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Commercial premises – to rent or to buy?

Finding the right commercial premises is a crucial early step for any business owner. One of the first decisions you’ll need to make is whether to rent or buy – but which is right for you? This brief guide will give you a rundown of what you need to consider for both options.

Renting

The shorter-term option, renting is more flexible, as it doesn’t tie you down to a particular property. This makes it easier to relocate if your business needs change; for instance, if you need to expand.

Another factor that is particularly helpful for fledgling businesses – who often don’t have large amounts of start-up capital – is that renting does not involve tying up large amounts of money in a property. It also means that your business is not exposed to the volatility of the property market.

If you choose to rent your commercial premises, you will need to negotiate a lease with your landlord. The shortest leases tend to run for at least 3 years and the longest for up to 25, so renting is still a long-term commitment; however, your lease should include a break clause (check that it does), which will enable you to terminate the lease early.

Note: as leases are commonly drawn up by the landlord’s solicitor, the break clause may favour the landlord. Be sure that you are happy with the terms of any agreement that you sign.

If you would prefer a shorter tenure, you might consider opting for a license rather than a lease. Again, licenses can be a good option for start-ups, who might not be able to predict their long-term requirements. Licenses usually run only for a number of months and are far easier to terminate than leases, with shorter notice periods and less onerous breaking conditions.

The cost of renting

Your main up-front cost for renting a commercial property will be the deposit, plus the purchase or rental of any equipment, fixtures and furniture you need for your business that is not included in the lease. Depending on your agreement, you might also be responsible for paying the lease registration fee and Stamp Duty Land Tax (SDLT). If your landlord has given you permission to make alterations to the property, you will also need to foot the bill for this. (Remember that planning consent may be required for certain alterations.)

It is common for a commercial lease to be granted on an FRI (full repairing and insuring) basis. If this is the case, then the cost of insuring the building and contents, as well as ongoing maintenance of the property, will be your responsibility. On top of this, you will obviously need to pay rent, business rates, utility bills, and probably also a service charge. Commercial tenants are usually responsible for electrical, fire and gas safety in their premises, and any up-front and ongoing costs associated with these obligations will be yours to shoulder.

It is typical for commercial leases, particularly long leases, to permit regular rent reviews. These may be agreed in advance, or they may be linked to inflation. Rent increases are often negotiable, but remember that your landlord can terminate the agreement if they are unhappy with the rent you are paying them. 

Buying

Buying is the option for business owners who want more long-term security and greater freedom to use their premises as they see fit. Buying also gives your business an asset that may increase in value, especially over a long period of time.

This is in exchange for some flexibility, and requires a bigger commitment. If your spatial requirements change, it will be harder for you to relocate. You have a lot of capital tied up in your property, and if you finance the purchase with a commercial mortgage, you will have a debt that you will eventually need to repay.

The cost of buying

It is no secret that buying a commercial property is significantly more expensive up-front than renting one.

First and foremost, you need a deposit. Without additional security, the maximum loan-to-value (LTV) ratio at which you are likely to be able to borrow is 75%, meaning you will need to fork over 25% of the property value. Other up-front costs such as mortgage lender fees, legal fees, survey costs and stamp duty will also be payable.

As typical commercial leases often transfer many of the burdens and expenses associated with ownership from the landlord to the tenant, there are few ongoing costs a tenant would incur (other than rent) that an owner would not. You might even need to pay a service charge if you don’t own the freehold to your premises outright. 

Your biggest ongoing cost, however, is likely to be your mortgage. Most commercial mortgages are repayable on an interest-only basis, with the interest payable in monthly instalments. Whilst it is possible to take out a mortgage on a full- or part-capital repayment basis, this will tie up more of your cash as equity and potentially reduce your all-important cash flow.

Remember: a mortgage is a legally binding agreement. As soon as the contracts are exchanged, you are obligated to repay the capital owed. If you are uncertain about the decision, then it might be prudent to start out renting; however, for those who take the plunge, buying allows you to take full control of the future of your business, with a commercial property that you can call your own. 

Written by Ben Gosling for www.commercialtrust.co.uk.

Your property may be repossessed if you do not keep up repayments on a mortgage secured against it.

