can also be capped. Tenants can therefore budget occupancy costs effectively during the period of their lease. Serviced office providers can in principle raise your rents significantly at the end of your licence term, which could potentially be only 6 -12 months after you have taken occupation.

Own Amenities 

In many office buildings that are conventionally leased, it is normal that tenants will have access to their own WCs, kitchen and breakout areas, as opposed to having to share with numerous other business.

Prestige

Ultimately having the ability to place your company branding on the façade, at the entrance or within the reception of a building can enhance your business image to both existing and prospective clients.

Space for storage

As accommodation is generally cheaper overall compared to serviced offices, companies that require significant amounts of storage space for files or materials would usually be financially better off in conventionally leased accommodation. This might be particularly important for some professional services firms such as solicitors and accountants who need to retain client files onsite.

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Disadvantages

Time to Agree and Finalise a Deal

A business lease is usually a lengthy document with numerous key terms that will need to be negotiated between the landlord and tenant and their respective agents. Negotiating these terms can be complicated and it is not just a case of agreeing a rent. Terms regarding the service charge, tenant incentives, condition, dilapidations and reinstatement, fit out, rent reviews, security of tenure, hours of access etc. are just some of the terms that will also require agreement. Tenants wishing to take pre-let’s of new buildings or existing buildings going under substantial refurbishment will have further terms to negotiate. After terms have been agreed the parties’ solicitors will need to agree the lease. The tenant’s fit out plans will need to be approved, sometimes by the landlord’s professional team. While a serviced office deal can be agreed within days, a conventional lease can take weeks, if not months, to complete.

Costs of Agreeing a Deal

As the above highlights, there are many stages to agreeing and completing a business lease. Professional fees for agents, solicitors, building surveyors, M & E consultants and in some cases planning consultants will need to be factored into any potential acquisition.

Fit Out Costs

A clear benefit of taking a conventional lease is the ability to create an office environment that best suits the needs of your business and staff. However, the costs of fitting out an office can be substantial and it is always best that several specialist fit-out consultants are approached for advice and costing advice. However, it is also possible to find conventional space that may also have a fit out that your company can use or adapt.

Office Management Responsibilities

The tenant will usually be expected (depending on what is agreed in the lease) to manage, maintain and possibly repair or replace facilities within their own office spaces. Office tenants will usually have to set up and pay for their own cleaning, IT infrastructure, telecoms contracts and utilities, together with paying a service charge in contribution to the maintenance of the whole building they occupy. While this will give a tenant greater control over their office environment and the services they use, these costs, together with the time required to manage these responsibilities are often overlooked.

Dilapidations and Reinstatement

At the end of the lease, it is often agreed that the tenant will need to remove their fit out works and reinstate the premises to the condition they originally took the accommodation. Tenants may also have repair obligations in the lease that they need to adhere to. Tenants will usually have the option to carry out the works themselves or pay a cash settlement. This can be extremely costly both financially and in management time. Specialist surveyors are usually employed to negotiated a dilapidations settlement, which is governed by specific dilapidations legislation.

Potential Medium to Long Term Liability

Conventional leases will usually require a medium to long term commitment from a tenant, normally in the region of 3 – 10 years. If your business falls on hard times and you need to downsize premises, reducing or assigning your liabilities can be difficult. If there is no forthcoming break clause in the lease, the only options available are usually subletting or assigning your lease (as long as your lease permits you to do this). In a weak market finding another tenant to take your lease, either via a sublet or an assignment, could be lengthy process. Agents and solicitors (and potentially other professionals) will need to be employed in most cases. Disposing of the lease will take weeks, if not months. During this time, you will still have to pay the rent, rates, service charges and utilities until a subletting or assignment has taken place.

Rent Reviews

Rent reviews are pre-determined points during the lease where the rent will be renegotiated, usually to the open market rent. The way in which the rent is reviewed is stated in the lease, however they can be on an open market basis, a fixed basis, upwards and downwards, upwards only (the rent will not fall below the passing rent) or linked to inflation as RPI or CPI uplifts. If you have managed to negotiate an upward or downward review in your lease, there is a chance your rent could be reduced in a downturn. However, typically rents are reviewed upwards only and in a rising market (as we have seen in recent years in central London), a rent review could mean a significant increase in your rent for the rest of your lease term. If your rent was increased in a serviced office you could leave for alternative premises at comparatively short notice.

Break Clauses

Break clauses can be both a benefit and disadvantage to a tenant, depending on what is agreed in the lease. A break clause can be tenant or landlord only or mutual. Single or multiple break clauses can be agreed at regular or irregular intervals in the lease. From a tenant’s perspective, a tenant only break option is obviously preferable as a mutual break option will give the landlord the right to serve notice to terminate your lease at a time when an office move may harm your business. In most cases a break notice period must be given, usually anywhere from 3 – 12 months. Financial penalties for exercising a break option can also be applicable so it is important break options are negotiated carefully.

Purchasing an office

Buying your own office is a less popular option, but can offer you a great long term solution for your occupancy needs. It may also be a great investment for the future.
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Benefits of buying your office

Knowing your costs


Purchasing your own office will give you ultimate control over your occupancy expenditure in the long term.


Greater security for your business


Owning your property means you will not have to worry about forthcoming lease expiries, break clauses or rent reviews, all of which could have a detrimental impact on your business.


Making alterations is easier


Subject to seeking planning permission and adhering to local planning policy, you will have much greater control over making alterations to your space, especially if you own the freehold interest. This could include making structural changes and adding additional floors.


Potential for an increase in capital value


In a rising or booming market your property could substantially increase in value. This could be a great nest egg for retirement or the property could be sold and the cash generated invested into your business.


Long term investment


In the event you wish to move your business from the property, the premises could be let out to one or multiple tenants providing you with a healthy income. Alternatively, if you purchase a building and only require use of part of it, the rest could be let out to tenants.

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Disadvantages

Upfront Cost


Purchasing a building is a substantial investment and commitment. Even if purchased with mortgage finance the deposit required will be high.


Costs of Maintaining the Building


Costs of running and maintaining a commercial property can be high and will be your sole responsibility if you occupy the whole building.


Potential to lose money on your investment


In a downturn or major financial crisis, the capital value of your property may actually decrease. If you need to sell your property in order to downsize your business, you may face substantial losses.