Renting a property is a big step. It can make or break a growing company.
As one of your business’ largest expenses, you need to understand the hidden costs and restrictions.
So, you’re thinking of a fixed home for your company. It’s exciting, but also risky. This guide explains the steps and associated costs of renting a commercial property.
Choosing the right location
Local commercial letting agents’ websites can give you a feel for the rental value for the type of properties available. Just like with residential properties, you must view and visit the premises. This is a great way to keep motivated and visualise your workforce in the space.
You should research incentives to influence your decision, including:
- Business Improvement Districts (BIDs), and
- Enterprise Zones and Local Enterprise Partnerships (LEPs).
Proximity to your competitors isn’t always bad. It’s usually for a reason, like clients being nearby, good transport connections or value for money on rent prices.
Negotiating an agreement
To rent a commercial property, you’ll have to sign a lease agreement or licence. More on licences later.
Don’t save money by taking out a lease without seeking legal advice. It is expensive, but worth it. You’ll need to factor in the costs to your budget.
A lease is a legally binding contract. If either party fails to comply with the terms of the agreement, it could result in court action and/or termination of the lease.
The lease explains the terms and conditions of the agreement between the landlord and the tenant. Leases tend to offer more fixed term stability than licences, which can be advantageous. But it’s hard to know where you’ll be in 3-5 years’ time. What will your workforce look like?
Negotiating favourable terms is crucial. Your lawyer can help agree the following points with the landlord:
- Do you need to pay a deposit? If so, how much is it? Will it get refunded at the end of the lease term?
- How will the rent be paid? Cash, cheque, PayPal, BACS?
- Lease length and any break clauses
- If any rent-free periods can be agreed (i.e. whilst you get the business up and running)
- Rent and any rent review periods
- Service, insurance and maintenance charges (the total cost, what it includes and whose responsibility it is)
- When and how bills will be paid
- Can the premises be sublet?
- Will a personal guarantee be required?
- Do you have any repairing and/or decorating obligations?
The lease should also outline how the premises should be handed back to the landlord. If it is left to interpretation, it can become very expensive.
Cashflow might be very tight in the early stages of renting. Anything you can do to reduce monthly outgoings will be hugely beneficial.
Building security and energy
Security is an important consideration. It’s worth checking what alarm, camera and CCTV systems are installed. Do the premises have security staff? This may mean that you incur additional charges. Are there any security measures needed and if so, whose liability is it?
Commercial properties often consume a lot of energy. Before renting a commercial property, your landlord is required to provide you with an Energy Performance Certificate (EPC). This shows how energy efficient the property is.
What about short-term renting?
If you only want to occupy commercial property for a short period of time (typically six or 12 months), licences are a good option. They are available for various types of commercial property. Instead of rent, you pay a licence fee. The landlord chooses payment frequency, which can be weekly.
But remember that if you want to stay in the commercial property after your licence is up, you will have no statutory right to renew it (this depends on the terms of the agreement).
How is rent usually paid?
Commercial rents tend to be paid quarterly. However, some landlords accept monthly payments. This must be expressly permitted in your lease.
Long-term leases usually include a rent review every three to five years. This means the amount you pay can either increase or decrease, depending on the property’s market value at the time of the review. This should be specified in your rent agreement. If you choose an up-and-coming area, your rent could increase dramatically.
What about business rates?
All non-residential buildings in England and Wales must pay business rates on top of their commercial property rent. This includes shops, offices, pubs, factories and warehouses. The costs are usually covered by the tenants.
Business rates can add around 40% to the cost of renting a shop or office.
Make sure you ask the letting agent for the rateable value of the property before proceeding.
Business rates are calculated by:
The rateable value of the commercial property + the level of the uniform business rate (UBR).
The next revaluation is scheduled for April 2023.
Sometimes there are additional payments for business with a high rateable value. For example, in 2010 a 2p levy was introduced on non-domestic properties with a rateable value in excess of £55,000 in London. This was to help fund the high-speed Crossrail.
If you have a rateable value of less than £15,000, you can apply for exemptions to paying business rates and extra fees by claiming “small business relief”.
Are there other hidden costs?
- Rent deposit (usually the equivalent of 3-6 months’ rent)
- You could be liable for the landlord’s legal fees (between £1,000 to £3,000). This is often paid upfront to ensure the landlord isn’t out of pocket if they instruct their solicitor to undertake any work
- Land Registry and other search fees (£250 to £400)
- Notice of Assignment fee (£50)
- Building Survey (open-ended)
Other factors to work into your budget may include:
- Advice from commercial estate agents and lawyers
- Local authority charges
- Stamp Duty Land Tax on commercial property valued above a certain threshold (based on the premium and rent)
- Moving costs
- Decoration, repairs and ongoing maintenance. We recommend you agree to a Schedule of Condition Report. This confirms the condition of the property with photographs. This is then attached to the lease. This means the landlord cannot make you liable for any damage or repairs that were there before you moved in.
- Running costs. Like a residential property, you will likely be responsible for electricity, gas, internet and other services.
When you’re ready to sign…
You might negotiate directly with the landlord or via an agent. We’d recommend engaging a lawyer early on.
You should ask the landlord to stop marketing the property. This should prevent them from being tempted by any higher offers.
The landlord will send you a document containing:
- A description of the agreement
- The rental value, currency and payment details
- The agreed timescales and proposed date of completion
This is not a legally binding contract. It is a draft of the main contract, called the “Heads of Terms”.
At this stage, many tenants conduct a Building Survey to assess any problems before they move in. You will have to pay for it. They can be up to 10% of the annual rent, with disbursements and VAT on top.
You could also conduct a search with the local council to highlight any issues you need to be aware of, for example in relation to:
- Major nearby road schemes;
- Planning and building regulations; and
- Noise abatement.
You can exchange contracts after the money is in place and all parties are satisfied with the state of the property and the contract.
This deal will be a legally binding contract when the contracts are exchanged. Completion happens once the full balance is paid.
Does the tenancy automatically end?
It depends. If you’re covered by the Landlord and Tenant Act 1954 then you have the right to stay. A new lease will be granted on the same terms, apart from the rent which is negotiable.
If your lease isn’t covered, then that right isn’t guaranteed. The terms of the lease are subject to negotiation in the same way the rent is.
What happens if you can’t pay the rent?
Leases are legally binding contracts. Not paying the rent has serious consequences. Your landlord can take legal action against you and any personal guarantors. It’s extremely important to seek legal advice to establish what your rights are. Your landlord will notify you if you’re in breach of the contract and you’ll be given a reasonable opportunity to remedy the breach before legal action is taken.
Ideally, you’re on good terms with your landlord and can quickly make them aware of any potential issues. This should minimise any disruption to your business.
Key takeaway: Ask yourself whether this building and its facilities suit your needs not just today, but in the future. Do you research, and your sums. Seek legal advice to point out hidden risks. Rent will be one of your largest outgoings, so it’s important to get it right.
Get in touch with our team now to discuss your move onto the commercial property ladder.