The demand for commercial property for start-up companies is growing rapidly in many areas of the UK. The need for laboratory spaces and offices in science parks and incubators is increasing and can be costly. Companies need to be alive to potentially hidden pitfalls if they envisage sharing such spaces with collaborators and service providers. This article sets out some strategies to avoid the most common problem that arises in this context.
In English property law, a lease will create a legal interest in land and grant exclusive possession for a period of time in return for the payment of rent. This creates a formal relationship of landlord and tenant and is by far the most common method by which companies take occupation of space, whether that space is used for offices, laboratories or a combination of the two.
It is usual for a lease to contain restrictions - or even an absolute prohibition - on a tenant’s ability to ’deal’ with the property, i.e. to grant further leasehold interests in all or part of the property or to share occupation of all or part of the property with third parties.
So what happens if, for example, the company decides to enter into a commercial agreement with another company for the provision of a service which includes the sharing of office and/or space?
Allowing a service provider company to share space in a building can, in certain circumstances and if the right factors are met (for example, providing them with exclusive use of one room or a whole floor) lead to a situation where an “underlease” is deemed to have been created. Such an “underlease” could place a company in breach of their lease, meaning that their landlord could have the right to forfeit their lease and bring it to an end almost instantaneously. This, in turn, could put the company in breach of the commercial agreement they have with the service provider and leave them in a rather difficult situation.
So how can this problem be addressed? One way is for the parties to agree to the third party occupying the property under a formal underlease which sits alongside the commercial agreement. This would usually involve having to obtain the consent of any superior landlord which is far from straight forward. A formal underlease will involve the third party having to pay market rent and this may not be within the spirit of the commercial agreement agreed between the two parties.
Another way may be for the parties to enter into a “licence to occupy” – a contractual right for the third party to occupy the property on a temporary basis. Such an arrangement however may still amount to a breach of the company’s lease as they are “sharing occupation” with a third party. Unfortunately, calling an agreement a ”licence” does not necessarily make it so in the eyes of the law. The law will look beyond words and look for the parties’ intentions. This leaves the company open to creating accidental leases disguised under the title of “licence”.
If the company (after taking into account all the circumstances and risks) decides to proceed by way of a “licence”, it would be wise for a break clause to be included in the licence. There would also need to be appropriate termination provisions in the service level agreement to the effect that should an underlease be deemed to have been created (thereby putting the company in breach of its lease) the commercial agreement ends immediately without putting the company in breach of this agreement as well.
To conclude, there are a number of pitfalls that need to be considered by companies who regularly enter into service and collaborative research agreements with third parties. Whilst the way in which companies structure themselves and run their day-to-day activities is becoming more and more flexible, English property law remains rigid. This means that companies must be alive to these strict procedures and ensure compliance so as not to be caught out.
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