ESTABLISHING A PLACE OF

BUSINESS IN THE UNITED KINGDOM

An Introductory Memorandum

Ince & Co
Knollys House
11 Byward Street
London EC3R 5EN

Tel: 020 7623 2011

Fax: 020 7623 3225
Email: firstname.surname@ince.co.uk

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 ESTABLISHING A PLACE OF BUSINESS IN THE UNITED KINGDOM:
AN INTRODUCTORY MEMORANDUM

INTRODUCTION

There are four principal ways for an investor to establish a corporate business presence in the
U.K. First, by setting up a U.K. company; secondly, by registering a branch of an oversea
company; thirdly by registering a place of business of an oversea company, and fourthly, by a
merger with, or acquisition of, a U.K. company.

The purpose of this introductory memorandum is to consider, briefly, the first three
alternatives. This paper does not purport to be comprehensive and it is most important that
specific advice is obtained before entering into any particular venture.

We believe that the U.K. has one of the simplest and cheapest procedures in the world for
setting-up and administering a company. The U.K. government is working constantly to
retain this advantage. Companies in England and Wales are governed primarily by the
Companies Act 1985. Companies may also be regulated by specific statutes dealing in more
detail with their particular trade or business - for example, the Insurance Companies Act
1982, or the Banking Act 1987. In addition, companies carrying on “investment business”
are subject to the provisions of the Financial Services Act 1986.

Company law as it applies to companies formed in Scotland or in Northern Ireland is slightly

different to that applicable to English companies, but for the purposes of this memorandum
the differences are not material.

The U.K. has no foreign exchange controls and funds may, therefore, generally be transferred
freely in and out of this country. Furthermore, foreign nationals may own land in the U.K.
and shares in U.K. companies and be directors of UK companies, without restriction. It is
therefore possible for a foreign investor wishing to start business in the U.K. to incorporate a
registered company or alternatively to establish a U.K. branch office or place of business of a
company incorporated abroad. A foreign company which establishes a branch or a place of
business within the U.K. is called an “oversea company”.

NATURE AND CLASSIFICATION

A company is a legal entity which is separate and distinct from its shareholders and its
directors. Most companies are limited by shares, which means that the liability of each
shareholder for the obligations of the company is limited to either the total nominal (par)
value of his shares in the company which remains unpaid from time to time or, if he has
agreed to take up such shares at a premium, (that is at more than their normal value), the total
amount he has agreed to pay for the shares.

Companies may be limited by guarantee (although this normally applies only to charitable
companies or mutual companies), and some companies are established on an unlimited basis.
The liability of the members of a company limited by guarantee is a specified sum which is
stated in the incorporation documents of that company. This sum will be contributed to the
company in the event of a winding up in circumstances where it does not have enough money
to pay its debts. One reason for setting up an unlimited company is to avoid disclosure of
financial information (see page 9). However, very few companies are formed in this manner

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because of the unlimited liability of shareholders to contribute to the company’s funds in the
event of it being wound up in circumstances where it has insufficient money to pay its debts.

Companies limited by shares can be further sub-divided into two groups; public companies
and private companies. Private companies serve a number of purposes - for example they
enable those carrying on a family business or other small trading operation to take advantage
of corporate trading through limiting the liability of the shareholders. In addition they avoid
the strict accounting and other obligations placed upon public companies. The shares of
private companies may not be listed on The Stock Exchange. The great majority of
companies formed in the U.K. are formed as private companies. If it becomes necessary, a
private company can be converted into a public company with relatively few formalities. In
practical terms, the obligations of and restrictions on public companies, certain of which are
described below, are considerably more onerous than those relating to private companies.

