More and more landlords, developers and investors are looking at opportunities in the UK life sciences sector, in order to capitalise on the growing demand for life sciences space as a result of the global pandemic. As with any new and developing sector, there are many novel and specific issues, not generally seen in other real estate sectors, to consider and grapple with when negotiating with potential occupiers.
Set out below is an overview of some of the issues we are seeing which real estate clients, looking to either invest in and develop new life sciences space or repurpose existing stock, will need to consider.
Hazardous materials
Before we get started, it is worth bearing in mind that there are two types of laboratories that need to be distinguished: ‘wet’ labs and ‘dry’ labs. In basic terms, ‘wet’ labs deal with wet materials which are liquids, biological matter and chemicals, whereas ‘dry’ labs are focused on physics and engineering. Wet labs, by their nature, tend to involve additional risk factors, and as a result some of the areas discussed below are predominantly relevant to wet labs.
Some wet biocontainment laboratories and research facilities will need to handle, store and dispose of hazardous materials, which is an important issue to be considered and dealt with as part of any potential letting.
This comes with its own risks and any landlord considering letting to a life sciences operator will want to ensure the occupier takes on a robust and accountable obligation for the management and disposal of any substance that could potentially contaminate the landlord’s building and/or utilities that may benefit a wider pool of tenants (this is in addition to the usual tenant covenant in leases requiring tenants to comply with all applicable laws and regulations):
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Landlords should consider imposing (or they may be required to impose for insurance purposes) limits on the amount and type of hazardous materials stored at the premises in question, as well as controls on the way in which any such hazardous materials are managed according to the prevailing statutory requirements.
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Landlords should impose regular reporting requirements on the occupier relating to the management, handling and discharge of hazardous materials, as well as rights for the landlord to carry out regular inspections in order to ensure that the occupier is complying with any such requirements. On the flipside, occupiers are likely to want to ensure that any reporting and/or management requirements do not impose a greater liability on them than would otherwise be the case pursuant to the prevailing statutory standards and that any inspection rights are not overly onerous or extensive, particularly given the often highly-confidential nature of many life sciences businesses.
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Notwithstanding any limits on the storage of hazardous materials, there does of course remain a risk that there could be an incident involving hazardous materials. In those circumstances a landlord will want to ensure that the occupier is under an obligation to notify any incident as a priority, as the landlord may have its own reporting and/or regulatory obligations to comply with.
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We will come on to talk about what decontamination-related provisions a landlord should expect to negotiate below. However, it is worth pointing out that whilst landlords will want an indemnity from the occupier in relation to any environmental liability resulting from contamination caused by hazardous materials, many occupiers will resist this (at worst) and (at best) seek to caveat their exposure significantly. If a landlord is successful in obtaining an indemnity from an occupier for environmental liability, given that any potential liability could be significant, it is important to ensure that the occupier (or any guarantor of the occupier’s liabilities) is of sufficient covenant strength to be able to meet any future claim on the indemnity or that there is other security in place to support the enforcement of any such commitment.
Reinstatement of alterations
Landlords will want to think carefully about reinstatement, because depending on the occupier and type of fit-out, a landlord may want the flexibility either to require full reinstatement at the end of the term or, alternatively, to have the option to require the tenant to leave elements of its fit-out in situ.
For example, if a life sciences occupier’s fit-out is very specific to that occupier and will be of little use to future occupiers, a landlord is likely to want to be able to require full reinstatement. That said, pre-fitted generic lab space is becoming much more common, so where a tenant’s fit-out is sufficiently generic (and, as a result, of use to a future occupier), a landlord will want to have the option of requiring the tenant to leave elements of its fit-out. The level of reinstatement required will also usually depend on the type of lab, i.e. whether the occupier is operating a wet lab or a dry lab.
As a result, reinstatement obligations tend to be deal-specific, and the market ‘norm’ is still evolving as landlords learn more about how life sciences occupiers’ systems operate and as lab system technology itself develops.
Decontamination
Over and above the usual reinstatement obligations seen in commercial leases, a landlord of a wet lab life sciences occupier will want to include additional obligations in relation to any necessary decontamination of the premises that may be required.
It is often going to be the case that neither the landlord nor the occupier will have sufficient expertise to determine what constitutes a satisfactory standard of decontamination in order to meet various statutory requirements. One way of dealing with this is for the lease to oblige the occupier to source (and then jointly appoint with the landlord) a decontamination specialist (there are several well-regarded specialist agencies in this field) to oversee the occupier’s compliance with any decontamination obligations in the lease.
However, landlords need to bear in mind that if an occupier vacates without complying with its reinstatement obligations (and/or without even appointing a decontamination specialist), the landlord may have no option but to arrange for the reinstatement works (including decontamination) to be carried out, and to recover the costs from the occupier. This is likely to require specialised contractors who are appropriately qualified to deal with hazardous decontamination, so not necessarily the landlord’s usual contractor.
