A guide to leasing property for small & medium businesses
If you are a small or medium sized business, keeping overheads to a minimum is likely to be an important aspect of your company’s success, and one of the biggest overheads is almost certainly going to be the cost of the property you run your business from.
It is critical that small or medium-sized enterprises (SMEs) looking to rent property are aware of the process of renting commercial property, and that they shop around for a building that is going to work for their business prior to committing to a lease. This article will explain a number of different considerations for businesses when it comes to leasing a property.
Why you should consider renting premises
For SMEs, renting a property is likely to be the most viable option as it makes good financial sense. Renting a property will usually involve less capital than buying a property which can free up vital finances to be used in other aspects of your business. The upfront costs of renting are low compared to buying a property. Rents are generally fixed for a period of time which protects SMEs from possible increases in mortgage interest rates that would affect repayments. Similarly, changes in the property’s value will not affect your business, thus reducing the risk of unexpected financial shocks should the property market have a sharp downturn.
Additionally, if you rent your businesses property you are likely to have less responsibility for the building. Your agreement with the landlord may state that you are responsible for the internal maintenance and repair while the landlord will be responsible for the outside of the building. This agreement scenario is most likely to be in place in a multi-occupancy premise, however, you may be required to pay a service charge to cover external maintenance.
The affordability in combination with the responsibilities associated with renting business premises provides start-up businesses and SMEs with an ideal solution to establish or expand their company.
Searching for the right premises for your business
When searching for the ideal property for your business, a good location, appealing aesthetics and functionality are likely to be the main areas you wish your business premises to address. Perhaps the most important aspect is functionality.
Whether you are looking for an industrial warehouse or are seeking office space the building must be able to function effectively to fulfil your company’s needs. You need to consider the logistics of operating a business within the space and whether any aspects may limit productivity. For example, if you have a team who are likely to benefit from working closely together in order to improve communication and productivity it is probably best to provide them with an open plan office space in which the whole team can be based. Segregating team members into individual offices will greatly restrict communication and reduce productivity.
The location of a property affects many aspects of your business and finding the right balance can sometimes be difficult. The location of a property will often be reflected in the rental cost of the property and property located in city/town centres demand the most rental costs. Being located in the centre of a city or town would be important to a retail business where high footfall is vital for business, but this is likely to be less important to other businesses. However, good transport connections, including public transport, can be very important to securing staff.
The internal and external aesthetics of a building can also have a huge impact on business, especially if you are inviting clients to your premises to discuss how your business can help them. Similarly, a comfortable and pleasing environment can have a significant impact on employee productivity. Many business use branding, plants and framed artwork on both the outside and inside of the building to reinforce their brand and ethics.
Before agreeing to rent a commercial property you should have a building survey completed. Doing so will highlight any issues with the building that will prompt you to contact the owner about completing repairs or maintenance prior to committing to leasing the property. If you agree to lease a property without getting the building surveyed and find that maintenance or repairs are required as soon as you move in, you will probably be required to cover these costs as part of your rental agreement.
Additionally, as part of your rental agreement you might have to return the building back to its original condition once your lease has expired or you plan on moving to different premises. Having a building survey completed prior to agreeing to lease the property will provide you with evidence of the building’s original condition which can prevent disputes with the property owner at the end of the lease.
Understanding rental agreements
When renting a commercial property a lease agreement is signed between the landlord and the tenant, which is then used to regulate your occupancy of the building. The lease agreement for a commercial property is likely to be very complicated and is a legally binding contract. Therefore it is important that you seek advice from an experienced commercial property legal firm. An experienced legal firm will be able to review your tenancy agreement and discuss your goals in respect of the terms of the lease in order to protect your interests.
The lease agreement is what the landlord and the tenant adhere to until the lease expires so it is important that, as the tenant, you understand every aspect of the contract. A lease agreement will usually cover:
- your maintenance responsibilities
- which parts of the building you are responsible for (internal and/or external) and what costs are involved for the maintenance of areas that you are not responsible for
- which utility bills you are responsible for paying and when
- if the property comes with any designated parking spaces
- the ‘term’ will stipulate the start date and end date, the shorter the lease’s term the less valuable it is
- break clauses which will stipulate a date for when the landlord can terminate the lease
- how much the rent is and when it needs to be paid, usually monthly or quarterly
- rent reviews - the landlord may set a time to review how much the rent is but sometimes the rent is set to a fixed percentage increase or can be based on your profits
- what happens if you do not pay the rent which will usually involve bailiffs taking goods to the value of the missed rental payments
- what you can and cannot do to alter the building - this usually covers structural alterations but may also apply to decoration - if you wish to make alterations to the building you must pay particular attention to these clauses
- other restrictions such as changing the use of the property
- the insurance which is sometimes covered by the landlord and then paid by you in a service charge, although you may be required to only pay a percentage of the insurance if you a renting a property of multiple occupancy or you may be required to insure the property yourself
These examples provide a guide to what is likely to be included in a lease agreement, but there are many other aspects that you may wish to negotiate with the landlord. A legal commercial property advisor will be able to advise you on what needs to be included or altered and can negotiate these aspects with the owner and their legal team. Furthermore, should any disputes arise in the future between yourself and the property owner, a legal firm will be able to resolve these issues through further negotiation or if necessary, litigation.
When leasing a commercial property you should already be anticipating covering the rental costs, service charges, utility bills, insurance and a deposit which is likely to equate to 3 or 6 months’ rent. However, there are additional costs associated with renting commercial property that you need to consider, such as the cost to purchase the lease, maintenance and repair costs and business rates.
Business rates are a tax that is applied to commercial property. The rate is set by the government and is collected by local authorities as a contribution towards the cost of local services. You can estimate the business rate for any potential commercial property through the Valuation Office Agency website. Additionally, there may be a cost associated with the purchase of the lease which is usually referred to as the ‘premium’ and will be stated in the agreement.
Making alterations to the premises
If you plan on making changes to the property you will first need to check if this is possible before signing the agreement as some landlords will include clauses which prohibit alterations. Conversely, before making any changes to the building you need to be aware of any clauses in the lease agreement instructing you to reinstate the property back to its original condition at the end of the tenancy. These clauses might make you think twice about carrying out any significant changes to the property because looking for alternative premises prior to committing to the lease is likely to be easier in the long run. Ultimately, before undertaking any work it is important to clarify and confirm the alterations you wish to make with your landlord.
If you intend to extend, convert or change the external appearance of the property you will generally require planning permission. If you are unsure, you should contact your local planning authority to ascertain whether you require planning permission to complete the work. Also, you should confirm with your local council that your planned changes meet building regulations.
Additionally, you need to be aware that any extensions may increase the property’s business rates or you may be liable for repair work if you are making changes within a multiple occupancy property.
Renewing a lease & rent reviews
When approaching the end of your lease it can be a worrying time but there is a law that gives a degree of security of tenure for business tenants and you can exercise your right to a new lease. If you decide you want to extend your lease agreement you must seek legal advice from a commercial property specialist because it is a very complex procedure which requires several vital steps to be conducted within a specific time frame. Delaying this process could mean that you lose your right to a new lease; therefore you should begin this process at least 18 months before your property’s lease expires.
Rollingsons act for companies, businesses and individuals, and adopts a commercial and practical approach that covers all aspects of the commercial property leasing process. Whether you are opening a shop, selling an office building or purchasing bare land for development, it is important to seek legal advice from experienced commercial property solicitors. For more information or to arrange an initial consultation, please contact us on 0207 7611 4848.