Commercial property FAQs

Some businesses do rent business premises without legal advice, particularly when they are agreeing a flexible property licence with a reputable landlord such as a local authority. But you need to be very clear about what obligations and potential liabilities you are taking on. For example, you could find that you are liable for expensive repairs, trapped in an inflexible arrangement, or renting from a less accommodating landlord if the property is sold on by its owner.

Having a lawyer check a simple rental agreement will be inexpensive, while getting it wrong can be disastrous. So it is always wise to take professional advice.

It depends on the terms of the lease. Most leases will impose some repair and maintenance responsibilities on the tenant. Your responsibilities might be as limited as updating internal decoration from time to time, or include full responsibility for internal, external and structural repairs and maintenance.

Unless you have completely fulfilled your repair and maintenance obligations, the landlord will usually be entitled to serve you a schedule of dilapidations detailing the work that is needed and the estimated costs. This can include requiring you to reinstate the premises to its original condition if you have made alterations — even if the landlord consented to the alterations.

If you fail to carry out the required work before the end of the lease, the landlord is likely to claim damages from you to cover the cost of putting things right. In some cases, however, these damages could be lower than the cost of doing the work — for example, if the landlord is planning to redevelop the premises anyway.

In most cases, the landlord and tenant will agree a payment to cover any dilapidations. If you are approaching the end of your lease term, or have been sent a schedule of dilapidations, you should take advice. Your lawyer can work with a local chartered surveyor to negotiate a fair outcome for you.

The first step is to check what rights the lease gives you. For example, you may have the right to assign the lease to another business (so that they take over the tenancy), sublet the premises, or give notice to bring the lease to an end.

Failing that, you can attempt to negotiate the surrender of the lease with the landlord. Typically the landlord will expect payment for agreeing to this.

You should be aware that subletting or assigning the lease does not usually completely remove your responsibilities and potential liabilities:

• If you sublet the premises, you continue to be the tenant under the original lease, and your existing responsibilities continue to be the same. In turn, your subtenant has a sublease requiring them to pay you rent, look after the premises and so on.
• If you assign the lease, the new tenant takes over the tenancy responsibilities. But you may continue to be liable if the new tenant fails to pay the rent.

To start with, you should be clear about what your priorities are. Price is not the only issue, particularly if you are taking on a leasehold property. Possible negotiation objectives might include an initial rent-free period while you fit out the premises, a break clause allowing you to end the lease early, and minimising any security you are required to give (such as a deposit or personal guarantee).

It helps if you know as much as possible about what the seller or landlord’s position: for example, whether they are in a hurry to do a deal and whether they have already had other offers.

You should make sure that you know as much as possible about the local property market and what prices or rents are being achieved for similar properties. A local chartered surveyor can help with this. A survey of the premises will identify faults that you can use in the negotiations.

You may want to ask your professional advisers to negotiate on your behalf. They will be less emotionally involved and have the right expertise and experience.

The first step is to decide what business premises you are looking for.  Draw up a property specification with details such as:

• Whether you are looking for freehold commercial property, leasehold property or a flexible, short-term business premises rental
• What type of premises you want (for example, office, shop or retail)
• How much space you need and any particular requirements (for example, high ceilings or parking spaces)
• Where you want the premises to be.

Business premises will be a considerable expense, whether you rent or buy.  Buying can be cheaper than renting on a month to month expense basis, but a commercial mortgage can be difficult to obtain, and you’ll probably need at least 15% of the premises’ value as a deposit.  Commercial leases can often run for 15 years; so that’s quite a commitment, particularly if you choose unsuitable premises.

There’s a well-known estate agent’s saying that the three most important things to consider about any kind of property are; location, location and location.  And then many business people claim that the most important thing to consider about ‘location’, particularly for retail premises, is the amount of ‘passing trade’, ‘traffic’ or ‘footfall’; literally the number of people that naturally travel past the premises entrance.

But not everyone can afford business premises on the most popular High Streets in town, and in any case for some types of business this will prove to be a waste of money, impractical, or not allowed (local councils employ strict guidelines that can restrict the types of business that can operate in certain premises or certain areas).

So as well as location you’ll need to think about your budget, and what trade-offs you are prepared to make: for example, whether you would be prepared to consider business premises further away from your ideal location if they are substantially cheaper.

