It is well documented that an increasing number of British manufacturers are
seeking to relocate certain aspects of their operations back to Britain.
There are many reasons given for the trend towards
‘reshoring’ or ‘onshoring’. Principal amongst these are the
ability for manufacturers to keep closer control on quality, a
reduction in and increased certainty of delivery times and a
shortening and strengthening of supply chains. These factors
are all big draws for British manufacturers and the trend
towards reshoring is positive for the British economy, for job
creation and for opportunities available to young talent keen
to be involved in the sector. The result of the EU referendum
and the significant uncertainty that this has for Britain’s
trading relationships with Europe and the rest of the world
may well strengthen British manufacturer’s resolve to continue
in this trend.
However, relocating operations can be a complex and costly
process, certainly in the short-term. A major challenge faced by
manufacturers seeking to return to Britain is locating premises
from which to conduct operations. So what are the options
available to companies wanting to make the switch?
Most companies will look to either lease or acquire premises.
There are a number of issues to be considered in making
this choice, which can broadly be grouped into the following
considerations: (a) flexibility; (b) funding the acquisition or
occupation; and (c) autonomy/use. For any company wishing
to return to the UK (or simply looking to start-up or expand
operations) it is worth assessing each of these considerations
in more detail.
Flexibility
A key issue will be how long new business premises are likely
to be required for. Flexibility may be key. A big advantage of a
lease is that the parties are free to agree any length of defined
term that they wish. Whilst it is not possible for parties to agree
to a ‘rolling’ lease term, including a break clause can give both
parties the flexibility of being able to end the lease before the
end of the contractual term. The period of notice that should
be provided, and its impact on business continuity, will be a key
consideration.
Assigning or underletting a lease can also be a far simpler
method for a company to divest itself of business premises
than achieving a freehold sale. Any steps and conditions
contained in the lease that the tenant will need to take and
comply with in order to effect a disposal should be carefully
considered. Invariably, the landlord’s consent will be required
to the disposition, but the other conditions likely to apply, for
example the provision of an authorised guarantee agreement
and additional third-party guarantees, will depend on the
circumstances and the terms of the lease. These considerations
can have a significant impact on a company’s ability to
dispose of a lease and for on-going liability.
Funding the Acquisition or Occupation
A key consideration for any company wishing to purchase
business premises will be whether it is able or willing to meet
that capital expenditure. If the new premises will be
required for a significant period of time, then
the certainty that ownership brings for
occupation and use may mean that
acquisition is the preferred choice.
Having a capital (and hopefully
appreciating) asset on a company’s
books may also be an important
investment and is potentially a
great method of pension planning.
Bank funding may well be available
to companies to both finance
the acquisition and to raise future
capital. Conversely, it is unlikely that
a bank will view a lease as representing
appropriate security.
In contrast, a lease allows a company to ‘pay
as it occupies’, which may be attractive. It will be very
important for companies to pay particular attention to any
provisions for rent review contained in the lease. Rent review
will often be in accordance with ‘open market rent’, and the
lease will generally specify the assumptions to be taken into
account in making this calculation.
These assumptions can make a significant difference to the
level of the review and it is important for tenants to take advice
from both a legal and valuation perspective so that a degree
of forward-planning can be undertaken.
Use of premises
Any landlord will wish to retain a
degree of control over the use of its
premises; the extent of this control
will generally decrease as the term
of the lease increases. In particular,
companies should consider the
provisions of the lease dealing with
permitted use and ability to make
alterations to ensure that these
authorise not only the initial intended
use, but also give scope for companies
to ‘grow into’ the premises.
This is not to say that without a landlord a
company will be free to use that premises as it sees
fit; there could be restrictions and fetters on use contained
on the title and there will always be planning and regulatory
considerations to take into account.
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