The Legal Considerations of Buying vs Leasing Commercial Premises
Commercial Property
Should you purchase or lease your next business premises?
Choosing whether to purchase or lease your next business premises is a significant decision with consequences which can shape the future of your business. In this article, we have outlined some important points you should consider before making any legally binding decisions.
Funding
Buying business premises carries with it considerably more up-front expenditure than taking a lease, giving rise to several financial considerations.
These include whether your business has sufficient cash to fund the acquisition outright (including any legal costs and Stamp Duty Land Tax) or whether you would require a loan from a lender who would usually expect you to fund some part of the purchase price – normally between 10% and 30% of the price, with the lender funding the balance.
Commercial leases on the other hand very rarely require the payment of a lump sum when the lease is granted. The issue is more one of cash flow to ensure there is sufficient money coming into the business every month or quarter to be able to pay the rent when it falls due. Your potential landlord will also want to know this before they agree to take you on as a tenant.
You should also consider how future economic factors may dictate market rent, lending terms and the value of premises.
Length of occupation
Purchasing your business premises provides long term security to occupy for as long as you require them. This is generally considered the ideal model for an established business which does not envisage a need to re-locate its base in the future and has been leasing premises up to that point.
Leasing premises allows a business to have greater flexibility as to its length of occupation – whilst the landlord might want you to take a 10-year lease you may only envisage a need to be in those premises for 3 years. This is all part of the negotiation of the terms of the lease between landlord and tenant.
If you are taking a lease of business premises you should also check as part of the negotiations whether you will benefit from the provisions of the Landlord and Tenant Act 1954, which allow a business tenant to remain in occupation of the premises even though the lease has expired. Such a lease also carries with it the right to request a new lease on substantially the same terms (other than the rent) from the landlord. It is possible for these provisions to be excluded from lease which means that the lease is for a genuine fixed term and you will need to vacate the premises unless the landlord will agree to grant you a new lease.
Some leases contain an option for the tenant to purchase the premises, which may be for a fixed price, or at price to be agreed, or where that cannot be agreed it can be determined by a surveyor.
Control and Repairs
As the owner of a freehold property, you have ultimate control over alterations or renovations (subject to planning and/or title restrictions) to tailor the property to your business’ needs and you can carry out those works in a timeframe and to the cash flow you have.
Where you are leasing premises, a landlord retains, through the terms of the lease, an element of control over the types of alterations or renovations permitted. Generally, structural alterations will not be permitted at all, whereas normally internal non-structural alterations are permitted but subject to getting the landlord’s consent, which usually cannot be unreasonably withheld.
When it comes to repairs the distinction between premises you own and those which are leased is quite stark.
With a freehold property the choice to do repairs sits with you alone – you can do those repairs at a time which suits you.
With a lease, a tenant’s repairing obligations vary widely depending on the terms of the of the lease but regardless of what the terms are, the landlord can force you to carry out the repairs you have agreed to undertake.
There are various levels of repair responsibility, the most onerous is a full repairing lease which means that the tenant is responsible for all maintenance and repair of the property. This is often seen with leases of whole buildings for example a warehouse.
At the other end of the spectrum is an internal only repairing lease, which requires the tenant just to maintain the interior of the premises which usually includes any external doors and windows. This type of lease is common with a ground floor shop, but which has residential flats above it.
The key is to take advice about what is suitable for you when negotiating the Heads of Terms with the landlord or their agents.
Disposal
You have reached the point where you need to move on from your current property for example because of expansion of your business or you have reached retirement and are looking to sell your business.
As the owner of a freehold property, you have the flexibility to sell or let the property to whomever you choose.
Leases include provisions which limit your ability to freely transfer or sublet the premises. Generally, a landlord’s consent is required to any transfer of the lease and you may remain liable to the landlord for the lease obligations even after you have transferred the premises if the person you have transferred the lease to defaults.
How can Bridge McFarland help?
Bridge McFarland has a team of legal experts across our who can assist business owners with the acquisition or leasing of business premises, as well as in connection with lease renewals or transferring or subletting premises.
To speak to a solicitor or a member of our Commercial Property team for advice or next steps with either leasing or purchasing a property, call or fill in our contact form and a member of the team will be in touch.
