Author: Gavin Whitney
The building lease is a combination of a development agreement and traditional FRI lease in which, for a period of time, many of the usual tenant covenants are suspended while the tenant does things to the premises that it would not normally be allowed to do.
When might a building lease be used?
Sometimes a landowner/developer may have the site and the necessary skills to get planning permission, but they might struggle to obtain finance for the scheme; however, a national multiple tenant may be cash-rich and have lots of building expertise. In this situation, it can make sense for a tenant to do the works and be reimbursed its costs by the landlord. The landlord might offer an occupational or building licence to the tenant to facilitate this, but such a licence does not protect a tenant that is expending large sums of money on a development.
Therefore, the main advantage of a building lease over a standard agreement for lease is the ability of the tenant to receive its asset in advance and protect it against the landlord or a receiver, administrator or liquidator by registration at the Land Registry. In a longer lease, the asset will have a capital value and could be used as security for a loan from a bank.
Another advantage to the tenant is the ability to take control of a development and deliver completion of it in its own timeframe, potentially shortening the date when practical completion (PC) would have occurred had a developer been constructing or refurbishing the premises.
The developer may remain responsible for obtaining planning permission, but once this has been achieved, the tenant may not want to leave building of the premises to a developer that does not appreciate its business needs and requirements. Further, it may want to use familiar contractors that understand its requirements. The tenant may also want to do its internal fit out at the same time as it constructs the shell, which is not always possible under the traditional development model. Using the same construction team to do both sets of works at the same time is likely to save time and cost and this will, therefore, allow the tenant to operate or open more quickly.
The building lease comprises two stages, namely: before and after PC. Its structure is essentially the same as a normal lease save that many tenant covenants do not come into force until the tenant has completed its building works. It could be used in a new build scenario, but also where a tenant is taking a lease of the whole (such as a stand-alone unit on a retail park) but is carrying out substantial works to the exterior and structure of that unit.
The obligations in respect of the works are often contained in a schedule to the lease and are not dissimilar to those usually found in a development agreement, except that the tenant, not the landlord, carries them out. Included within that schedule may be a specification for the works or a form of building contract.
Some of the key provisions of the lease affected are:
Clearly, a building lease is not always suitable on every deal but is something which tenants may want to think about when negotiating heads of terms and assessing how much money they are spending on works. If they are in a strong position, have the right expertise and the cash, then it is definitely worth some consideration.
Gavin Whitney, Partner, Fladgate LLP (email@example.com)