Commercial premises – to rent or to buy?

30 March 2015

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).