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When a business needs a commercial property – or to expand their current operation into a bigger or additional property – there are generally two options: buy a property, or rent/lease one.
Here we look at the two options from the perspective of a Commercial Property Surveyor.
Leasing a property offers shorter-term flexibility, which can be great for businesses that are growing at a fast pace. Although it isn’t uncommon for a lease to have a term of 5 years or longer, many leases will contain a ‘break clause’, giving the option to exit the property early, provided that sufficient notice is given and conditions are met.
The capital investment needed to move into a leased commercial property is obviously far less than would be required to buy a property. We would always recommend seeking the professional advice of a Chartered Building Surveyor and having a Pre- Lease Assessment and Schedule of Condition prepared prior to signing the final lease paperwork.
It may also be that the timescales involved in finding and moving into a leased property are shorter than finding one suitable to buy. This depends on the type of property you are looking for and the market conditions at the time.
A downside of leasing a property is the lack of overall control. The property owner can object to any changes to or uses of the property that fall outside the scope of the lease. If they choose to do so, a landlord can sometimes serve notice on the tenant – either at the point of a break clause or at the end of the lease term.
With the proper notice and in line with the contract, a landlord may be able to raise the rent, which may have an impact on a business’ profitability.
Despite not owning the property, the majority of leases have onerous repair and maintenance obligations for tenants.
Any value that the property accrues during the term of the lease – either due to improvements made to the property or as a result of market conditions – will not be enjoyed by the leaseholder and will only serve to benefit the property owner/landlord.
If you have the capital available to do so, owning a commercial property allows you the maximum freedom in how you manage the building and your investment in it. For many business owners, there are tax advantages of owning a commercial property and renting it back to yourself via the business. There is also the long-term potential for capital growth in the property’s value, which is often not insignificant over the course of a business’ lifetime.
On the flipside, owning the property where your business is based means putting all your eggs in one basket. If the business experiences an unexpected downturn, you will still be required to pay the mortgage on the property.
Similarly, if your requirements for space change over time, you will be left with few options as to how to overcome this. Depending on the property itself and whether there is the ability to do so, it may be possible to extend – although this will of course be subject to obtaining planning permission etc.
As an owner occupier of a commercial building, how you choose to maintain the property is up to you. It is always in the best interests of the property owner to take a proactive approach and remedy repairs as and when they arise. The larger the property, the more costly repairs and maintenance are likely to be.
When buying a commercial property, the obligation for due diligence will largely fall on you. This can mean that the process takes longer than it would to lease a property, as you will need to instruct a number of investigations and then decide on how to move forward based on the results. We would always recommend a Pre-Purchase Survey when buying a commercial property so you know exactly what you are buying. A lender may also require a Valuation Report to be conducted by a RICS Registered Valuer.
For more information or to discuss seeking our advice in relation to a lease or purchase of a commercial property, please get in touch.
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