Whatever it might be, the costs, disruption and uncertainty of undertaking a relocation cannot be underestimated. It is, therefore, key for occupiers to understand how they might improve their existing warehouse space.

Staying can be mutually beneficial for all

With early engagement, occupiers can agree a works schedule which enhances the building during the existing lease term, for mutual benefit. Whether the landlord or tenant pays, it can be advantageous for both. The occupier, for instance, can benefit via the terms of a re-gear with a rent-free period, while a lease term and a steady rental income works in the landlord’s favour. The negotiation ability here will depend upon how close the lease is to expiry.

As well as the positive environmental impact of upgrading the quality of supply in the market, there are also other benefits for the landlord. Namely, the ability to improve a building while an occupier is still in occupation reduces the risk of a stranded asset and does not extend the void period while the refurbishment is underway.

Although occupiers may be reluctant to pay for the works, they will still need to adhere to their lease obligations. This is both during the term and notably at lease end as part of the dilapidations process. Beyond this, discussion and consideration of re-gearing a lease would be an effective mechanism to balance the cost of upgrade works between the landlord and tenant.

Occupiers are likely to be even more amenable if the upgrades could reduce their operational expenses (opex). For example, the installation of LED lights or solar panels can reduce electricity costs.

What’s more, if upgrades reduce future dilapidations costs this could be a good incentive for an occupier to stay. This needs to be appropriately captured in a new schedule of condition and attached to the lease, or specific sections carved out of any repair or reinstatement obligations. 

What about the cons?

Despite the benefits of staying and improving, occupiers will still be concerned about disruption to existing operations. This could be anything from external works affecting access to HGV yards, or indirect costs associated with landlords’ works, such as the part closure of a warehouse while roof lights are being installed. 

The type of occupier and their client base may also be an important factor when it comes to decision making. How high up on the agenda ESG is within a company’s overall strategy will affect their stay or go decision making. 

Communication is key

The key is ensuring good communication and collaboration between landlords and tenants. Occupiers will likely be much more collaborative if they are aware of the works in advance, or are involved in discussions of what works are to be carried out.

Sometimes the direction of a business means that an existing building, regardless of its operational efficiency, is just not fit for purpose and a new site is the only option. So, given limited supply and a lack of development pipeline, whether it’s to upsize or to consolidate multiple facilities, the earlier the project can start the better.

However, if an occupier does stay, ultimately the goal should be to end up with a better building. With property costs far less of a priority then operational disruption it can only be a positive for all parties.

Further information

Contact George Unwin or Rebecca Poulton

Big Shed Briefing