This article was first published by Estates Gazette, June 2018
Over the past decade, the UK life sciences sector has enjoyed rapid expansion, aided by a 41% annualised increase in investment. Almost 6 million people in the UK (one in five British workers) are currently employed in the sector which is predicted to grow a further 4.3% by 2020. Government backing through its industrial strategy and Life Sciences: Sector Deal should encourage and support future growth and development in both research and manufacture throughout the UK.
The changing needs of occupiers and the growth of clusters around cities with appropriate talent pools and other demographics has led to an increase in the demand for suitable premises presenting a significant opportunity for landlords with properties in the right locations. Landlords and developers now see life sciences related real estate space as a thriving asset class and, with the advent of personalised medicine and the expansion of digital health, the sector is only going to grow. However, landlords and developers who are new entrants to this area (and looking beyond the incubator space required by start-up companies) should be aware of the specific considerations that are relevant to these occupiers. Many provisions common in office or industrial leases are not appropriate or, at the very least, require careful adaptation. Tenants and their representatives need to have an open and frank dialogue with their prospective landlord to ensure that their particular requirements are understood and catered for. Some innovative thinking may be required by landlords to maximize the chances of a successful and mutually beneficial relationship for both parties.
So what types of issues need to be considered?
Fit-out: Occupiers in this sector will almost inevitably need to carry out bespoke alterations and/or fit outs to make premises suitable for their specific use and the tenant needs to be certain that its operational needs cannot be thwarted by routine restrictions in the lease. Even in a standalone building, carrying out structural alterations/extensions would ordinarily be prohibited, and landlords generally want control over works to the mechanical and electrical plant. The position will be further complicated if the premises form part of a multi-let building where the tenant must have regard to legitimate concerns over the impact of works on the remainder of the building and its other occupants. It is critical that the landlord understands both the tenant’s immediate needs and how those needs might involve future changes to the premises during the life of the lease. Evolution in working practices and processes, such as the movement away from wet lab space and towards collaboration zones and computational research areas also need to be recognised and accommodated as necessary.
Reinstatement clauses also need to be carefully considered in light of the potential capital expense involved in making the premises suitable for the tenant and equally the potential cost of removal at the end of the term. It is likely that a landlord will insist on having the right to require reinstatement of some if not all of the works if they will not suit the needs of a subsequent occupier but there may be some flexibility around this.
Services: The nature of the tenant’s use is likely to require a higher specification for utilities than those of a standard office occupier and the tenant should ensure it has specialist advice both on quality of supply and capacity. Whilst this might be an issue for many occupiers, for example in relation to electrical or data capacity, supplies of water and issues such as air quality and ventilation may be as important. Upgrades to systems may well be required but may not be possible in all buildings, and agreement will be needed on how this is addressed and paid for. Where this is an important element for the tenant it is crucial that an early assessment of such operational issues is made and it should form part of the tenant’s general survey and appraisal in determining the suitability of the building.
Repair: Whilst the tenant will be responsible for maintaining its own plant and equipment, it may have legitimate concerns if there are central or communal services for which the landlord will retain responsibility, as would generally be the case in multi-let buildings. The landlord may be unwilling or unable to allow the tenant to take over maintenance or to introduce independent services which would be under the tenant’s control. The tenant needs to be aware that a landlord’s failure or delay in maintaining and repairing installations which are critical to the tenant’s operation could be catastrophic and should seek to build in higher standards of obligation on the part of its landlord.
Use: Compared with a traditional office tenant, the uses carried out by companies operating in the life sciences sector can be more specific. As with any lease it is important for the tenant to carry out adequate due diligence to ensure that their use complies with both the user permitted under the lease and the planning consents for the building particularly if these are also restrictive. Keeping the permitted rights broad will help to future proof the lease in the event of subsequent changes of user or the potential disposal of the lease.
Issues may also arise over the storage and disposal of chemical waste and hazardous materials. Understandably landlords will require that the tenant is responsible for safety issues and statutory compliance and tenants will be fully aware of the regulatory requirements associated with their own activities. In a multi-let building both parties will also need to carefully consider whether additional safeguards might be required to accommodate varied uses/processes in the building and how these should be addressed.
Landlord Access: Most leases will reserve a right of physical access to the landlord for inspections and other purposes connected with the lease, subject (generally) to giving the tenant prior written notice. This may be a major issue for a tenant, for example, if the work is commercially sensitive, requires a sterile or clean laboratory environment or simply involves the use of hazardous or specialised substances. The clause will require some thought and adaptation so that both parties’ legitimate rights are catered for.
Assignment and Underletting: Increasingly businesses look for flexibility in their leasing arrangements. This may be of critical importance where mergers or changes to the business structure might be contemplated during the course of the term. Depending on the structure of the acquisition, such an event could require an assignment of the lease to the acquiring entity and the need for landlord consent. Similarly prohibitions on permitting a change of control should be resisted if the impact of a share transfer triggering the alienation provisions would be potentially problematic.
The tenant’s business model might equally envisage being able to share occupation with a third party where collaboration on projects may well be important. Standard lease provisions which provide that the tenant may not share occupation with any entity outside a strict group company structure and that any assignment or subletting requires landlord’s prior consent which, in turn, may be subject to a number of pre-conditions, may be unduly restrictive. At the heads of terms stage, the tenant should give careful thought to its future plans and look to build in as much flexibility as the landlord is prepared to accept.
Yielding up: It is important for any occupier to consider from the outset what its exit scenarios might be during and at the end of the lease term. For organisations in the life sciences sector there may be the added complication of licences and permits which need to be surrendered to the relevant regulatory body and significant downtime involved in removing equipment in order to vacate space. These issues need to be thought about at the outset especially with leases where conditional break rights might be in play.
Lease term: The needs of life science occupiers to be in a particular geographic location (frequently driven by the availability of a talent pool of staff or to be in close proximity to medical facilities, seats of learning or similar businesses) in conjunction with the significant capital outlay often involved in making premises suitable for its needs, tend to result in longer lease terms being desirable. This heightens the importance of putting in place a lease which caters for the changing needs of the business and requires open communication and collaboration between the parties and the professional teams advising them.