Key issues to consider when negotiating a commercial lease overseas
Published on 6th Jun 2019
When first setting up an international office, most fast-growing US companies start with a serviced office space that provides a flexible base of operations for the initial team to begin building the overseas business. As the market opportunity and the team grows, a more permanent office solution becomes more appealing, but sourcing and negotiating for commercial office space varies significantly from the process you may be familiar with in the US. As the leasing process and legal formalities differ significantly around the world, it is important to understand your target jurisdiction's approach, to manage time and cost expectations, as well as pre-empt potential pitfalls. To help you navigate international commercial real estate markets, we've highlighted some of the key points US companies should bear in mind when securing office or retail space abroad, with a particular focus on markets in the UK and Continental Europe.
Heads of terms
The initial stage is to agree "heads of terms" which set out the key terms agreed by an agent (broker) or you with your landlord. These are generally agreed before lawyers are instructed but you should arrange a legal review before they are settled to prevent legal issues emerging at a later date. Heads of terms are usually not legally binding but some countries' law require that this is expressly stated in the heads of terms.
Once heads of terms have been agreed, the "lease pack" will be sent to your lawyer. Typically, it comprises the draft legal documents, evidence of the landlord's right to grant the lease, replies to enquiries and a plan of the premises to be let.
Your lawyer will review this documentation and consider any issues with you, including advising on potential mandatory law applicable to your lease. They may also submit searches with appropriate authorities on aspects such as the planning history of the property.
The landlord will try not to give, or to limit to the extent permitted, any warranties as to the condition or fitness for purpose of the property. You must therefore satisfy yourself that it is fit to be used as intended and ensure that you have obtained the necessary authorisations/licences to run your business within the property to the extent required. Your lawyer will assist you with this and they will raise any concerns or enquiries with the landlord on your behalf. The landlord's responses may be relied upon by you, but they are not always helpful!
If you instruct your lawyer to carry out the full due diligence process, they will report to you on any issues and advise you on their significance before you are legally required to take the property. However, undertaking full due diligence can be costly and time-consuming and often unappealing to start-up companies or those seeking rapid overseas expansion. Businesses therefore sometimes opt not to undertake full (or any) due diligence and accept the associated commercial risk. One way of mitigating this risk is to negotiate a break option in the lease which is either fixed or rolling and exercisable on giving a short period of notice (typically six months). The enforceability and operation of break clauses varies from country to country.
Mandatory lease laws
Several European jurisdictions have mandatory laws applicable to commercial leases; mostly applicable to the retail sector and often protecting you as the tenant. Should these laws apply, a lease will typically be subject to specific break windows (for example, every 3 years), long notice periods (between six and 12 months), and landlords can only terminate the lease in certain circumstances (such as where they intend to use the property for their own business). Moreover, you could be entitled to compensation if the landlord terminates the lease and you may also enjoy additional protection if the property is sold to a third party and, in some countries, even have a right of first refusal.
In a typical transaction, the main documents are: an agreement for lease (a contract for the grant of a lease on a future date), the lease itself and a licence to alter (generally needed to carry out fit out works). If the tenant has agreed to pay a deposit as security for its compliance with the terms of the lease, there will also be a rent deposit deed which records this.
The lease and other ancillary documents will be annexed to the agreement for lease, so they all have to be negotiated and agreed before the agreement for lease is entered into. This negotiation is generally the most complex and time-consuming aspect of the transaction.
The agreement for lease may be dependent on conditions being satisfied: for example, the landlord completing construction works. It will also detail what happens if the conditions are not satisfied on time.
Exchange of contracts
Once the transactional documents are agreed, your lawyer will send you the agreement for lease for signature. When signed, they will "exchange" the contracts with the landlord's lawyer. Exchange means you and the landlord are contractually committed to enter into the lease on a date usually referred to as "completion date", subject to the terms of the agreement for lease.
The landlord may permit you to access the premises after exchange of contracts but before completion of the lease. During such access you will be required to comply with the terms of the lease as if it had completed. Early access can trigger payment of specific land taxes which are payable upon the grant of a lease and are calculated as a percentage of the rent and premium paid by the tenant, or based on the property income as estimated by the relevant administration.
We find the most common sources of delay to exchange are:
- Approval of fit out works by the landlord. If you are doing fit out works, you should look to provide copies of the works specification and plans as soon as possible so they can be submitted to the landlord for approval.
- Consent to the installation of telecoms infrastructure or other activity-specific equipment. A wayleave agreement may be required to permit the telecoms provider to install the telecoms equipment in the landlord's building. Whilst wayleave agreements aren't complex, they can be frustratingly low on people's priority lists to deal with. We recommend consulting your telecoms provider, IT colleagues and the landlord about your telecoms requirements as soon as possible.
- Search results from appropriate authorities. These can take several weeks to be returned so it is good if these can be submitted early.
The lease and ancillary documents will be sent to you to be signed as deeds on behalf of the tenant before the completion date. In the UK, it is unfortunately generally not possible to sign leases electronically due to the UK Land Registry's stance on this issue. If you are planning to sign the documents for a UK lease electronically, let your lawyer know at the outset so they can check this point for you. Once signed, your lawyer will need the original documents to complete, which they will do by agreeing to date the documents with the landlord's lawyer. On completion, there may be sums due to the landlord, such as rent or service charge.
Depending on the nature and duration of your lease, it may have to be notarized in order to be valid and some countries will require that the agreement and its documentation be signed before a notary public or a public official vested with a similar function.
Post completion legal requirements may include filing documents with the local tax authorities and registering your lease at the local land registry. Both formalities may be subject to specific deadlines so you should consider listing the necessary steps on completion date of the agreement for lease. Overlooking these deadlines could give rise to penalties and/or interest becoming due.
These are some of the primary legal issues and the general process elements in an overseas commercial lease negotiation, but each market and transaction will vary and you'll invariably encounter unforeseen issues. Knowing in advance that the process, 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.