FORMATION AND CORPORATE STRUCTURE

The foreign investor who wishes to establish a U.K. subsidiary has a choice of either
acquiring an “off the shelf” company (that is, a “ready-made” company which has been
formed but which has never traded), or having a company tailor-made and incorporated to
suit his specific requirements. The advantage of an “off-the-shelf” company is that it can
start trading immediately under its existing name and with limited liability. It will be
necessary to change, for example, the original name, directors, secretary and shareholder(s),
but these changes can be made very quickly. A tailor-made company normally takes up to
two weeks to form and register, such that it is able to begin trading. In most circumstances,
therefore, an off-the-shelf company is used.

The paragraphs below set out various matters which need to be considered when forming a
U.K. company.

The Name

The Registrar of Companies (“Registrar”) (the official responsible for overseeing company
regulation) keeps a public master index of the names of all companies and of all branches and
places of business of oversea companies registered in the U.K. It is therefore possible to find
out, before incorporation, whether a company already exists under a name which is the same
as the one proposed to be used. If so, it will not be possible to form a company with that
name. After incorporation, the Registrar may, within 12 months of registering a particular
name, require a company to change its name if it is “too like” that of an existing company
which appears on the register. In addition, if the company is formed with, or changes its
name to, a name which an existing company feels is misleading to, or likely to lead to
confusion among its customers, that company can itself seek to have the name of the new
company removed from the register.

Certain names require the prior consent of certain regulatory bodies. For instance, the words
“insurance company” in a name will require the consent of the Department of Trade and
Industry.

An oversea company may be required to carry on business in the U.K. under a name other
than its corporate name, if the relevant authorities are of the opinion that it would be
undesirable for that oversea company to carry on business in the U.K. in its corporate name.
This may be the case, for example, if that company attempts to carry on business under a
name which is identical to that of an existing U.K. company.

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A public limited company must have the words “public limited company” or the letters
“PLC” at the end of its name. A private company must (unless it is, or is similar to, a charity)
end its name with the word “Limited” or the letters “Ltd”.

A company may trade under a name other than its registered name. If it does so, then the
corporate name must appear on all of its stationery. In addition, the stationery must contain
the company number, the country of incorporation and the registered office. If the notepaper
names the directors of the company, it must name all of them. Furthermore, when their
names are included on the company’s notepaper, if any of them are foreign nationals then
their nationality must also be stated.

Memorandum and Articles of Association

A U.K. company is governed by the contents of its Memorandum and Articles of

Association. The Memorandum sets outs its name, the country of its registered office (e.g.
England or Scotland), the objects for which it is formed, the nature of its liability and its
initial capital. A company may not engage in activities or objects which have not been
authorised by its Memorandum. The objects clause is therefore usually drafted in very wide
terms to include all of the objects which the company may, at some time, wish to carry on,
even if those are not viewed by the shareholders as matters which they consider will be part
of the company’s business when it starts to trade.

The Articles of Association constitute the agreement between the company and its members
regarding the management and control of the company. This document governs the internal
administration of the company and deals with such matters as the appointment and removal
of directors, the procedure for calling meetings, the manner of issuing and transferring shares,
etc. A copy of the first Memorandum and Articles (and of any subsequent changes to those
documents) must be filed with the Registrar.

Shareholders

Until July 1992 all U.K. companies were required to have at least two shareholders. If the
new company was to be a wholly-owned subsidiary, its parent could be the registered holder
of all the shares except one, the remaining share being registered in the name of a third party
who would hold that share as a nominee for the parent company. It is now possible for
private companies to have only one shareholder. Any person and any company or
corporation can become a member of a company incorporated in the U.K.

Directors and Secretary

Every U.K. company must have at least one director and a secretary, neither of whom need
be U.K. nationals. A public company must have at least two directors. Where there are two
or more directors, a director may also be the company secretary. Normally, directors will not
be personally liable for the debts of the company. However, if they are found guilty of fraud,
or have allowed the company to continue to trade in circumstances where they knew that it
was insolvent then they may attract personal liability.

All directors have a general duty of care in undertaking their responsibilities. They must act
honestly and in good faith in the best interests of the company. They must exercise the
degree of skill and care when carrying out their director’s duties as might reasonably be
expected from someone fulfilling their role and with their own ability and experience and

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they must carry out the statutory obligations imposed on them by the Companies Act 1985
and other legislation.