However if you look at somewhere more remote think about; is there any car parking space for your employees and customers, are the premises well served by public transport (how will your employees get to work?), and is there enough space to stock everything you need?  Are the premises accessible to wheelchair users?  Is there enough power, water and drainage?

Think about the space you’ll require, the layout you’ll require, and the space and layout you may need if your business grows.

Once you know what you are looking for, check commercial property websites and contact local commercial estate agents. It’s also worth contacting the local council and local business support organisations (such as enterprise agencies) as there may be grants to help you.

After that, a good solicitor will check leases for hidden costs, help protect you against any penalty clauses that appear in there, and can even use their local knowledge to negotiate a better deal for you.

Contact QualitySolicitors on {{phone}} today to discuss your needs.  We can have a short chat for free in the first instance just to check that we will be able to help.  We call this Free Initial Assessment, and it’s a five-minute chat with a legal representative to reassure you that QualitySolicitors are right for your needs.

The break clause in a lease sets out what rights you have to bring the lease to an early end. You can only exercise the break option at the specified date or dates.

If you do want to break the lease, it is vital to make sure that you comply with any conditions in the lease. The details will depend on the particular lease, but typically:

• You need to give written notice to the landlord by a specified date — perhaps six months prior to the break date.
• The landlord will have the right to refuse the break under certain circumstances. Commonly this will be the case if you are behind with your rental payments; in some leases, even trivial breaches of the lease can be grounds for refusal.
• You will need to provide vacant possession of the premises on the break date, making sure you have moved out and returned the keys.

If you do intend to use a break clause, you should take legal advice and plan ahead. A small error such as giving notice in the wrong form or missing a deadline could be very costly.

Buying the freehold of your own commercial property represents a significant capital investment. Many businesses will not have the financial resources to make this a realistic option.

Many businesses that do choose to buy commercial property outright do this as an investment. For example, you might buy a commercial property in order to develop it, or as an asset that you hope will increase in value over time.

A far more common choice is to lease your business premises. Leasehold property is available in most areas to suit most businesses, and often requires little or no initial capital investment.

A relatively short lease, or a lease that offers you the option to get out of the lease early, gives you flexibility if your needs and circumstances change. Conversely, you might prefer a longer lease if you will be spending money to adapt the business premises to your particular requirements, or expect to build a local reputation. In either case, you should be aware that taking on leasehold property usually means that you will be responsible for maintenance and repairs.

The easiest option, with the lowest initial costs, is to rent business premises that are available on a short-term licence. This sort of flexible arrangement allows you to occupy business premises without taking on a substantial longer-term commitment. Typically, both you and the landlord have the right to end the rental at a month’s notice. Serviced offices and small workshops are often offered with a flexible licence.

Whether you are charged VAT on rental payments depends on the particular property. If the landlord has ‘opted to tax’ for VAT purposes, then the rental payments will be subject to VAT; otherwise, rental payments are exempt from VAT.

If your business is VAT-registered, your costs will not normally be any higher whether the landlord has opted to tax or not. You can reclaim any VAT you pay, in the same way as you do for other business purchases.

However, if your business is not VAT-registered, or if you make VAT-exempt supplies, any VAT charged on rental payments will increase your costs.

Once you have exchanged contracts to buy or lease business premises, the deal is binding. If you fail to complete the deal, you could be liable for any losses the seller or landlord suffers.

If you want to cancel the deal, you will need to negotiate an agreement to limit your potential costs. You should take legal advice.

Speak to a solicitor. An initial free enquiry will help you decide what course of action to take. A negotiated resolution is often the best option but if necessary you may want to take legal action.

Your rights depend on the lease.

Many leases, particularly older leases, give you the right to renew the lease in most circumstances. However, the landlord may be able to refuse to renew the lease if:

• You agreed to give up your right of renewal when you originally took on the lease.
• The original agreement was for a fixed term tenancy lasting less than six months.
• The landlord wants to use the premises themselves or to redevelop them.
• The landlord has offered suitable alternative premises.
• You have sublet the premises and are no longer occupying them yourself.
• You are in substantial breach of the terms of the lease — for example, by failing to pay the rent or fulfil your maintenance obligations.
• The original agreement was in fact drawn up as a licence rather than a lease. This sort of rental agreement is typically used for short-term, flexible rentals such as serviced offices.

If your landlord is refusing to renew your lease, you should take legal advice. You may be able to negotiate an agreement, or if necessary take legal action.

You need to confirm that the equipment is owned outright by the seller (rather than being covered by a hire purchase agreement, for example). Your solicitor will do this for you.

