Renting business premises
- 1 Overview
- 2 The advantages of renting premises
- 3 Finding the right premises to rent
- 4 Types of property rental agreement
- 5 Practicalities of renting premises
- 6 Financial considerations when renting premises
- 7 Alterations to the property
Renting premises ties up less capital than buying which means you can invest it in the business instead. It can also give you flexibility to relocate easily.
The type of premises you rent and the location will be partly dictated by the type of business you are running. The amount you can afford - taking into account extra costs such as business rates, utility bills and building insurance - will also be a deciding factor.
This guide outlines the things you should consider before deciding whether renting is a better option for you than buying. It highlights the practicalities you need to consider as a tenant and the type of expert help you can get to make the renting process as trouble free as possible.
Financially, renting can make good business sense. Upfront costs for leasing premises are often relatively low, though you may pay a premium to purchase the lease. You may also have to provide a refundable deposit. But generally renting ties up less capital than buying, freeing up cash that could be used elsewhere in the business.
You are not exposed to interest rate rises, although your rent may rise periodically as a result of rent reviews. Always check to see how rent is reviewed before you sign the lease.
There is also less potential for unexpected financial shocks - unless you wish to sell the remaining term on your lease to someone else, falls in property value will not affect you. Also, you will have no concerns about Capital Gains Tax unless you decide to sell your lease for a premium.
You may have less responsibility for the building if you rent rather than buy, although this will depend on the terms of your lease. You may have to look after repairs and maintenance inside the building but external maintenance is more likely to be the responsibility of the landlord, particularly in multi-occupancy premises, though you may have to pay a service charge.
It is essential to match your premises to your business needs. There are a number of ways to search for appropriate premises to rent. You could consider:
- agents' letting boards outside the premises
- local newspapers
- the internet - the NovaLoca website allows you to search for commercial premises across the UK
- your local council - through their Economic Development Unit
- estate agents
- trade associations - if an existing member is retiring or selling up
Another good way to find suitable premises is through appointing a commercial agent or commercial surveyor. You can find one in phone directories, or via a trade association, the Royal Institution of Chartered Surveyors website (RICS) or a local Chamber of Commerce.
Commercial agents and surveyors have expertise on the property market in the area and can keep you up to date with any new developments. They will also send you detailed specifications of suitable premises, which can prove invaluable, particularly if you are limited by time.
Commission is payable to a commercial agent for acting as an intermediary between you and the landlord or seller. You will need to fully brief the agent, manage the relationship well and maintain regular contact to ensure that they find you the most suitable premises.
When employing an agent to act on your behalf, you should also draw up a contract, even if the relationship is informal. This will help to set out expectations and clarify your legal obligations to them.
You can rent business premises by leasing them. If you require premises for a short term - for instance, to complete a large order - then consider a licence rather than a lease.
Leases typically have agreements of between three and 25 years and can offer long-term stability. However, lease lengths are getting shorter and recent research suggests that the average length of a business lease is below eight years.
You will probably be able to negotiate this with your landlord and should certainly check before signing the contract.
Other than the rent itself, key areas of the contract that you should study include:
- lease length
- break clauses
- service charges
- dilapidations (an amount payable to the landlord at the end of the lease)
- responsibility for maintenance and repairs to the building and external areas
Rent is usually paid quarterly in advance. However, you may be able to pay monthly. This can form part of negotiations with your landlord. If your business is new, you may want to consider a short lease of three years or less or ask for a break clause.
Check how much these are and what services they cover, such as cleaning and heating. Establish what facilities you may be sharing with other tenants. Service charges are an additional cost to the rent and can be more expensive than if you organise them yourself. You have the right to challenge service charges.
A licence could be of benefit to a small business looking for a short-term property solution, of up to one year. Licences generally offer more flexibility and can usually be terminated at short notice on both sides. However, you would not have an automatic right to renew a licence and it is always advisable to seek professional advice, eg from a chartered surveyor or solicitor.
Contracts can be complex, so consider professional help from a solicitor or chartered surveyor. While this can be expensive, mistakes can be much more costly to remedy.
Before renting a property, make sure you have planning permission to make any changes you need to the property.
Find out if there are any restrictions on delivery or loading times that may affect your business. There may be other restrictions or covenants in the lease or imposed by the local authority - for example, rubbish disposal, parking, noise, lighting, litter.
The lease will state whether you or the landlord need to arrange insurance for the premises. If the landlord arranges this, you will pay the premiums as part of the service charges. Therefore, you may need to take out additional insurance to cover risks, such as loss or damage to contents, which are not covered in the building policy.
Your financial commitments when renting can include:
- a premium to purchase the lease
- rental costs
- service charges
- utility bills
- maintenance and repair bills
- a deposit - typically equivalent to three or six months' rent
- stamp duty, which is payable on all commercial leases
- business rates
Normally, the landlord will request references to confirm you are able to pay your rent and rates liability. You may find it advantageous to have a guarantor for your rent and other liabilities under the lease.
Energy Performance Certificates (EPCs)
All landlords of commercial buildings are now obliged to provide prospective tenants with an EPC. An EPC indicates how energy efficient a building and its services are and can act as a good indicator of likely energy costs.
In particular, air conditioning systems and boilers can have a significant effect on your overall energy bills. You can make considerable savings by keeping these well maintained and having them regularly inspected by a qualified engineer.
Business Improvement Districts
Business Improvement Districts can agree to pay an additional levy on their business rates to fund local improvements, which can increase ongoing costs. However, you will benefit from improvements to the local trading area.
Planning permission is generally required if you want to extend, convert or change the external nature of the premises - though it's not always needed if you want to make alterations. Check (at the proposal stage) with your local planning authority whether the development will require planning permission. You should also check with the building control section at your local council that the work conforms to building regulations.
Before you start any alteration work, you should check the details of the lease. You may need to get permission from the landlord. Unless the lease expressly prohibits improvements, the landlord may not unreasonably withhold consent to tenants' improvements. Also, you should clarify whether you will be required to reinstate the property to its original condition before the agreement expires.
You should also check whether the works you are planning will alter your rateable value. The rateable value of business premises is based on their open market rental value. Changing your premises may affect this and the amount you pay in business rates.
You also need to be aware of liability for repairs. If you rent workspace in multi-occupancy premises, liability for external repairs and maintaining common areas is likely to fall with the landlord. Check the terms of the lease to find out who is responsible.
You should also check the rental agreement to see whether there is any repair work pending. You may decide to commission a survey and ensure that any such work is finished before the rental agreement is signed in order to avoid paying the bill.
Read our guide Buying business premises.