The directors usually have powers of delegation and the conduct of day to day business is
usually delegated to managing or executive directors or to managers (who need not be
directors).

The company secretary is the chief administrative officer of the company. His primary
responsibility is to ensure that the company complies with its various statutory duties and to
implement the management decisions of the directors in connection with the company’s day
to day affairs.

It should perhaps be noted that both the legislature and the judiciary are requiring ever higher
standards of care and accountability from directors of both private and public companies. If
you require further information about the duties and liabilities of directors please ask for our
brochure regarding this matter.

Share capital

The Memorandum of Association of a U.K. company which is limited by shares must state
the amount of the company’s share capital and its division into shares of a fixed amount. The
amount of capital stated in this clause is known as the company’s authorised or nominal share
capital. Public limited companies are required to have a minimum authorised share capital of
£50,000 of which 25% must be issued and paid up. There are no minimum requirements as
to the amount of paid up share capital in respect of private companies.

It is now permissible for a company’s share capital to be denominated in a currency other

than Sterling and indeed to have a mixed basket of currencies making up its share capital. In
the case of a public limited company, the first £50,000 of share capital must be denominated
in Sterling. The requirement that the nominal capital be divided into shares of a fixed amount
means that English companies cannot issue shares of no par value.

Shares in a public or private company may not generally be allotted for cash unless first
offered to existing shareholders in proportion to their shareholding. A private company may
exclude this provision in its Articles of Association; directors of a public company may also
be given limited authority to exclude these provisions.

Registered Office

Every U.K. company must have a registered office in the U.K. - this is the address to which
all legal and other official communications will be sent. In addition, the official books and
records of the company are normally kept at its registered office. The registered office need
not be the company’s place of business although in many cases this is likely to be the most
appropriate address.

Accounting Reference Period

Within nine months of incorporation, a U.K. company must notify the Registrar of its
accounting reference date (financial year end). If it does not do so, its accounting reference
date will be fixed as the last day of the month in which the anniversary of its incorporation
falls. A company may, subject to certain conditions, change its accounting reference period.

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Liability

As a company is a separate legal entity, its parent company will not usually be liable for its
obligations or activities, unless for example, a guarantee has been given or the subsidiary has
been acting as agent for the parent.

COMMENCEMENT OF TRADING

In order to form a U.K. private company the following documents have to be filed with the
Registrar: Memorandum and Articles of Association and a statement of the first directors,
secretary and address of the registered office and the names of the first subscribers for shares
in the company. In addition, a form must be signed either by a director or by a solicitor
forming the company, stating that all the legal requirements for formation have been carried
out correctly. The current incorporation fee is £20.

Once the relevant papers have been filed with the Registrar, a Certificate of Incorporation is
issued, following which the company can start trading. The Certificate gives the name and
official number of the company and the date of incorporation. Although the company can
change its name from time to time, the official number will never change and it is a useful
way of tracing a particular company should this ever be required.

In certain circumstances various consents or approvals will be required by the company

before it can start trading. For example, an insurance company will need the prior approval
of the Department of Trade and Industry and companies providing financial services will
need the approval of the relevant regulatory organisation.

A public limited company formed as such also needs a Certificate of Trading before it can
start business. This is a second formal document issued by the Registrar stating that the extra
formalities for a public limited company have been complied with (for example, that the
company has an authorised share capital of not less than £50,000 paid up as to at least 25 per
cent).

FINANCE

Depending on the circumstances, U.K. companies may be financed by a mixture of share

capital, loans, extended trade credit and guarantees. Companies will usually be able to
borrow from a bank or other financial institution, but a parent company guarantee and some
form of security will usually be required.

Loans by the parent company will often provide more flexibility than the issue of a large
amount of share capital to a parent company. In addition, interest charges incurred by the
U.K. company on loans made by the parent (as well as other loans) may be tax deductible
whereas payments of dividends to the parent will not.

