Guide: Leasing or buying business premises – the legal stages involved
Six steps to buying or leasing commercial property for your business. The process explained in plain English.
Before you get started, there are some key decisions you need to make about the type of property you’re looking for.
Deciding on the business premises: the usual starting point with business premises is deciding on the size and type of property your business needs. Choosing the right commercial property will depend on the type of business you run.
You will need:
- To consider your realistic expansion plans and the potential to take on extra space.
- To decide whether it is better for your business to buy or to rent. See the comparison of the advantages and disadvantages of buying V renting a business property we’ve provided.
- To work out how much your business can afford in rent or mortgage payments.
- To register with commercial property agents (estate agents or surveyors specialising in business property) to see what property is available to buy or rent in the locations you’re interested in.
Buying – commercial mortgage: if you decide to buy (rather than rent) this will usually mean taking out a commercial mortgage. You will need to see how much mortgage providers will lend your business and at what cost. It’s often a good idea to make initial enquiries early on.
For most businesses the first step is usually to speak to your Business Relationship Manager at your bank. Commercial mortgages are offered by many of the main banks and building societies or through a mortgage broker. There are brokers who specialise in commercial property. Step 3 has further details.
Renting – commercial lease: if you decide to rent (rather than buy) you will need to review the rental terms. Commercial leases are long documents. Expensive mistakes are easy to make. If you are not experienced at reading and negotiating the terms of commercial leases, you may not realise how an innocent looking clause hidden in such a long document could cause a massive cost to your business.
Find out more about the mistakes to avoid with commercial leases.
It pays to take professional legal advice from an early stage: by using our Free Initial Assessment service you can talk through any concerns or questions you have with one of our specialist business property lawyers. It’s best to do this before you invest time and money in committing to go ahead. We’ll help you understand the likely costs, timescales and any risks associated with the transaction.
Having a lawyer on your side means your business won’t get caught out with a legally binding agreement which causes your business future problems, commits you to avoidable payments or means you’re stuck with a property which isn’t right for your planned use.
Once you have found the right property we can give you a firm quote for the legal costs involved. And when you’re ready to go ahead, we’ll send you some paperwork and check your ID. You’ll need to let us know the name of the property agents. Having this information ready means we can move fast on your behalf.
If you plan to buy, then we will need the details of the funding arrangements or mortgage provider. Let us know if you are also selling a business property and need the transactions to happen at the same time.
If you plan to rent, then you may have reached the stage of agreeing heads of terms with the landlord’s agent. This is the first stage of negotiations (see step 4) where you and the landlord agree the basic details of the rental agreement to be used to prepare the full lease. We will need to see these or can give you guidance on them if they are not finalised.
Whether you’re buying or renting, our first job is to carry out extensive investigations and enquiries on your behalf. This is important as you need to know of any problems before you reach a binding agreement to buy or rent the property. These are sometimes called searches:
Property title documents: Research of either old title deeds or official copies of electronic records from the Land Registry, to check the seller has good title and no one else has rights over the property that might restrict your planned use of the property or prevent its sale or rental to you.
Rights of way and easements: Does the public or a neighbour have the right to cross the land? Does the seller have any legal rights that you would need to be passed you to access the grounds or driveway? Let your lawyer know if anything seemed strange when you visited the property and which needs to be investigated.
Boundaries: Are these clear? Who is responsible for maintaining walls, hedges or fences? If any look unclear or in a poor state of repair – let your lawyer know so they can advise further.
Restrictive covenants: There can be all sorts of restrictions, such as the times the premises can be accessed to limitations on the use of the premises – which might impact on your planned business use.
Commercial property standard enquiries (CPSEs): Whether you are buying or renting, we will usually raise these enquiries on your behalf – they cover many key issues about the use of the property:
Potential disputes: Have any official or unofficial rights been agreed with neighbouring property or land owners? Have there been any neighbour disputes and does anyone else have a right (official or unofficial) to use the premises?
Planning and other legal issues: Is there planning permission for the current use of the premises and will that cover your planned use? If not, you will need to apply for a change of use of planning permission. Also does the building comply with all relevant laws? For example, if the owner has carried out building works to the premises (such as an extension)– did they have planning permission and were they carried out in accordance with building control?
Fixtures and fittings: What items are included in the price? Any agreement you have reached with the owner needs to be recorded
Local authority: Are there any issues or disputes with the local council concerning the property (that you might find you have to sort out if you proceed).
- Who is responsible for the adjoining road?
- Are there any refused or granted planning permission applications or any building control or regulations issues?
- Is it a listed building or in a conservation area?
- What business rates will you have to pay?
- Finally are there are any plans for major road developments or transport links – that might affect your use of the property?
Utilities: Enquiries to check if the property is supplied with gas, water, electricity and drainage for waste water. Depending on your business it may be necessary to check for consent to discharge trade effluent. Whether the supply runs over a neighbour’s property or is shared – to highlight any problems this might cause:
Mining searches: In areas where there was a history of mining, a records check is needed to see if there were mine workings which might affect the stability of the property.
