Drafting leasing agreements for tenants in the life sciences sector

23 July 2018

When drafting leasing agreements with any business, it is important to consider how their needs may differ to the previous tenants or other occupants of the building. Every business is different and will have different requirements for the space that they work in.

According to a recent Government report, the UK life sciences sector is booming with a record turnover of over £70 billion. The industry provides over 241,000 jobs across the country and attracts significant funding from private equity and foreign direct investments. The growth in the sector will inevitably result in an increased need for suitable premises in the right locations, offering opportunities to landlords that are able to fulfil this need.

Businesses operating in this industry will have specialist needs in comparison to a regular office tenant. The sector is subject to heavy regulation in comparison to other companies and their premises will need to be compliant with any regulatory frameworks. When drafting leases for life sciences tenants, landlords need to consider how agreements will need to differ to protect their assets and ensure that agreeable relationships are formed.

How is access and safety an issue in lease agreements?

Due to the nature of life sciences, there may be issues with landlords having regular access to the premises. Work can often be confidential and safety also needs to be considered. Laboratories may use hazardous substances or need to be kept sterile. Having landlords on the premises without forewarning could have significant consequences, causing production delays and breaches of contract.

Landlords that require access to the building will need to agree with their tenant alternative arrangements so that they can provide consistent service while remaining safe and not compromising the tenant's operations. It might also be advisable to consider security generally and if it could affect other occupants of the building.

How can utilities be an issue in a lease agreement?

Businesses in the life sciences sector will operate in a different way to regular tenants and therefore their use of utility services needs to be considered when drafting a lease agreement. Landlords should discuss with the tenant things like water and electricity usage, as well as air regulation. It will need to be agreed how these specialist needs for the businesses will be catered and paid for and should be discussed early on in negotiations.

How can alterations cause issues in a lease agreement with life sciences tenants?

When leasing to businesses in the life sciences sector, you will often begin with an empty shell that need to be converted for the tenant's needs. Bespoke alterations may be needed to make premises suitable for their operations. Any potential tenants need to be made fully aware of any restrictions in the lease that could hinder their activities. These restrictions can then become further complicated if there are other tenants in the building. Considerations will need to be made as to how alterations would impact occupants and their businesses, such as any additional noise, changes to access and security.

Landlords need to make sure when discussing the leasing agreement that they understand the needs of the tenant, as well as any future changes that are in the pipeline. The future needs of a tenant are always a valuable consideration as strategies are subject to change and could impact how a space is used. Talking to the potential tenant about their plans for the period of the lease rather than just their current needs could prevent future issues.

While negotiating the responsibility and costs of any alterations can become complicated, these discussions are incentives to both parties. They should make it easier to contract a longer lease term and future renewals, securing recurring revenue for the landlord.

How can the lease period cause issues in an agreement?

Due to the nature of the alterations that may be needed by businesses in life sciences, it is advisable that lease terms are contracted for longer periods of time. The tenants are likely to welcome longer terms as they are unlikely to want to continuously search for new premises that cater for their needs, and alterations can take significant periods of time to be made.

While the terms of any agreement should be carefully considered, if a longer lease term is agreed it becomes even more critical to ensure that the agreement is acceptable to all parties and considers everyone's needs.

What should always be considered in lease agreements with life sciences tenants?

While it is important to cover the specialist needs of a life sciences tenant, it is also essential that you consider the terms that are included in typical agreements that you might find with office tenants. You should outline items like each party's responsibilities, rent and payment methods and notice periods. When discussing these areas there may even be some further changes needed to be based on the nature of the business.

When drafting leasing agreements with businesses in the life sciences sector, landlords should consider the potential needs of the tenant and how the agreement may need to be adapted. Our Insights and Resources are recommended for landlords drafting lease agreements. We will update you regularly with information from our legal experts in Real Estate, as well as other sectors and services you may be interested in.

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