TAXATION

Corporation Tax

U.K. resident companies are liable to corporation tax (“CT”) on their worldwide trading and
other income profits and chargeable capital gains. U.K. tax residence is determined by two
tests. Firstly, a company which is centrally managed and controlled from the U.K. will be
U.K. tax resident, regardless of the country of its incorporation. Secondly, every company
incorporated in the U.K. is U.K. tax resident.

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A U.K. office will not necessarily create a taxable presence for an oversea company. An
oversea company with a taxable presence in the U.K. (other than a U.K. subsidiary), (for
example, an office, factory, or an agent in this country who regularly concludes contracts on
its behalf - a “branch” for tax purposes), will be liable to CT only on the taxable profits of
such branch. The taxable profits of the branch will be those which it might be expected to
make if it were a distinct and separate enterprise dealing independently with its head office.

It is not possible to reduce the profits of a U.K. subsidiary chargeable to CT by artificially

high or low prices being charged on supplies of goods or services between it and its parent.

Rates of Corporation Tax

U.K. companies pay CT on the taxable profits of their accounting periods at the rate or rates
applicable to the financial year or years in which they fall. The U.K. financial year runs from
1st April to 31st March. The rate of CT for the financial year to 31 March 2001 is 30%. A
reduced rate of 20% (the “small companies’ rate”) is payable by companies where income
profits and chargeable capital gains (“Profits”) do not exceed £300,000. With effect from the
year 2000, there is also a starting rate of 10% up to profits of £10,000 and marginal relief
again on a sliding scale from £10,001 to £50,000. Companies whose Profits exceed £300,000
but are less than £1,500,000 pay CT on a sliding scale between 20% and 30%, the rate
increasing as the Profits approach £1,500,000. These are the lowest rates in the European
Union. The same rate of CT applies to UK resident companies and branches of oversea
companies.

Under a system called “Pay and File”, U.K. companies are required to submit to the Inland
Revenue an estimate of their liability to CT, together with payment of this amount within
nine months of the end of each financial year. They are required to submit a copy of their
accounts for each financial year together with a CT return within 12 months of their
accounting reference date. Penalties are levied for failure to comply with these requirements.

Value Added Tax

As well as CT, all companies (including branches of oversea companies) are required to
become registered for value added tax (“VAT”) purposes and to charge VAT to customers
and pay this to H.M. Customs and Excise if the value of “taxable supplies” made by them in
the previous year exceeded £52,000 with effect from 1st April 2000 but this figure is usually
increased annually. VAT is a European Community turnover tax levied on the supply of
most goods and services. It is also levied on the value of goods imported into the U.K. and
certain imported services. Most taxable supplies are subject to VAT at the standard rate of
17½%, but many items, such as foodstuffs, books and most passenger transport are zero-rated
supplies. Certain supplies are exempt from VAT, such as many insurance and financial
services. Company dividends, wages and salaries fall outside the VAT system.

Once registered for VAT, a U.K. company or branch of an oversea company making taxable
supplies in the U.K. should be able to recover some or all of the VAT it pays or has paid on
goods or services purchased in or imported into the U.K. If it is not required to become
registered for VAT, it can become registered on a voluntary basis if it can satisfy Customs
and Excise that it makes or intends to make taxable supplies in the U.K. or that it makes
supplies outside the U.K. which would be taxable supplies if made in the U.K.

VAT registered businesses must quote their registration number on all VAT invoices they
issue.

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Local Taxes

Businesses in the U.K. are liable to pay uniform business rates to the local authority in whose
district their business premises are located. These are a contribution to the services provided
by the local authority.

Stamp Duty

Stamp duties are payable in the U.K. on certain written documents. Stock transfer forms
transferring shares in a company are liable to stamp duty at the rate of 0.5% of its value
subject to a minimum charge of £5.00.

There is a section of this report at the end dealing with stamp duty charges on the acquisition
of property.

