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November 2013

Incubators are not often commonly associated with corporates or business enterprises,  yet young companies can benefit greatly from a period of 'incubation'. Often referred to as 'Business Incubators';  'Innovation Centres' (or commonly 'Techniums' in Wales), these are specialised spaces designed for the needs of young science and tech start-up companies (and  are generally distinct from Science Parks which tend to accommodate more established companies).

Experience of supporting small companies from their initial demand for space through to the management of their property portfolios as their businesses grow, particularly in respect of negotiating Incubator leases, shows that there are a number of key considerations which tenants and landlords alike will need to be aware of in order to maximise the value from their property. These considerations are discussed in more detail below:

Location

In order for a young start-up company as tenant to benefit fully from 'incubation', the space that they are looking to acquire will need to provide:

• A combination of both research facilities and office space. Generally a small start-up will only have the funds and the capacity available to initially take a lease of a single space, which will need to meet the various needs of the business. This can be difficult when there may be competing requirements which need to be balanced.
• A space with access to expertise in the relevant field. Generally young companies will need to be situated in close proximity to established research institutions, and other similar companies where support and assistance can be sought in the early stages of business growth.
• A site which has connections to sources of funding. There is an element of a 'chicken and egg' situation in this regard, as investors and venture capitalists will be attracted to existing knowledge and skills clusters in a given space.
• A site with the financial backing, for example, of a relevant government body, or a large established pharma company, as this can greatly improve confidence at an early stage.

In light of the above, it is no surprise that such Incubator space is often in high demand. It  can therefore be difficult for tenants to secure their most desired site in the face of stiff competition.

Term and assignment

The UK property market is typically geared towards longer leases designed for financially secure tenants which maximise rental income for landlords. Commercially, this can also have the effect of giving the landlord a stronger negotiating position.

However, in the case of the young start-up, the Incubator tenant will often prefer a shorter lease so that it can look to upgrade to a bigger space in the event that growth of the business proceeds as planned. This may also benefit the landlord, as young companies will have a higher attrition rate, and as such, shorter term leases can provide the flexibility for landlords to only retain those tenants who are performing well financially.

For similar reasons, tenants will generally find that their leases are excluded from security of tenure. In short this means that the tenant will not have any statutory right to renew the lease at the end of the term – should the landlord wish to, they will have every right to require the tenant to leave at that time.

In addition, it is often beneficial to a landlord to have the flexibility to move tenants around within the Incubator site to the spaces most appropriate for a specific tenant, freeing up smaller spaces for new propositions. As a result, tenants may find that they are required to 'graduate' to a larger space, or exit the incubator space entirely when they reach a certain size. Such requirements may even be embedded into the landlord's standard form of lease, and this is something for tenants to be aware of.

One potential downside of such flexibility relates to the complexity of the legal documents. It is generally not appropriate to have a complex form of lease for a small incubator space, and for a tenant unfamiliar with such property documents this could increase legal fees for the unwary.

Rent

Tenants in the early stages of business could consider requesting rent free periods or phased rents, in addition to requesting that the Landlord carry out any required fit-out works to the property. This may be helpful where a high quality lab is needed, or where a tenant has insufficient funds available. The tenant will need to demonstrate a financially-sound business when negotiating this element of the lease, so that the landlord can ensure that the company fits into the tenant mix in the Incubator.

While a higher rent can typically benefit the landlord, in relation to Incubator space, the landlord will often make more profit from being an early investor in its more successful incubator tenants. The landlord may even try to build provisions into the lease allowing it to take a percentage of the royalties in the event that the company develops a successful product. With this in mind, the landlord should not be looking to price a young company out of the incubator space.  

Rights over the Centre's common spaces and facilities

A further point for incubator tenants to consider is the degree to which the lease enables them to benefit from the common parts, facilities and infrastructure of the Incubator site and potentially of any linked research institution. Incubator tenants will make greater use of common parts than any office tenant, and so the tenant should ensure that everything it needs is provided for. Examples include:

• 24/7 rights of access over the car parking and other facilities (if needed), security provisions and the ease with which visitors can be admitted entry.
• Rights to make use of specialised equipment. The proximity to such equipment may  have been a reason for the tenant selecting a particular space in the first instance, and as such, it should ensure that the lease allows freedom of access to equipment such as  freezers, nitrogen storage facilities, IT equipment and specialist waste equipment.
• access to in-house training and support  services (e.g. business planning, accounting and legal skills, marketing, raising finance, networking etc.).

Throughout this article we have highlighted just some of the considerations that tenants will need to bear in mind when taking incubator space, ranging from selecting the right asset in the right location, to issues concerning lease terms, rent and access rights. There are however many more considerations beyond those highlighted here, and we would encourage any start-up company looking to take initial space to seek legal advice at an early stage.

If you have any questions on this article or would like to propose a subject to be addressed by Synapse please contact us.

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