Provision of utilities and services
There are likely to be certain services (and standards to which those services will be provided) which a life sciences occupier will expect, as part of any agreement to occupy, which would not necessarily be provided by a typical office, retail or warehouse landlord. A life sciences occupier is also likely to hold landlords to a far higher standard given the importance of the continued provision and uninterrupted supply of those services to support the occupier’s operation. This is something that developers as well as landlords will need to bear in mind when designing a new development or repurposing existing stock.
In terms of hard services (such as plumbing and air circulation), life sciences occupiers are likely to require far more power, reliability of background infrastructure and access to back up systems than your standard office occupier (this is true of both wet and dry labs).
In addition to electricity, water and a standard gas supply, a life sciences occupier may also require a supply of lab gases. Thought needs to be given to how these will be provided, who will provide them (e.g. the landlord) and how the costs are to be dealt with.
The current hot topic (particularly among life sciences occupiers in the R&D and/or data harvesting space) is data loss resulting from a failure of the building’s services and who bears responsibility for any resulting loss of data. Should it be the landlord or the occupier who bears responsibility?
Our view is that the landlord should avoid any responsibility for the occupier’s data loss and there are two principle reasons for this:
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Given the importance of data preservation, the occupier should have a robust software system in place which will periodically back up the data the occupier is processing (similar to cloud computing) and therefore the occupier should have already de-risked the possibility of data loss via its own infrastructure. It is not commercially reasonable for a landlord to effectively ‘prop up’ the functionality and robustness of a system which it has no control over.
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More often than not, unless and until the data that has been lost has been commercially scaled and launched, the data has no intrinsic monetary value, in which case it is not clear what the occupier’s loss actually is. Is it right for the occupier to look to the landlord to cover it for a loss that is not really capable of quantification? We don’t think so.
Where that leaves you is a world in which the landlord should be making it explicitly clear in the lease that it accepts no liability whatsoever for any loss of materials and/or data suffered by the occupier as a result of any outage (whether temporary or otherwise) of any services that the landlord is responsible for providing to the occupier’s premises.
As for softer services, certain laboratory and research facilities will be obvious targets for protester action. The result of this is twofold: first there may be a need for additional security and, second, this creates a malicious damage scenario which could jeopardise and/or vitiate the landlord’s insurance (on which we comment further below). Depending upon the asset, this security may be provided by the occupier. However, if the occupier only occupies part of a building, such as a floor in an office block, then the occupier is likely to want the landlord to provide some additional security measures.
Landlords will need to bear in mind that if the life sciences occupier requiring the additional security only occupies part of a block or development, the other occupiers may not be liable for any increased share in security costs. As a result, landlords will want to ensure that any additional security costs can be properly recovered from the life sciences occupier.
Insurance
Landlords will need to check their existing/prospective insurance policies to ensure that they are fit for purpose. Whilst the cost and process of insuring premises let to a life sciences operator is not likely to be materially more expensive or difficult than other uses, the landlord will need to pay careful attention to what use the occupier is operating under to check whether any variations to the usual policy terms are required.
One flag (relevant to wet lab and hazardous substance use) is the need for specific environmental impairment cover. Traditional buildings insurance policies will cover environmental contamination but only where that contamination results from one of the insured risks (which creates a risk gap where any contamination is caused by something other than an insured risk – such as the occupier’s use). Specific and bespoke cover is available in the market to suit specific business and/or premises uses and so landlords should consider what variance of cover is required. The corollary to this is that landlords may want to adjust the proportion of insurance recovery among occupiers (on a mixed use multi-let scenario) to account for a particular occupier’s use, relative to other occupiers in a building.
User
The term ‘life sciences’ is extremely broad, and captures a vast array of uses ranging from vaccine development to cloning.
As a result, a landlord will want to ensure that any permitted user is sufficiently limited. For example, a landlord may wish to exclude certain laboratory uses which are highly controversial, such as genetic modification.
Conversely, a prospective occupier will want to ensure that any user clause is broad enough to allow the occupier to use the premises for its intended purpose throughout the duration of the lease. An occupier will also want to ensure that there is sufficient flexibility in the user provision so that, if required, the occupier will be able to assign the lease to an alternative operator.
So what next?
Whilst by no means exhaustive, the above provides a snapshot of some of the issues that will need to be addressed when looking to invest in the UK’s growing life sciences sector. What is clear is that as the UK’s life sciences sector grows, and with it the demand for space and premises increases, more and more landlords, developers and investors will find themselves having to consider these and other issues.
Authored by Graham Cutts and Benjamin Willis.
