Life sciences: questions for landlords

The extent to which people will return to working in offices remains unclear; the future of physical retail is even more precarious. It’s not surprising that landlords and developers are devoting more consideration to sectors with growth potential, where working from home is impracticable. Life sciences, pharmaceutical and medical research are all sectors where remote working isn’t really an option. The rents for lab space are also appealing – prime lab rents in Oxford and Cambridge have risen by 8% and 11% per annum respectively over the past three years. The government reforms to use classes should have made conversion from many uses to laboratory use much easier. Nevertheless, a change of use class is the least of the hurdles to be overcome when retrofitting space for life science use. Is it the right building? Is the building in the right location? Life science tenants prefer to be in a cluster with similar occupiers near a research institution, delivering primary research which is then commercialised. Bidwells’ research with YouGov found the recruitment and retention of staff to be the key driver of location decision-making. The stereotype of a scientist working alone in a windowless lab is outdated: collaboration with others is key, and some of the most exciting start-ups exploit crossovers between disciplines – and sometimes with other companies. A building near an ecosystem of smart scientists, funders and great amenity space is attractive. City centre buildings tend to suit start-ups and, as they scale up, a science park will be preferable. Secondly, does the building have the right features? Labs require more ventilation and extraction facilities than offices. They are likely to need specialist gases, require increased electrical capacity (to run equipment) and use drainage differently, to name just a few differences. They are fundamentally different from offices in their use, and this must be fully understood when reviewing whether a property is adaptable, not only to alternative R&D businesses but also to future developments in the underlying science. When viewing property, an office user will not typically enquire about power resilience, vibration performance of the building structure, plant room space or accessibility for rising extracts. Nor will they consider removal of an entire M&E system for replacement with their own specialist and bespoke set-up. Other possible considerations are the addition of goods lifts, service risers and alterations to below-ground drainage. Some features may be essential to obtain regulatory consent for the work done at the laboratory, while other changes will be health and safety related. For an investor with a leasehold interest, the legal issues are apparent: structural works may be needed, and ventilation may well require external flues or chimneys that need planning permission. Both of these are normally prohibited by leases. While the Use Classes Order permits ready change of use, the development works themselves could need planning permission and building regulations consent. Not all local authorities have staff with the relevant expertise for life science buildings, so approvals can take longer and may place commercial deals under pressure. In a multi-let building, the designation of shared spaces and other building resources such as power will need to be carefully controlled so as not to lock out future options for others. Is the building the right size? Incubators offer “fully catered” small spaces on flexible terms to scientists taking the first step out of the lab with their ideas – Grassroots in Oxford is one example, offering mentoring and other types of support as well as dedicated space. Accelerators cater for scale-ups on a similar basis. However, the provision for intermediate-stage companies, seeking 5,000-10,000 sq ft or so but not large enough to take their own building, is a particular issue. Catering for this size of life sciences company is challenging. Typically, lease lengths are too long for companies with unpredictable growth plans, which typically outgrow space in two or three years. Their requirements are out of kilter with the market even before lab fit-out costs are considered, and they may not have proven covenant strength. Furthermore, the pace of growth means a prelet is not attractive for most. Intermediate tenants (10,000-30,000 sq ft) will have more understanding and stability, but with this they are likely to have greater technical requirements. Large and established companies (30,000+ sq ft) will take long leases and control their own fit-out to be fully bespoke, and will not be able to compromise on technical needs. Is the fit-out right? Although each tenant’s needs are bespoke and technical, depending on the type of science being done, there are some common elements. The premises should mix laboratory with write-up/office and analysis space, typically in a flexible 50:50 to 70:30 (lab/office) ratio. Collaboration space is critical between staff, both in labs’ write-up areas but also in social areas. Often, the really specialist laboratory equipment is purchased and owned by the tenant, leaving with them as they move on. Since it is this specialist equipment which brings most of the building requirements, a flexible services set-up is ideal. This won’t eliminate the need to future-proof the premises for changes. Scientists and entrepreneurs need the ability to change direction, by trying a concept and either expanding if it works or moving on if it doesn’t. Some of the most important discoveries in science are made by chance findings that are then developed. Incubators and accelerators offer the occupational flexibility to support this for small companies. Larger companies have the same need, but to a lesser extent. Even very large entities will look for highly flexible alterations rights in their leases to facilitate work developing a series of new concepts. Is the science right? This is probably beyond the skill set of the average property consultant to evaluate: some investors specialising in the sector will have staff with the relevant science background. However, landlords need to be ready for concepts to fail, requiring the lab to be repurposed for another venture, and possibly tenant. Understanding the value of changes and what to accept back is specialist knowledge, and will carry particularly high risks in certain circumstances. It can be equally tough to evaluate the covenant strength of tenants: accounts will be heavily influenced by the stage of funding a company is at. Capital investment might mean the financial information is hopelessly out of date, or overly flattering. Is the legal offering right? Life science companies tend to be run by intelligent people with little experience of commercial leases or the way space is “usually” procured. They would rather focus on their day job than run a design and procurement exercise for a bespoke fit-out, and find the processes cumbersome for their rapidly growing concepts. Savvy landlords will therefore include the core facilities needed by occupiers when marketing the premises, to reduce the timeframe for works; they will prepare with information to answer technical questions to compress deal timelines. Landlords may also consider procuring the bespoke fit-out for the tenant under an agreement for lease. Costs can be paid as the work is done or on lease completion, and may also be rentalised. This approach calls for more intensive involvement from the landlord and its team: the target occupier may well have little knowledge of the cost of its desired fit-out, nor of the time involved in arranging for the provision of indicative costs. A word of caution, though: always consider to whom design responsibility is owed – the rights and obligations need very careful documentation. What happens at the end? Leases generally oblige tenants to yield up following reinstatement of any alterations permitted after the date of lease completion. The drafting should expressly refer to reinstatement of tenant works under any agreement for lease, whether undertaken by the tenant or the landlord on the tenant’s behalf. In the context of a tenant likely to undertake a series of fit-outs, a reinstatement specification will be extremely useful. Well-advised tenants will resist reinstatement to office spec or full replacement of M&E systems. Consider whether any landlord works undertaken as part of the retrofit are so specific that these should be included within the tenant’s reinstatement obligation – or will that be so onerous that it could have a detrimental effect on rent review? While substantial life science clusters have evolved in markets such as Oxford, Cambridge and London, other UK cities are showing growth and are planning for a life science future. To illustrate the potential, more than half of Cambridge’s office and lab floorspace is occupied by the life science sector. However, science is evolving rapidly, with advances in areas such as AI drug discovery and cell and gene therapy all impacting on property requirements. The need for specialist knowledge of the sector will only grow. Sam Potts is a partner at Bidwells and Suzanne Gill is a partner at Wedlake Bell Photo © Jochen Tack/imageBROKER/Shutterstock