Warehousing and manufacturing agreements – issues for a tenant to consider

Background

We have acted for many companies in taking leases of “new build” warehouse and manufacturing facilities. There are many important issues to be considered and the earlier in the process these are considered the better. In this note we summarise the main issues we see arising, time and time again. These are not “dry” legal issues – on the contrary they are important practical issues which can have a serious impact on the end product which the developer builds.

Unless the relevant protections are built in to the development agreement, a tenant may have a nasty surprise. Ideally, these issues need to be considered and discussed at or even before the Heads of Terms (HOT) stage. If they are not included in HOT that in itself is not critical, but those issues will then need to be raised by the tenant’s lawyer in the “legals”.

Frequently, we see HOT where the developer is reluctant to include too much detail around the main “tenant protective” provisions. Sometimes, the HOT will not mention these provisions at all. Our view is that the more detail in the HOT, the better. The issues need to be addressed at some stage in the negotiation and if the developer is not going to agree to these points then it is better that these issues are flushed out at HOT stage – before the tenant incurs legal and project fees. In this note we focus on six key areas: planning, rent, the building itself, construction, warranties and lease completion:

1. Planning:

Sounds obvious. The parties will generally be aware that planning consent is needed for the development – the agreement will therefore be “conditional” on planning consent being issued.

The key issue for a tenant is that it will not want anything in the planning consent which impacts to a material extent on the tenant’s business – or, depending on the type of business, perhaps to any extent on the tenant’s business. The tenant will therefore not want the agreement to go “unconditional” if the consent is not satisfactory because an unconditional agreement will mean that the tenant is bound to proceed.

Points the tenant should focus on:

• a) What is being applied for? An obvious question – but the tenant should have approval rights over any planning application. Does the planning application cover everything that the tenant wants to do?
• b) Timing – There must be an obligation on the developer to lodge the planning application within a fixed period after exchange and to progress the application and keep the tenant informed.
• c) What constitutes a “satisfactory planning consent” – i.e. so the agreement becomes unconditional? The developer will want to keep these provisions as simple and short as possible – the tenant on the other hand will wish to ensure that if the consent contains any “tenant’s onerous condition” then it is not an acceptable consent and the planning condition will not be satisfied.

There are a wide range of possible onerous conditions – the key element is that the condition must be clearly drafted so it is easy to identify if it is satisfied or not. Also, it may be that there are certain essential requirements that the tenant needs in order to operate its business. The tenant should therefore ensure that if any condition is imposed which means that any of those essential requirements cannot be satisfied then the consent will not be a satisfactory consent [e.g. issues around minimum area/operating hours/servicing hours/service routes etc].

• d) Disputes – There needs to be a mechanism for resolving any disputes as to whether a condition is an onerous condition or not. Most commonly, by reference to an independent surveyor (as expert) or planning counsel.
• e) Longstop date – The developer will propose a longstop date. If the condition is not satisfied by this date then either party can terminate the agreement. The issue for the tenant is that it cannot commit to any other sites whilst the agreement is current. The tenant will want the longstop date to be as soon as possible and should therefore take expert advice to ensure that the longstop date is realistic and not too far in the future.
• f) “Drop dead date” – The developer will invariably ask that the longstop date can be extended in certain circumstances, e.g. if the application has not been processed, if an appeal is in progress, if there is a referral to planning counsel, if the challenge period has not expired or if a challenge is made and has not been determined. From the tenant’s point of view, those provisions are reasonable, but there needs to be a “final” or “drop dead date” allowing the tenant to terminate if an acceptable consent is not in place by that date.
• g) Appeal – Is the developer obliged to appeal? The tenant will want an obligation on part of developer to do all it can to obtain the consent and should request an obligation to appeal. A developer should generally agree this, but may seek to include a provision whereby the developer is only obliged to appeal if planning counsel gives a favourable advice on the merits of an appeal.

2. Rent:

• a) Is the rent fixed or does it vary according to the area constructed?
• b) If the rent is fixed then it will have been calculated at a rate per square foot and based upon a “target area”.
• c) Agreeing a fixed rent is quite dangerous for a tenant – what if the developer delivers a building smaller in size than the target area? To overcome this concern, a tenant will generally want the rent to be calculated on the actual area delivered.
• d) There are two options:
  • i) The tenant can require that the rent is calculated by reference to the measured area.
  • ii) The rent is fixed and based upon the target area and if the developer delivers a building within a [3]% tolerance of the target area then that “fixed” rent is payable, but if the building is smaller [i.e. [97]% of the target area or smaller] then the rent is re-calculated at the agreed rate per square foot.
• e) There will come a point where the building may be so small that it does not work for a tenant. Therefore, the tenant will seek to include a tenant break option if the building is less than [95]% of the target area.

4. Carrying out of the developer's works and practical completion (PC):

• a) A “target date” for completion of the developer’s works will be specified in the HOT.
• b) This date will be referenced from the date on which the agreement goes unconditional.
• c) The tenant will want an obligation for the developer to procure that completion takes place by this date. The developer, on the other hand is likely only to agree to a “reasonable endeavours” obligation and will ask that the target date is extended as allowed under the main building contract or where there is a “force majeure” delay.
• d) What if developer is late? The tenant should consider (a) a liquidated damages provision or (b) right to break if practical completion is not achieved by a specified date.
• e) At PC a certificate will be issued by the “Employer’s Agent” [generally a surveyor or project manager appointed under the main building contract].
• f) This is obviously a very important date, because it will trigger lease completion and occupation by the tenant to fit out. The tenant should therefore ensure that it has as much notice as possible of the proposed meeting to issue the PC certificate and is entitled to attend.
• g) What if the tenant thinks that works still need to be completed? The tenant should be allowed to make representations, which the Employer’s Agent should take into account.
• h) The agreement should also provide that the tenant is given a warranty or duty of care letter from the Employer’s Agent [see below].
• i) PC Longstop date: what if construction takes much longer than was envisaged? The tenant will not wish to be committed to the scheme indefinitely and will therefore require the ability to terminate the agreement and walk away if PC is delayed beyond the PC Longstop date.

Lease completion

• a) The lease completion date is important for all sorts of reasons. The importance of lease completion to the developer/landlord is that it may trigger completion/payment to the landlord under any forward sale agreement.
• b) Once the lease is completed, the tenant’s leverage against the developer/landlord diminishes substantially. The tenant must therefore ensure that before the lease is completed the developer/landlord has done everything that it has promised to do under the agreement. To ensure maximum protection for the tenant, the following should all occur before the lease is completed:
  • i) Practical completion
  • ii) Provision of signed and dated warranties
  • iii) Provision of the following:
    • 1) All test and commissioning certificates
    • 2) All planning and building regulations approval certificates
    • 3) Confirmation from local authority that any “pre occupation” conditions have been satisfied
  • iv) Provision of all CDM, H&S files and BREEAM certificates

Conclusion

The devil is of course in the detail and the development agreement/agreement for lease itself will need to be thoroughly checked and negotiated by the tenant’s lawyer to incorporate all of the above points – and other points of lesser importance. We hope that the above has helped to identify the main issues which a tenant and its agent/surveyor should think about at the negotiation/Heads of Terms stage.