Focus on Manufacturing | Irwin Mitchell | The Trend Toward Reshoring

It is well documented that an increasing number of British manufacturers are seeking to relocate certain aspects of their operations back to Britain.

There are many reasons given for the trend towards ‘reshoring’ or ‘onshoring’. Principal amongst these are the ability for manufacturers to keep closer control on quality, a reduction in and increased certainty of delivery times and a shortening and strengthening of supply chains. These factors are all big draws for British manufacturers and the trend towards reshoring is positive for the British economy, for job creation and for opportunities available to young talent keen to be involved in the sector. The result of the EU referendum and the significant uncertainty that this has for Britain’s trading relationships with Europe and the rest of the world may well strengthen British manufacturer’s resolve to continue in this trend.

However, relocating operations can be a complex and costly process, certainly in the short-term. A major challenge faced by manufacturers seeking to return to Britain is locating premises from which to conduct operations. So what are the options available to companies wanting to make the switch? Most companies will look to either lease or acquire premises. There are a number of issues to be considered in making this choice, which can broadly be grouped into the following considerations: (a) flexibility; (b) funding the acquisition or occupation; and (c) autonomy/use. For any company wishing to return to the UK (or simply looking to start-up or expand operations) it is worth assessing each of these considerations in more detail.

Flexibility

A key issue will be how long new business premises are likely to be required for. Flexibility may be key. A big advantage of a lease is that the parties are free to agree any length of defined term that they wish. Whilst it is not possible for parties to agree to a ‘rolling’ lease term, including a break clause can give both parties the flexibility of being able to end the lease before the end of the contractual term. The period of notice that should be provided, and its impact on business continuity, will be a key consideration.

Assigning or underletting a lease can also be a far simpler method for a company to divest itself of business premises than achieving a freehold sale. Any steps and conditions contained in the lease that the tenant will need to take and comply with in order to effect a disposal should be carefully considered. Invariably, the landlord’s consent will be required to the disposition, but the other conditions likely to apply, for example the provision of an authorised guarantee agreement and additional third-party guarantees, will depend on the circumstances and the terms of the lease. These considerations can have a significant impact on a company’s ability to dispose of a lease and for on-going liability.

Funding the Acquisition or Occupation

A key consideration for any company wishing to purchase business premises will be whether it is able or willing to meet that capital expenditure. If the new premises will be required for a significant period of time, then the certainty that ownership brings for occupation and use may mean that acquisition is the preferred choice. Having a capital (and hopefully appreciating) asset on a company’s books may also be an important investment and is potentially a great method of pension planning. Bank funding may well be available to companies to both finance the acquisition and to raise future capital. Conversely, it is unlikely that a bank will view a lease as representing appropriate security.

In contrast, a lease allows a company to ‘pay as it occupies’, which may be attractive. It will be very important for companies to pay particular attention to any provisions for rent review contained in the lease. Rent review will often be in accordance with ‘open market rent’, and the lease will generally specify the assumptions to be taken into account in making this calculation.

These assumptions can make a significant difference to the level of the review and it is important for tenants to take advice from both a legal and valuation perspective so that a degree of forward-planning can be undertaken.

Use of premises

Any landlord will wish to retain a degree of control over the use of its premises; the extent of this control will generally decrease as the term of the lease increases. In particular, companies should consider the provisions of the lease dealing with permitted use and ability to make alterations to ensure that these authorise not only the initial intended use, but also give scope for companies to ‘grow into’ the premises.

This is not to say that without a landlord a company will be free to use that premises as it sees fit; there could be restrictions and fetters on use contained on the title and there will always be planning and regulatory considerations to take into account.

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The Trend Toward Reshoring

Flexibility

Funding the Acquisition or Occupation

Use of premises

For general enquiries

International Firm

Award Winning

About Irwin Mitchell

Contact Us

Get a call back

Request A Callback

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The Trend Toward Reshoring

Flexibility

Funding the Acquisition or Occupation

Use of premises

For general enquiries

International Firm

Award Winning

About Irwin Mitchell

Contact Us

Get a call back