The Life Sciences Market
Lease issues for Occupiers
On 25th May, the Chancellor reported that the Life Sciences sector employs over 280,000 people and contributes £94 billion to the UK economy. He also unveiled a ‘growth package’ of £650m to ‘fire up the UK’s life sciences sector.’
The Government’s proposals include an intention to reform planning rules to speed up development of more lab capacity, but at present, demand for high quality life science facilities outstrips supply, meaning that occupiers are often under some pressure to conclude leases within a short space of time and must take care to ensure that the terms on offer are appropriate.
Occupiers in the pharma, bio-tech or medical device markets may be growing rapidly and although they may begin by occupying licensed space in shared innovation hubs, at some point on the growth journey they are likely to move into exclusive use facilities.
In this article, we highlight a number of issues that occupiers should consider, prior to signing up to lease a lab or other life science space.
Technical Specification and Location
Before solicitors become involved in the lease negotiation process, occupiers must be sure that the building meets the technical requirements for their use and is also in the correct location for their business. Specialist technical and commercial agency advice is usually sensible prior to committing to the lease. A lease is a formal legal commitment for the business, so the space (including all the utilities and infrastructure serving it) must be fit for purpose and the location must be suitable.
In addition, the base specification must be suitable to interface with any bespoke fit-out that that the occupier intends to carry out. The Lease should be drafted in a way that allows tenant internal alterations to be made with the Landlord’s consent, but the occupier will be responsible for ensuring that the specification, including electricity connections, and all M&E installations are suitable for its purposes.
Repair, Defects and Dilapidations
Often the occupier will be responsible for keeping the let premises in repair under the terms of the Lease and without careful drafting that may extend to remedying defects in the original construction of the building. If the occupier is taking space in a new, purpose-built facility it is important to understand who will be responsible for defects: either the occupier, in which case a full bundle of third-party warranties will be needed from the contractor that constructed the facility and the design team; or the landlord. Defective M & E can have a significant adverse impact on life science uses and so responsibility must be clear, particularly in a multi-let facility.
At the end of the lease term, the space may have to be reinstated to its original specification and layout. If so, this needs to be budgeted for and particular care should be taken where a fit-out is bespoke to the occupier’s requirements and has a high initial capital cost. However, in the lab sector, because of current demand the tenant may be permitted to handover the fitted out space to a new occupier without reinstatement. This also means that the incoming tenant will not receive a rent free period for fit-out and so ensures continuity of rental income for the landlord.
Service Charges
Life science facilities are often part of a wider estate or science park. In general, a landlord will be able to pass down to occupiers the costs that it incurs in managing the building itself and also in managing the wider estate. It is important to ensure that the service charge provisions are fair and reasonable and, as far as possible, follow the requirements of the RICS Practice Statement on Service Charges in Commercial Property.
Occupiers should ensure that they understand the method of apportionment being used to divide the service charge. They should also check that where there are other users of the estate or building that have particularly high demands for services (for example, through the use of energy intensive equipment or because of enhanced waste disposal requirements) those increased costs are not passed on.
In addition, occupiers will also need to ensure that they receive continuity of certain services, as failure on the landlord’s part to maintain or repair critical building infrastructure could have serious adverse consequences.
Lease Duration and Break Clauses
The duration of the lease, when considered with any break clauses will need to dovetail with the occupier’s business plans. For a rapidly evolving life sciences business, then space requirements are likely to change over time and some flexibility to exit the arrangement early is desirable or to sublet or reconfigure space.
Rent Review
The rent review clause in the lease should be reviewed carefully to ensure that it will result in a fair rent, as at the review date. Life Science developments are often part of an ecosystem, relying on close collaboration with local hospitals, universities and other stakeholders. If the occupier is an early entrant into a development, then it is likely that the rent will rise on review, as the Landlord keeps investing in developing a collaborative, successful and connected life sciences hub.
Access by the Landlord
All leases will allow the Landlord to enter the premises in certain circumstances. However, these provisions will need to be amended to ensure that the landlord and its representative comply with any particular requirements that the occupier may have regarding health and safety, commercial confidence or the need for a sterile clinical environment.
Environmental Performance
Lab operations are generally more energy intensive that ordinary office space and occupiers should carefully consider the environmental performance of the building and how, if at all, the lease supports collaboration on sustainability issues between landlord and tenant. For example, the lease should encourage open sharing of environmental performance data between the parties and may even require the landlord to improve performance over time. The occupier should have regard to how the facility fits with its own ESG strategy.
This article sets out some of the issues that occupiers should consider prior to taking their first lease of lab or other life science facility space. Given the importance of the issues, it is always sensible to obtain appropriate commercial agency, technical, tax and legal advice prior to entering into any commitment.
If you would like to discuss this topic further, please get in touch with us at Hill Dickinson LLP.
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For further information, please contact:
James Atkins, Partner, Hill Dickinson
james.atkins@hilldickinson.com
