Rachel, a Property Director has been given 12 months to set up a new multi-floor HQ for a tech firm with 500 employees. There are risks involved that could jeopardize the current and future office. Find out what four action points she needs to follow to make sure the building is ready when they need it to be ready.
Rachel Huang, Property Director at one of the UK’s fastest growing tech companies, has been waiting for her COO, Karen Craig, to confirm the location of the company’s new HQ for months.
Rachel finally gets the call she’s been waiting for at 8am on Monday. Karen has pinpointed a brand new building, KC1, in fashionable King’s Cross, London, which she thinks will be the ideal creative hub for the company’s 500 London employees. It’s now up to Rachel to get the deal done in time for the grand opening in exactly 12 months’ time – giving the company a home worthy of its ambition and growing brand…
12 months is an aggressive timeframe to get an HQ ready, and Rachel doesn’t know where to start. She has legal, facilities, marketing, operations and finance stakeholders calling and emailing her on an hourly basis, asking for updates and assurances that the deal will happen within the year. The company absolutely has to deliver the vision it has sold to its staff, the market and the press. The bespoke interior design and fit out is packed-full of features that reflect its innovative and fun culture, including a climbing wall, helter skelter slide and swimming pool.
Rachel thinks through three key risks that could derail the timetable, and works out three possible solutions…
Key risk #1 - Incurring double overheads
The company’s current lease has six months to run. When should Rachel approach the landlord at the company’s current premises to ask for some more time. How much time does she need, and how much will that cost? How can she ensure that there is as small an overlap as possible, whilst ensuring the company doesn’t end up homeless? Does she need to consider serviced offices?
Key risk #2 – Consequences of delay
What happens if there is a delay in the delivery of KC1 before they start their own, state-of-the-art fit out? Rachel has already had to sign-off on the contract for the interior design firm, who are busy turning the virtual reality vision into life…and issuing invoices.
Key risk #3 - What does “ready” even mean?
Rachel is concerned that there may be a mismatch between the developer’s / landlord’s definition of “ready’”, Rachel’s definition of “ready” and her stakeholders’ definition. She’s heard nightmare stories from peers about lifts and security passes not working on day one.
Solution #1 - Avoiding double overheads
Rachel negotiates an extension of the lease of the current premises which will start when the current term finishes and contain a rolling tenant break. This means that there will be a regular opportunity for notice to be served, and she will only need to push that button once she is confident that KC1 is ready for her company.
Solution #2 - Managing delay
Working with her Facilities Manager and legal team Rachel creates a GANT chart. Key dates from that along with requisite notice periods are fed into the KC1 Agreement for Lease, so that all parties know to what timeframe they are working. The Agreement allows the landlord twelve months to carry out its works. The landlord must keep Rachel’s project manager regularly updated on progress and involve them in all site inspections. If there are delays, then liquidated damages will be payable at a daily rate. Rachel is also discussing whether early access may be offered to those parts which are ready and the landlord is raising that with its contractor.
Solution #3 - Defining “ready”
Rachel insists that the specification the landlord has provided is given proper technical scrutiny and is negotiating additional conditions to be met before handover occurs. In particular, she is concerned that all plant and machinery is properly commissioned and the snagging list does not include anything that would delay the fit out or affect occupation.
Andrew MacGeoch, Head of Asia Real Estate and Infrastructure at BCLP says Rachel has many things to consider.
1. Existing Landlord
Rachel should be approaching her current landlord at the earliest possible opportunity. Hong Kong landlords are often not very cooperative in these situations. They will want to agree parameters around whether the extension periods will be agreed on a monthly or quarterly basis and may also set a cap on how long these extensions can be rolled over. They will of course want to find a replacement tenant and the lack of certainty on when the current lease will expire will make that task difficult. Accordingly, they may well then ask for higher rentals to cover these extension periods. Much depends on market conditions but typically with low vacancy rates and a queue from aspiring tenants in some premises in HK, can make these dialogues rather challenging!
2. The New Landlord - Structural and related issues
In addition to the key risks identified Rachel will want to consider certain insurance issues arising out of the interesting and fun features to be included. The climbing wall, helter-skelter slide and swimming pool will give rise to a number of incidents and liabilities as well as complicating the licences and permits required for completing the project. A detailed chat with the company’s insurance broker is recommended although no doubt this is often left to the last minute and a sudden panic of should we really be offering these facilities! A football table and a pool table may be better!
