Growing your footprint overseas | Key considerations in Real estate
Published on 12th Nov 2019
Having the right roof over your head is always a key consideration in business (and life!), but is particularly crucial when expanding into a new country. You want to be spending your time driving your expanding business forward and not worrying about whether you are in the right location and space for your business. Things can be very different as you move into different jurisdictions, and so here are some of our top tips and legal considerations when choosing your business premises overseas.
Choice of 'space'
Following on from a likely navigation of the immigration and visa process in your chosen jurisdiction, physical space and 'where to work' are likely the next issues to mind (noting that fixed space isn't a requirement for incorporation). The choice that faces a new entrant to a jurisdiction are:
(a) a traditional office;
(b) a serviced office; or
(c) co-working space.
The choice used to simply be (a) or (b) but option (c) is becoming the increasingly popular choice. Don't let the recent failed IPO of one of the market leaders put you off – there are many providers of co-working spaces, all of which provide new entrants to market with the flexibility to "dip their toe in". The obvious advantages of co-working tend to be: a sense of community, trendy perks, the ability to grow or contract your space requirements, relatively limited notice periods, unparalleled networking opportunities and, perhaps most importantly, the ability to find smaller space in large and busy markets which would otherwise be tricky.
That said, as with most things, there are factors that must be carefully considered. Users will want to make sure that the identification of space and responsibility for property damage are clearly defined. There are potential issues with insurance (and availability of the same) as traditional commercial insurance covers risks in conventional workplaces. For example, claiming under a policy for theft of a laptop would be much more difficult if taken from a desk in a shared office with no forced entry. Shared spaces also bring with them issues relating to privacy and data breach – owing to shared IT infrastructure – which is heightened by everyone's favorite topic… GDPR(!). For entities that have nondisclosure agreements with business partners and clients, it is important to consider whether the innate “openness” of co-working space will pose issues.
Occupation of co-working space will usually be governed by a standard form license, with little or no room for negotiation. Much like a commercial lease agreement (of traditional office or serviced office space), it is still essential this license clearly defines who is entitled to use what space, i.e. what space is exclusive to the licensee and what space is shared with other occupants. The agreement should also clearly state how the cost of communal space is allocated among occupants and whether the licensor or the licensee is responsible for any damage and/or repairs needed with respect to common areas. While licenses are often simpler and easier to negotiate than leases, they can also be terminated more readily, often with a short period of notice (usually 30 days). Licensees will also not benefit from the statutory and other legal protections of established landlord/tenant law which a tenant under a commercial lease may have the benefit of.
Growing your business and the strain on space
Should you continue to successfully grow your business in the new market, it is likely that you will look to 'upgrade' to a different type of space. The want or need for a more permanent space will often lead to leasing a defined area under a lease. The benefits of taking space under a lease includes having your own space with the potential ability to put your own "mark on it" (subject to the landlord consenting to your carrying out any necessary alterations), but this comes with less overall flexibility. If a new entrant wants to extend or amend the lease of its office space this is not as easy under a traditional office lease in which rights of termination are a commercial term agreed at the outset.
Tip 1 – Break conditions (if any) must be clearly defined and ideally limited to payment of the principal rent (rather than all of the rents payable under the lease). If agreeing or exercising break provisions, legal advice should be sought from experienced real estate lawyers with expertise in the jurisdiction.
Tip 2 - A good agent / broker can be invaluable when it comes to negotiating lease terms and making sure that the tenant receives the concessions commonly available (or required) in a particular jurisdiction. These would include agreements relating to fit out costs, service charge arrangements and caps, assignment terms and rent free periods.
Other considerations when taking space outside of the USA
The role of the professional team
Typically, your broker would play a much larger role in a transaction in the US agreeing terms and also playing a role in the negotiation of the lease itself (depending on the size and complexity of the letting). Outside of the US, the broker / agent's role would be limited to agreeing terms, with your legal team then picking up the heavy lifting on the lease document. In turn, this will impact on the fees paid to the different parts of the professional team.
Tip 3 – We would always recommend a legal review of these terms, to make sure that the professional team (as a whole) has what it needs.
Tip 4 – Although the role of the broker can be somewhat diminished when compared to their role in the US, it can be valuable to consider using a broker who has familiarity in both the US and the target jurisdiction. This can allow for an easier "translation" and explanation of key and comparable deal terms.
When taking a lease in the US, a landlord will usually confirm or certify it has full authority to enter into the lease with you. Nevertheless, market practice is to still undertake a proportionate amount of title diligence (in light of the deal size). This is very similar to the approach outside of the US, particularly in Europe, where your lawyer will usually undertake a legal review of the title to the property which you are leasing and report accordingly. Property searches are also submitted and add a further layer of time and cost to the due diligence process. It is important to take these additional costs and timings into account in your budget and timeline.
Post completion requirements
Depending on the jurisdiction, these may include filing documents with the local tax authorities and registering your lease at the appropriate land registry. These formalities may be subject to specific deadlines and overlooking them could give rise to penalties and/or interest becoming due. Registration, where applicable, is a fundamental post completion exercise as legal title to the lease often cannot be transferred without it.
Taxes and rates
Each jurisdiction will have its own duties on real estate transactions and likely additional commercial rates which will need to be paid. In particular, stamp duty or property transfer taxes can be considerable, depending on the lease term and rent levels, and are (as is the case with commercial rates) a tenant cost.
Good tax advice is a must and can inform your strategy and leasing approach. An example of the potential dangers here would be the UK, where local councils are sending enforcement officers to 310 companies a day over arrears for commercial rates (1 in 16 of all business premises in the UK).
The default position across most of Europe (the UK being an example), places responsibility for remediation costs on the polluter. This contrasts to the headline position in the US in which the owner/occupier of a property is liable alongside the polluter.
As is the case in the US, liability can be substantial if you are found culpable for contamination of property. This can be the case even if your activity has released contamination as opposed to creating the problem originally. In certain jurisdictions, liability can be limited contractually between parties.
Tip 5 – Given the potential liability your professional team is key here. Your lawyer and broker have a mitigating role to play and if the risks are particularly high, an environmental consultant can be employed to advise you.
Finally, it is worth noting that many European jurisdictions require a lease to be notarized in order for it to be valid and enforceable. Only certain individuals are able to perform such a task and therefore it can have an impact on your deal timings and, to a lesser extent, costs.
These are some of the primary legal issues and process considerations when taking space overseas, but each market and transaction will vary and you will no doubt encounter unforeseen issues. Having the knowledge that the options, timelines and key issues will be significantly different than what you’ve experienced in the US will help you take the right precautions and set appropriate expectations. We hope this overview gives you some broad brushstrokes on what to expect as you further grow your footprint overseas. Our real estate team can help you understand what this means for your business.