EMPLOYMENT

When a business opens an office in the U.K. (whether by setting up a U.K. company, a
branch or a place of business) it must notify the Inland Revenue. If the company, branch or
place of business is to have employees in the U.K., arrangements will be made for a “PAYE
Scheme” to be opened for it. PAYE stands for “Pay As You Earn”, the procedure by which
employers withhold income tax at source from payments made to their employees.
Employers must also withhold employees’ national insurance contributions (NIC) and
themselves make payments of employers’ NIC. All PAYE and NIC must be accounted for to
the relevant authorities. Employers are also under a duty to supply the Inland Revenue with
details of non-cash benefits they provide to their employees, for example, company cars.

In the U.K, employees are normally paid weekly or monthly in arrears, and by law, are
entitled to receive written particulars setting out their basic terms and conditions of
employment. Non-U.K. nationals can be employed if they have the relevant work permits. A
work permit is a permission issued by the Department for Education and Employment to
allow an employer to employ a named employee in a specific job; it is therefore the employer
who must make the application. There are two kinds of permits available; a work permit and
a training and work experience permit. Work permits are generally issued for a period of up
to four years and an application to renew can be submitted. Training and work experience
permits are granted for a more limited period; usually for no more than two years. In the case
of EEC nationals, work permits are not required.

Under UK employment legislation, employees who have been continuously employed by

their employer or an “associated” employer for at least two years (“qualifying employees”)
have the right not to be unfairly dismissed and if dismissed by reason of redundancy, the right
to receive a minimum redundancy payment, dependent upon age, length of service and their
salary level. There are various potentially fair reasons for dismissing a qualifying employee
including redundancy, lack of capability and misconduct. In order for a dismissal to be fair,
however, the employer must adopt a fair procedure in dealing with the employee and act
reasonably at all times. An employee who believes that he has been unfairly dismissed may
claim reinstatement (in his old job), re-engagement (in a different job) or a compensation
payment from his former employer.

UK legislation also provides that employees may claim compensation from their
employers/former employers if treated less favourably by them (i.e. discriminated against) on
the basis of their sex or race. No minimum length of service is required to bring such a claim

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and there is currently no financial limit to them. Women are entitled to maternity leave
during pregnancy and to return to work after exercising this right. There is no minimum
length of service required to qualify for this entitlement, but particular rights will depend on
whether or not the woman is a qualifying employee (see definition above). There are now
new provisions for parental leave for employees to take unpaid time off work to care for
young children and dependants.

ACCOUNTS

All U.K. companies which are carrying on business are required to have a statutory audit
each year unless they fall within the exemptions for so-called “small companies” introduced
in 1994 and amended in June 1997. These exemptions apply to companies and certain groups
of companies with an annual (or aggregate annual) turnover of not more than £1 million
(recently raised from £350,000 for companies with accounting periods ending after 26 July
2000) and a balance sheet total (or aggregate balance sheet total) of not more than
£1,400,000 net. They do not apply to any public companies, banks, insurance companies,
certain insurance brokers, and authorised persons/appointed representatives under the
Financial Services Act 1986.

The audit of a non-exempt company is carried out by an independent auditor. An auditor is

appointed by the shareholders at each Annual General Meeting for a period until the next
such meeting. The Companies Act 1985 contains detailed rules regarding the contents of
company accounts. In particular, the auditor must make an annual report to the members of
the company as to whether the annual accounts have been prepared in accordance with the
Companies Act 1985 and whether in his opinion a true and fair view is given of the
company’s profit or loss and of its financial position at the date of the balance sheet. The
rules for public companies are considerably more detailed than those for private companies.

Many companies which qualify as “small” or “medium” sized are entitled to file with the
Registrar and in the case of “small” companies, circulate to their shareholders, a modified
version of their annual audited accounts. For these purposes, “small company” is one which
meets at least two of the following tests in any one year:-

Turnover: not more than £2,800,000 (net)

Balance sheet total: not more than £1,400,000 (net)

Number of employees: not more than 50.