Environmental search: A detailed environmental risk report covering the site and its vicinity. This can identify potential land contamination (which you might be charged to clean up).
Other searches: Local issues may mean other types of specialist searches of historic records are also required to protect you. Examples are chancelcheck® (historic liability to pay towards maintenance of a local church) and flood risk.
Once the results of all these enquiries have been received, your lawyer will report to you. This is called a ‘Report on Title’ (if you are buying) or ‘Report on Lease’ (if you are renting). The report will advise you of any issues or problems. They will also let you know about any legal solution or insurance that can be taken out.
Sometimes the replies to your solicitor’s enquiries will raise concerns that mean you decide to instruct a surveyor to inspect the condition of the property or a particular problem in more detail.
If serious problems are found you may decide not to proceed with the property. Alternatively you may wish to negotiate a price reduction to take account of any issues.
If you decided to buy (rather than rent) most business will need a commercial mortgage to pay for the property.
- Usually a commercial mortgage is for a period of 15 years or more.
- Lenders like businesses to have invested in their property, so you will usually need to put down a deposit of 20% to 30%.
- Interest rates are generally higher on commercial mortgages than residential ones.
- Check the terms of the mortgage to ensure there are no restrictions which may harm your plans (such as use of the premises or sub-letting).
- The mortgage provider will want a great deal of information about your business – so it is worth preparing this in advance. Basically you need to persuade the lender that you are a ‘safe bet’ and your business can afford to keep up the mortgage payments. If your business gets into trouble and cannot make the payments, the mortgage provider may use its right to sell the property. Therefore they will want to check it will be worth enough to cover the money they are lending you. Your starting point will often be a conversation with the Business Relationship Manager at your Bank.
Business information you may need to provide:
- Audited accounts for the last two years.
- A business plan and details of the current financial performance of the business.
- A profit and loss forecast for the next few years.
- The personal details of the directors, partners or owners of the business, including details of their personal assets and financial liabilities (money they owe such as home mortgages and personal investment in the business).
- Cash flow projections (to show the business can afford the mortgage payments).
- If you are buying the business as well as the premises they will also want to know about the past performance of the business, its credit status and its growth projections.
Mortgage valuation or full survey
Your mortgage provider will want a valuation report on the property as part of your loan application. This valuation (which is not a survey) is made for your lender. It is often worth employing a surveyor to prepare a full report for you on the condition of the property.
They will be able to report to you on:
- The local commercial property market and the cost of similar properties.
- The condition and any problems with the property – including any structural issues. This is important with buying a property, as your business will have to fund the cost of any problems and repairs.>
- The value of the premises (to ensure you are paying a fair price for the conditions and location).
- An assessment of the investment value.
If you are buying the property with a mortgage, and we act for your lender as well as you, then after we have completed our investigations (see step 2), a version of the Report on Title will also be provided to your mortgage provider (called a Certificate of Title). If everything is fine and there is good title, then we can also request they make the mortgage loan to you.
Armed with the results of all the investigations and (if you are buying) a surveyor’s report, we will then negotiate contract changes in order to agree the terms of agreement for your business to buy or rent the premises – that you and the property owner will sign. .
Negotiations can cover:
Purchase price or rent: A negotiated change as a result of the investigations.
Agree deposit amount:
- With buying, this is an advance payment to show your intention to proceed with the purchase on the agreed completion date. It is usually 10% unless a lower sum is agreed.
- With renting, a rent deposit may be required to show your intention to comply with the terms of the lease (such as rent payments and returning the property to the landlord in good condition at the end of the lease).
Defects: Either limiting your responsibility for certain defects found, or creating a requirement for the owner to first put them right (at their expense).
Planning permission: Making the contract conditional on planning permission being given for a change of use (where needed) to enable your business to operate from the property. When renting, the landlord also has to agree to your planned use.
Completion date: It is important to agree the date you pay for, acquire the property and can move in (and the owner or occupier moves out). If buying, you also need to agree an earlier date that the contract to buy becomes a binding agreement (called exchange of contracts).
Renting – commercial leases
If you are going to rent the premises then there will be many additional issues to negotiate. Be warned – a commercial lease can run to 50 or more pages. Costly mistakes are easy to make. Find out more about the mistakes to avoid with commercial leases.
As mentioned in step 1, the first stage is to agree heads of terms – a summary of the planned arrangements. If this can be agreed then it will be used as the basis for negotiating the detailed terms of the actual lease.
The further issues it is likely to cover and we will need to negotiate on your behalf include:
Property description: Exactly what land or buildings are to be rented to your business?
Parties: Who are the landlord and the tenant (are they participating as individuals or a business)? Is there anyone else such as someone guaranteeing you will pay your rent? Is the landlord the full legal owner (owner of freehold making this a headlease)?