The swimming pool will also require some structural aspects to be considered in the design and there are special swimming pool licenses which are required under HK law. These licences are notoriously hard to secure on first inspection so can cause delays. Query if the helter skelter raises structural issues if the height requires removal of a ceiling between two floors. These add complications and cost at the front end of the lease and, of course, on termination (assuming the usual reinstatement clauses apply). Early dialogue with the new landlord is essential to ensure that the specifications for these additional facilities are agreed and approved as part of the agreement for lease. Defining whether OP is sufficient for handover or whether other licences are critical in this context will also be part of the negotiation depending on who is doing what (eg the swimming pool is probably being done by the Landlord’s contractor). Much will depend on the extent of detail agreed as part of the Agreement for Lease/Lease.
Coordinating activities and information between the current landlord, new landlord and interior decorator will require careful planning and a critical path identified on the GANT chart.
Rachel will also want to ensure that there are obligations in the Agreement for Lease for the new Landlord to give monthly updates at least say in the 6 -9 months running up to the earliest handover date. This information will be needed to provide extra visibility on progress both for her interior designer and in terms of terminating the existing lease.
She will also want to negotiate timely approvals from the new Landlord in relation to approving any fit out plans to ensure that the fit out timetable is respected. We assume the new Landlord will also provide the relevant Fit-Out Manual at an early stage so that the interior designer can comment on whether the Manual is clear enough to ensure compliance. If it is too vague/highly subjective then this can lead to disputes on how to comply and again cause delay, frustration and extra costs!
As a side issue it is worth checking for compliance with any confidentiality provisions in the leases (new and old) and various renovation related contracts to ensure that sharing of information with the interior designer and potentially the current landlord (being a competitor no doubt of the new landlord) is permitted!
Query if Rachel can secure any liquidated damages from the new Landlord if the premises are not delivered by certain dates.
Landlords of new premises often give quite a long range from the earliest date to the latest date for completion and it will be hard to get any great clarity on specific dates until quite close to the time when the occupation permit (Occupation Permit) is likely to be given. Delays may be caused by the landlord or delays may be caused by the interior designer and their contractors. Accordingly liquidated damages will need to be considered in the context of delays caused by these parties. LD’s can typically be enforced if they represent a genuine pre-estimate of loss (rather than a penalty amount which is unlikely to be enforceable). Large landlords will be reluctant to give any LD’s whereas contractors and interior designers will of course be familiar with such a mechanism and approach.
Heather Boelens, a Partner in BCLP’s Denver office, says…
In the US, Rachel would want to be confident that rent does not commence until the landlord has substantially completed all work in the new HQ space and the landlord has delivered exclusive possession of the new HQ space to the company. In connection with any delay by the landlord in delivery of the HQ space, Rachel would want to consider negotiating a two-tiered approach to remedies: (i) abatement of rent for a certain period of time and (ii) a termination right if the landlord fails to meet an “outside date” (in which case, the landlord should also reimburse the company for all out-of-pocket costs incurred in connection with the lease).
Hazel Shakur Quinn, a Partner in BCLP’s Abu Dhabi office, says…
Rachel may be pleased to know that under the Dubai landlord and tenant law, a tenant has an automatic right to renew its lease with landlords being given limited circumstances where they may reject such renewal rights. That being said, in order to provide Rachel’s company with certainty, I would still recommend negotiating a contractual right of renewal (and any break options) for the periods that work for her company’s business.
The concept of liquidated damages is recognised by the Federal Law of the United Arab Emirates. However, local courts have the right to increase or decrease the amount of liquidated damages stated in a contract to more accurately reflect the loss suffered. It is therefore advisable to ensure that liquidated damages provisions are carefully drafted to reflect the parties’ agreement on what constitute a genuine pre-estimated loss that may be suffered by the tenant.
An office with a dedicated swimming pool sounds great! However, assuming the pool forms part of the tenant fit out works, Rachel may wish to confirm (and at an early stage) that her facilities management team are satisfied that the power allocation for the premises is sufficient to support this exciting design and that this design complies with Dubai’s building/planning regulations for commercial space.
If the new office is not located near to a metro or tram station, walking to work during in the summer in Dubai may not be a welcome option. Rachel should ensure that the landlord is obliged to deliver full access to any agreed onsite basement/surface car parking spaces when the premises (or relevant phases) are delivered.