Some commercial mortgages are not regulated by the Financial Conduct Authority (FCA).

MPs call for change in insolvency process after City Link's collapse

Since the administration of City Link in December, a group of MPs have been looking closely at how the situation was handled leading up to the administrators' appointment.

The MPs overall view was that employees were not given priority when the company fell into financial difficulty, and were not given enough notice before City Link entered administration on Christmas Eve.  
Under current insolvency law, if a company does not follow the statutory redundancy consultation process, they will be fined for this. However MPs have highlighted that in the case of City Link, the risk of ceasing trading was far greater in cost than that of a fine, suggesting the company knowingly failed its employees and contractors.

As for the order of priority and who gets paid when a company becomes insolvent, employees are ranked below banks and secured lenders but above HMRC, trade suppliers, contractors and customers (known as unsecured creditors). MPs now feel employees and contractors should be moved further up the chain.  

There is often no good outcome when a large company goes into administration as this will usually mean some or all employees will lose their jobs, customers won’t get paid back and suppliers lose business. The company will still be in financial difficulty regardless of how quickly employees are told.

In the case of City Link, if employees and suppliers had been told a while before the company entered administration, many could have left the company and pulled out of contacts. Millions of packages and Christmas presents may have been undelivered, creating still a gloomy outcome for customers and the business.

If a change to the order of priority was considered, with employees moved to the top and banks pushed further down, where would the incentive be for banks to lend to businesses? If they thought they would get little back in the event of insolvency, would the risk to lend be too great?

Employees should get fair treatment and appropriate consultation rights if a company they work for goes into administration. And for that reason, it is definitely worth looking into. We must all remember though that in this type of situation, not everyone will benefit. 

In a report, the group of MPs stated “We accept that there will always be those who lose out when a company goes into administration and cannot cover all of its debts. We do not agree, however, that the current system, where those who have given secure credit to a company are cushioned from the full impact of an insolvency because of the losses borne by those who work for a company on a self-employed basis, or as contractors or suppliers, represents the appropriate balance.”

The group are calling on the government to change the insolvency process, in order to better protect contractors and agency workers who are considered as unsecured creditors and not employees. 

Please see our new infographic for more information on the order of priority - who gets paid when a company goes bust

Number of high street retailers continuing to fall

A total of 5,839 stores closed in the UK last year with 987 being retail outlets. This is an increase of 600 shops since 2013, according to research by PwC. The majority of store closures included mobile phone shops, pawnbrokers and quick cash shops as well as clothing and food retailers.

We’ve reported over the last few years of problems that retailers face, including expensive business rates, high rent and significant shifts in consumer spending patterns. Over the last few years, the move from traditional retailers to online and discount stores has changed every high street in the UK, causing many shops to either close or relocate to retail parks outside of cities.   

Mike Jervis, insolvency partner at PwC said in a statement, “This year's numbers expose the harsh impact of 'macro' changes on the high street, especially in certain sub-sectors”.

“Despite the benign economy, the net loss of shops has accelerated. The insolvencies of Phones4U, Blockbuster, Albemarle & Bond, and La Senza, a diverse cross-section of the retail market, epitomise these factors”.

George Osborne pledged a review of business rates in last autumn’s Budget and now it seems the exact plans will be revealed on Wednesday this week. It will be the last Budget announcement before the general election in May so we suspect there will be a few grand gestures which will benefit the public and small businesses. It’s thought that new plans could see the business rate system calculated in a more fair way and even scrapped for very small businesses. 

Free insolvency toolkit for accountants

Calling all accountants!

Receive a free professional toolkit for access to cashflow templates, insolvency advice and turnaround solutions to help your clients. 

This includes expert guides to:

  • Time to pay programmes
  • Company dissolution
  • Warning signs of a struggling business
  • Company voluntary arrangements 
  • Creditors voluntary liquidation
  • Administration and pre-pack administration 
 
Use these guides to help your clients decide on the right options for their business.

All the information is stored in a small USB stick so you can easily email or print off PDFs and excel cashflow spreadsheets for your clients as many times as you like. 

For more information, see our insolvency toolkit page:
http://www.companyrescue.co.uk/companyrescue-direct 

Email Robert Moore now for your free toolkit: robertm@ksagroup.co.uk
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