Term: Length of time you will occupy the property. Also any date for a break clause where either of you can bring the rental agreement to an early end without any penalty. And whether you will be entitled to apply for a new lease at the end of the term (called security of tenure).
Rent: Not only the amount but also the time and process for reviewing the amount.
Service charges: Any additional payment you will have to make for specified services. This could cover facilities such as reception, meeting rooms, toilets and grounds managed and maintained on behalf of you and other businesses in the same building or business park.
Repair obligations: Details of what you are responsible for. Issues such as who is responsible for the main structure. Also details of the condition you will be expected to leave the property in when the agreement ends.
Changes: Any restrictions on how you can alter the premises to meet your changing needs. There may be requirements over internal alterations as well as structural changes. Also any limits on how the property is used and your right to sub-let part of it.
Insurance: Clarity as to what you are required to cover with insurance at your expense.
Signing the contract
When the contract for sale or lease is finalised and you are happy with the terms agreed, then if you are ready to go ahead, you will need to sign it.
If you decide to buy a property, there is an extra step in the process – exchange of contracts.
We will check we have received the agreed deposit from you and that your mortgage funding is in place ready for the Completion date.
When everything is agreed we will then contact the seller’s solicitors. We both confirm we hold signed contracts with no further amendments. We agree that a binding agreement has been reached for you to buy the property. We agree to post the signed contracts to each other. This is known as exchange of contracts.
The Completion date is confirmed. With commercial property it is likely to be 14- 28 days later, although sometimes it can be agreed (in advance) that the Completion date can be the same date as exchange.
We will then pay the seller your non-refundable deposit (usually 10%).
Legally exchange means:
- The seller cannot now pull out.
- The seller must move out on the Completion date (unless alternative terms have been agreed for example if the property is let to a tenant).
- You no longer need to worry about gazumping – the seller cannot now accept a higher offer from anyone else.
- You cannot now pull out of buying the property.
If you did pull out, then you would lose your deposit. If either party now breaches the contract they risk being sued for compensation for breaching the agreed contract and this may result in being asked to pay the other’s losses and expenses. The contract for sale also contains financial penalties if either party delays the completion.
Once the final agreement (contract for sale) is in place the formal transfer document needed to put the agreement into action by transferring ownership will be signed.
If you are using a mortgage, we will also finalise the mortgage paperwork, so the mortgage money is available in time for the moving date. You will need to sign a mortgage deed. This is the document where you give the mortgage company a stake in the property and the right to sell it if you do not keep up with the mortgage payments.
You will then need to let us have the final balance of money you are providing (on top of any mortgage) several days before your moving date (as transferring large sums of money remains a slow banking process) – we’ll confirm with you the date you should make your payment.
The total with the mortgage money will need to cover legal fees, stamp duty (tax) and Land Registry fees.
Once the contract is agreed, you can make arrangements for the Completion date, that may include:
- Final payment: If you’re buying the property, we will confirm the final payment we will need and when we need it. This is to cover the amount needed on the Completion date and the stamp duty land tax and Land Registry charges.
- Fitting out and redecoration: Preparing your new premises and returning your old premises to a rentable or sellable condition.
- Moving equipment: If you have existing premises, you will need to make plans to move your equipment or put it into storage. You will have to consider the potential costs or loss of business while doing this.
- Buying new office furniture and equipment.
- Setting up IT and telecoms systems: If you are able to transfer an existing phone number this will usually need to be arranged well in advance. Contact utilities companies: Organise any water, gas and electricity supplies for the new premises.
- Arrange buildings and contents insurance.
- Order new stationery: Letterhead, invoice paper, business cards and other stationery items which have your business address on them.
- Order new building’s signage: Before doing this, you may want to check if there any planning permission restrictions which you will need to comply with. If renting, you will need landlord’s consent.
For further protection, we will make final (updated) title searches at the Land Registry to check no one else has registered an interest in the property since our earlier investigations.
Buying: As soon as our bank confirms the money has been transferred by your mortgage provider, then we can complete the transaction on your behalf.
The property agent will then release the keys and you can move in.
Finally there are some important final administration tasks we will carry out for you in the following few weeks:
Payment of stamp duty land tax (SDLT): This is tax payable to the government (HMRC). A Land Transaction Return form has to be submitted and SDLT must be paid within 30 days of completion or penalties are payable.
- When buying it is calculated on the price you have paid.
- When renting under a lease it is calculated on a formula that covers any premium paid for the lease, the annual rent and the length of the lease.
Registration at the Land Registry:
- When buying you need to register your ownership (transfer of title to you).
- When renting for more than seven years, (or buying an existing lease with more than seven years to run) this must be registered.
- When renting commercial property for seven years or less, your rights given by the lease should be noted on the record of your landlord’s title.
Have a question or need some help? Call us today on 08082747557