A U.K. branch or place of business of an oversea company must file accounts with the
Registrar of Companies in the appropriate form in respect of each financial year of the
company. The accounts required to be filed are those of the oversea body itself, or in certain
circumstances, those of its parent company.

All U.K. companies must file a copy of their accounts with the Registrar, together with an
“annual return”, containing basic information on matters such as share capital, directors and
shareholders. If these documents are not filed, the Registrar may, in the final instance,
remove the company from the register.

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Branch or place of business?

An oversea company should generally register its U.K. office as a place of business if the
functions performed by it are ancillary or incidental to the company’s business as a whole, for
example, warehouse facilities or customer liaison/information office.

Where the functions performed in the U.K. are more extensive than this, for example, the
office is organised to conduct business on behalf of the company in the U.K., so that a U.K.
customer is able to deal directly with the U.K. office instead of the oversea company in its
home country, then the U.K. office should generally be registered as a branch.

U.K. branch or place of business - formalities

As a general rule no government consent is required for the establishment by a foreign

company of a branch or a place of business in the U.K. However, as in the case of a
company, special legislative rules may apply to certain activities, such as banking and
insurance.

In registering the U.K. branch or place of business of an oversea company, the company
remains registered under the law of its place of formation. It is, in addition, subject to certain
further requirements of U.K. law.

Registration of branch or place of business

If a foreign company establishes either a branch or a place of business in the U.K., then
within one month of doing so it must file certain documents with the Registrar. Initial
registration is carried out by filing basic corporate documents, such as an English copy (or
translation) of its constitution, a list of its directors, the name of its Secretary, and the date on
which the Company’s branch or place of business in Great Britain was established with the
Registrar of Companies. It must also, in either case, deliver the name and address of a person
resident in the U.K. who is authorised to accept service of documents on behalf of the
company and as stated above, on an annual basis, accounts of the oversea body of which it is
a branch or place of business.

More information is required to be given by an oversea company registering a U.K. branch

than one registering a place of business, but in either case the registration fee is currently £20.
Any alteration, from time to time, in the particulars or documents filed with the Registrar
must also be registered.

Since the branch or place of business of an oversea company has no separate legal status from
that of the oversea company, the oversea company will be liable for the debts or any breaches
of contract of its branch or place of business. Therefore a judgment against the company can
be enforced against the assets of the branch or the place of business in the U.K.

Branch or subsidiary?

Whether to trade in the U.K. by means of a branch or to set up a U.K. subsidiary is often a
question both of tax-planning and of what might be described as general perception. The
main non-tax consideration is that potential U.K/European customers might well feel more
“at home” with a U.K. company than with a foreign (or non-European) company trading in
the U.K. through a branch. A subsidiary company also suggests a more permanent presence
in the U.K/Europe than a branch.

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Set out below are some of the major tax differences between trading in the U.K. through a
branch and through a subsidiary. In all cases specific advice should be sought before a
decision is made as this will depend upon the comparative rates of tax in the U.K. and the
oversea country and the exact provisions of any double taxation treaty between them.

Advantages of a branch

Losses are often likely to be made when an oversea company first begins to trade in the U.K.
The losses of a U.K. branch are more likely to be able to be set directly against the non-U.K.
profits of the oversea company than the losses of a U.K. subsidiary against the profits of its
oversea parent. Only the U.K. profits of the oversea company will be liable to CT.

Advantages of a subsidiary

Although its worldwide income, profits and chargeable gains will be liable to CT a subsidiary
is more likely to qualify to pay CT at the small companies’ rate of 20% than a U.K. branch
(see page 7).

Provided it is not U.K. resident, the parent company will not be liable to CT on any
chargeable gain arising on the sale of shares in its U.K. subsidiary. An oversea company will
be liable to CT on any gain arising on the sale of the assets of its U.K. branch.