You will also want to check the condition of the equipment. You may want to ask for servicing records or arrange for electrical or mechanical equipment to be independently tested.

More broadly, you should think about whether the equipment meets your needs and how much the equipment is adding to your costs. Would you be better off getting business premises without this equipment and then buying (or leasing) the equipment you really want?

The lease for your business premises should state when the rent will be reviewed and on what basis the new rent will be established. Typically rent reviews are based on ‘open market rents’ — the rent that the landlord could expect if the lease was offered on the open market — though alternatives include indexing the rent to inflation.

A rent review based on open market rents may justify a sizeable increase in the rent, particularly if the general level of rents in an improving neighbourhood rises significantly. Improvements to the premises can also lead to a higher rental value — in some cases, even if you have paid for the improvements yourself.

If you think the proposed rent is too high, you should appoint a local surveyor to advise you and negotiate on your behalf.

Your initial costs typically include:

Professional fees for your lawyer and surveyor. You will also need to pay the landlord’s legal fees if you have agreed to do so.
Incidental legal costs such as the costs of searches and Land Registry fees.
The price of the premises (for a freehold purchase) or any initial lease premium (for leasehold property).
Any stamp duty land tax (depending on the price and/or the rent payable).
The costs of any alterations, fitting out etc.

Your continuing costs typically include:

Rent and service charges (for leasehold property).
Insurance, utilities and so on.
Non-domestic rates (business rates).
Maintenance and repair costs.

Key terms in a lease include:

• How long the lease is, and what flexibility you will have if you want to leave the premises before the lease comes to an end.
• What the costs will be, including rent and any service charge.
• What your responsibilities are for repairing and maintaining the premises, and what restrictions there are on making alterations.
• What types of business the premises can be used for.

A full lease agreement can be very lengthy and detailed. It’s important to get professional lease advice to make sure that you understand exactly what you would be agreeing to. For example, you could be required to maintain the premises in good condition — even if repairs are already needed when the lease starts.

It’s worth carrying out your own informal checks first. Take a look at the property to get an idea of its condition and check that it matches all your requirements. Have a look around the neighbourhood for any potential problems, such as noisy or disruptive neighbours.

You need to confirm that the premises have the right category of planning permission to allow them to be used for your kind of business. Your solicitor will check this as part of the routine searches involved in buying or leasing commercial property.

If you will be responsible for repairs — on either a leasehold property or business premises that you buy outright — get a professional survey carried out by a qualified surveyor.

You should take advice on what consents you are likely to need and how best to get agreement to your plans.

Whether you lease your business premises or own them outright, any significant alteration (such as structural alterations) is likely to require building control approval. Additional consents may be required for properties in conservation areas and listed buildings.

If you want to change the use of premises from one ‘use class’ to another — for example, from a shop to an office — you may require planning permission.

If you are occupying leasehold property, additional restrictions are likely to be included in the lease. Typically, the lease might contain clauses prohibiting significant alterations or a change of use, or these may require the landlord’s consent.

Start by checking the terms of your lease. The lease may prohibit subletting altogether or may contain restrictions: for example, only allowing you to sublet the premises as a whole.

Where subletting is allowed, the lease will generally state that the landlord’s consent is required (and you will usually be required to pay your landlord’s legal costs). You should take legal advice on the best way to approach the landlord.

You will also need to ask your lawyer to prepare a sublease covering the agreement between yourself and the new subtenant.

You are likely to share various responsibilities with the landlord, depending on the terms of the lease and who has the most control over different areas.

As an employer, you have a general duty to ensure that you are providing a healthy and safe working environment. As part of this you need to carry out a health and safety risk assessment. You are also responsible for fire safety.

Other responsibilities may include:

• Making sure that electrical or gas installations and equipment are safe.
• Managing asbestos, particularly if you are responsible for maintaining the premises.
• Ensuring that any building works are carried out safely.
• Making reasonable adjustments to accommodate disabled employees and customers.

Your responsibilities depend on the lease.

For a short-term rental such as serviced offices, you might only be responsible for internal decoration, with other maintenance and repairs being the landlord’s responsibility.

With a typical commercial property lease, your obligations can be much more extensive. With a ‘full repairing and insuring’ lease, you are generally responsible for internal, external and structural repairs and maintenance. Or you may only be responsible for internal repairs and maintenance, while the landlord maintains the structure.