If you are considering buying business premises there are many financial, practical and legal aspects that you might want to consider before climbing onto the commercial property ladder.
Below we examine some of the advantages and disadvantages of buying business premises, as against the alternative of leasing commercial property. We will also look more closely at the costs, as well as the practicalities and legalities when buying business premises.
Advantages of buying business premises
Whilst many businesses will opt to lease commercial property, there are significant advantages to buying business premises:
Buying your own premises can prove to be a lucrative financial investment and help future-proof your business. It can provide a valuable commercial asset in the long-term, with potential capital to reinvest with any rise in property value.
Other financial benefits
Whilst the initial capital outlay in buying business premises can be significant, mortgage repayments will typically be lower than comparable rent prices. By fixing the interest rate on a commercial mortgage you can forecast your business expenditure and avoid the uncertainty of rent increases that are common under commercial leases.
Security and stability
Buying rather than leasing commercial property can provide greater certainty for your business, particularly as any landlord may seek to restrict your security of tenure. By buying business premises you will avoid the disruption and cost of relocating your business upon expiry of your lease in circumstances where there is no viable option to renew.
Freedom and flexibility
By buying business premises you will not be restricted by the terms of a commercial lease, for example, prohibitions against assigning or sub-letting. Subject to planning regulations, lending conditions and any restrictive covenants, you may sell, lease, sublet or otherwise dispose of your premises as you see fit.
Alterations and extensions
As a proprietor you will be free to carry out structural alterations or extend your premises to suit your business needs, again planning permission and restrictive covenants permitting. A commercial lease, on the other hand, will normally limit the type of alterations you can carry out as a tenant. You may also be required to reinstate the premises at the end of the lease term.
Disadvantages of buying business premises
Needless to say, there are also some disadvantages when buying business premises that will need to be factored into your decision-making process:
The initial capital outlay when buying business premises can be significant. Even with finance secured, lenders will only typically loan up to 70% of the property value, as such a substantial deposit will still be required. You will also need to factor in any arrangement or valuation fees, legal and land registry costs, as well as stamp duty land tax.
Just as property value can rise, it can also fall, potentially leaving your business premises with negative equity. Further, a variable mortgage rate will expose you to increased repayments and, in turn, the threat of repossession if you default on your commercial mortgage.
When buying business premises you must consider day-to-day running costs in addition to any capital outlay. As the owner, you will be responsible for maintaining, repairing and insuring the premises. That said, under many commercial leases the cost of maintenance, repair (structural or otherwise) and insurance costs can commonly fall to the tenant.
Disposing of the property
Although buying business premises can provide you with greater security, selling the property at short notice may prove difficult. This can cause practical or cash flow problems in circumstances where you wish to relocate or release working capital. In commercial premises, there may be an option to end your lease early by way of agreement, assignment or sub-letting.
Funding the purchase of business premises
When buying business premises you may need to secure a commercial mortgage or business loan. Commercial mortgages generally run over a much shorter term than residential loans. They also carry higher interest rates as lenders regard commercial borrowing as higher risk.
Interest rates and repayment options will vary according to the lender, although most commercial mortgage schemes offer both variable and fixed rates. You will need to budget for any fluctuation if you opt for a variable rate.
Each mortgage application will be considered on its own merits based on affordability, the loan to value of the property and credit checks on those responsible for running the business. As such you will need to provide detailed financial information about your business including:
- audited accounts
- business bank statements
- current financial performance
- a profit and loss forecast
- a business plan including cash flow projections
- details of each director, partner or co-owner
- asset and liability statements for each applicant.
Cost of running business premises
In addition to any initial capital investment, there are a number of operational costs associated with buying business premises. These include:
- Mortgage repayments
- Buildings and contents insurance cover
- Repairs and maintenance
- Running costs, ie; utilities, security and cleaning
- Business rates.
Whether you are the owner or tenant, business rates will be charged on almost all non-domestic properties. These are based on the rateable value of the property rather than your turnover or profits. The rateable value is generally assessed on its estimated open market rental value on a given date.
You may be eligible for a discount by way of business rates relief, although the overall amount you pay annually will be subject to periodic revaluation. It is also important to note that any improvements made to the property may increase your rateable value and, in turn, the amount you pay in business rates.
The process of buying business premises
The buying process generally involves the following stages:
Finding a property
When buying business premises you will need to consider a suitable location, the size and type of property, what your business can reasonably afford and any expansion plans for the future.
Finding commercial property with vacant possession can be difficult so it may be prudent to enlist the help of a commercial property agent. They can also advise you on any interest expressed in a property and investigate reasons why it is being sold.
As a prospective buyer of commercial property you should be provided with an Energy Performance Certificate (EPC). The EPC will give you the energy rating of the building, providing you with a good indication of the likely energy costs. If you are buying business premises as an investment property, you should be aware that as of 1st April 2018, it is unlawful to grant or renew a tenancy for both domestic or non-domestic properties with an EPC rating of less than band E.
Making an offer
Once you have identified a potential property, unless it is to be auctioned, you will need to make an offer. You may want to consider whether your offer is conditional upon, for example, vacant possession or any other contingencies. It is also worth considering a lockout agreement to prevent other sellers from entering into negotiations.
Valuation and survey
Whilst your commercial mortgage provider will request a valuation report on the property as part of your application, you may also want to independently instruct a surveyor to report on its condition.
A chartered surveyor will not only determine the market value of the property, but also identify any underlying structural problems, the estimated cost of repairs, compliance with building regulations and the feasibility of any plans for the building.
Once an offer has been accepted, you will need to instruct a lawyer to undertake enquiries and carry out searches. These will include:
- Checking for good title
- Rights of way, easements or restrictive covenants
- Responsibility for maintaining boundaries
- Existing neighbour or any other disputes
- Planning or local authority issues
- Inclusion of fixtures and fittings
- Utilities, ie, the supply of gas, electricity and water
- Mining and environmental searches.
Once the results of all these enquiries have been received, your lawyer will provide you with a ‘Report on Title’. This may help you to renegotiate better terms when buying business premises, including a price reduction to counter the cost of any structural, legal or practical problems identified.
Exchange and completion
Exchange of contracts when buying business premises is where signed contracts are exchanged between lawyers and held prior to completion. This constitutes a legally binding agreement attracting financial penalties if either side pulls out.
On exchange a non-refundable deposit will be sent to the vendor’s lawyer. The completion date will then be confirmed, although it is sometimes possible for exchange and completion to take place simultaneously.
On the date fixed for completion the balance of the monies will be transferred to the vendor’s lawyer and the keys to your new property will be released.
Seeking legal advice when buying business premises
When investing in commercial property it is important to seek legal advice. Buying business premises is likely to represent one of the largest financial investments your business will ever make, although for any established, expanding or even brand new business it could prove to be a very shrewd move.
A specialist property legal adviser can provide guidance on all aspects of the law relating to buying business premises, as well as carry out the necessary legal and practical steps to help secure the future of your business.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
This article first appeared on our sister publication www.lawble.co.uk