Stamp duty is currently payable on stock transfer forms at the rate of 0.5% of the value of the
shares, with a minimum payment of £5.

It is possible for a U.K. branch to be converted into a subsidiary with a minimum of

regulatory problems. The same documents are necessary as would be required in setting up a
new company. The taxation implications of transferring the trade of the branch to a
subsidiary would, however, require careful examination.

In conclusion, because losses are likely to be made when commencing to trade in the U.K.,
unless the tax and other advantages of a subsidiary are overwhelming, it may be advisable to
commence trading in the U.K. through a branch rather than a subsidiary.

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POINTERS ON REAL PROPERTY IN ENGLAND AND WALES

As a foreign business you could be looking to take on real property interests in England and
Wales as business premises, pure investment, and staff accommodation, long term or short
term. Whatever you want, the key point to remember about England and Wales and indeed
the whole of the UK is, even though it is a small country, choosing the right location is
absolutely essential. A beautiful building in the wrong place is worth a fraction of what it
would be worth in the right place.

The right location may depend on fashion, going where other businesses or cheap rents are,
employee costs, going where the planning (zoning) is friendly to your business, special tax
breaks through planning, high or low business rates (local taxes), proximity to raw materials,
transportation costs, communications, or environmental considerations.

Once you have an idea of approximately where you want your business to be it is important
to get the right advice and you will need the help of a good surveyor (real estate agent) (who
will charge a finder’s fee) to find the right place. You will probably take the advice of your
lawyers and/or your business friends who have gone through the same process to help you
find a good surveyor.

It can be a long process finding the right area and premises. It also takes a long time to
negotiate the legal documents once the right premises are found. If you go for leasehold
premises it can take even longer to tailor the lease to your needs. If you need to make
alterations to the premises, build in time to negotiate, agree (with the planners and your
landlord) and actually make the alterations. Allow plenty of time for this - so that you do not
get pressured into agreeing terms which you do not want.

It is often wise to do things in stages. You could take a very short term letting of
offices/business space as a start. This should not be too difficult to arrange at present because
there is an ample supply of space in most property sectors and adequate and sufficient space
can be taken on tenant-friendly terms.

You might even persuade someone to give you a licence (a right to occupy premises without
security of tenure) on a short term basis - although such arrangements tend to be slightly
more expensive.

You should build into your negotiations for premises a “shopping list” of requirements. You
should do this even if you are looking for a short term lease. The shorter the lease the less
likely you are to get the items on your list but you may as well aim high at the beginning.

You should cover the following points:-

• the length of the lease; terms over five years should contain a break clause should you
wish to come out of the property;

• security of tenure; it is usual for leases of business premises to have the automatic
right of renewal of the lease at the expiry date but landlords and tenants can agree to
contract out of these statutory renewal rights;

• rights of use; you should ensure that the lease provides for use of the premises as you
intend;

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• service charge clauses, estimates of which should be available to avoid taking on
more expensive premises than you might wish to afford;

• the usual disposal provisions, by way of assignment or underletting should you wish
to move before the lease expiry date.

There are also considerations whether to go for a new lease or take over someone else’s lease
by way of assignment or take an underlease of premises (ie a lease from another tenant).
Avoid having an underletting if you want to be able to do things quickly - a landlord with a
landlord of its own to satisfy will take twice as long to make any decision affecting you. If
you take an assignment of an existing lease the disadvantage is that you have no input into
negotiation of its terms. The advantage is that if and when you transfer your interest to
someone else you should expect to be released from your obligations under the lease. If you
are the first tenant under a lease you will be on the hook (unless you can negotiate otherwise)
for the full length of the lease if you transfer your interest and the transferee defaults.

When relevant think about having a structural survey (engineers’ inspection) of the premises
and an environmental audit to find out the long term costs of occupying the premises. If you
are taking a short lease of office space with a fixed service charge, then you probably would
not need either of these. If you were purchasing a freehold such as a building and the land
which it occupies, you will definitely want a structural survey (along with a professional
valuation by a surveyor) and, if it is in a questionable area, an environmental audit by a
specialist company. The idea of environmental clean-up costs is new in the UK and the costs
are not likely to be as large as in the US but the legislation can place heavy costs on
complying with the statutory requirements.

If you are purchasing, you will also need to check whether it would be more tax efficient to
borrow funds to enable you to buy.

You will also need to check whether two government taxes paid by buyers/tenants will apply
to your transaction. Stamp Duty (on a scale of 1% of the purchase price between £60,001 -
and £250,000 - rising to 3% between £250,001 and £500,000 - and 4% if more than
£500,000) - is payable on purchases of land and buildings, freehold and leasehold and there is
an additional costs based on the rental charges under the lease. Both charges are incurred on
a one off basis at the time of acquisition. VAT (at 17½% at present) is payable on many
purchase transactions on a “one-off” basis. You should establish early on whether the
property is VAT registered or exempt from VAT. Often you can recoup some or all of the
VAT but it could create a big hole in your cash flow.

Whether you buy or lease, you will need in addition to the advice of your surveyor, advice on
insurance matters (landlords normally insure buildings but not tenants’ contents and business
risks) and the advice of a good lawyer to negotiate the contract terms and/or the lease and to
check on title and local matters.

Business leases in England and Wales are complex documents because ownership of land
interests with the benefit of full rents is historically a very popular investment. Rents and
land prices have traditionally continued to rise in England and Wales for a very long period
so landlords have had a long time to draft leases in unfriendly terms. Rents and land prices
are variable so that negotiation is important in minimising the effects on your new business.

A landlord’s aim is to get its rent clear of all deductions, and cover all its operating costs by
service charges and maintenance obligations etc on the tenant.

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If you go for a lease term over, say, five years, the landlord will want to review the rent and,
again historically, will want to ensure that the rent cannot go down (even if comparable rents
go down). Landlords, if offered a good tenant, will try for a longer lease -fifteen, even
twenty-five years. Look long-term if you wish, but try for the right to break the lease early
and really push to be released from the covenants on you as tenant if you transfer the lease.

If you go for a second class property initially, you are likely to get a better deal from your
landlord but if you are in a multiple occupation you might pay in the long run because the site
may be badly (and possibly expensively) managed. Try and find out what the performance of
the managers is like e.g. from current occupiers.

Staff accommodation is probably best left to the employees if they are recruited in the U.K.
However, if senior staff are coming from abroad, again it is probably best to take
accommodation as a short term let in the name of the company initially and to suggest buying
residential property either as an investment or for residence once you know you are going to
stay.

Again, there will be tax considerations here - not only for the company but also for the
employee who, unless the deal is carefully structured, can end up paying tax on the benefit of
having rent free accommodation.

U.K. legislation relating to landlord and tenant matters for residential property can be
complex. For example if you take a company let, most of the legislation giving security of
tenure will not apply.

From the tenant’s point of view, it is wise to have a lawyer look at the tenancy agreement
(short lease agreement) just to make sure that the tenant’s interests are protected. It is not
unknown for landlords already in arrears with their loan to let their property without getting
their lender’s consent and for the lender to be able to remove the tenant and gain vacant
possession.

Acquisition of an interest in land in England and Wales is required by law to be in writing

and to incorporate all the agreed terms. In practice you start off with a written offer made
“subject to contract”, or heads of terms being agreed in writing “subject to contract”. The
lawyers and the surveyors then make their inspections and enquiries, report and negotiate the
documentation. It is only then that the purchase contract is signed by both parties and
exchanged making the agreement binding in law. In the acquisition of a lease, this is when
the lease agreement or the lease itself is signed.

Ince & Co

Should you require any further information on any of the matters contained in this
memorandum please contact Nicholas Gould, David Coupe or Albert Levy.

This publication is not intended to replace the need to obtain your own professional advice in
relation to any topic discussed.

May 2001 (revised)

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