Investing in a commercial premises

Key things to think about when investing in a commercial premises

For many businesses the acquisition of a premises will be a significant financial investment and key to growth. However, the acquisition of a premises can be a time-intensive and lengthy process that requires you to do your due diligence, research and make smart investment decisions.

Here are some of the most important things that a buyer should be thinking about to achieve the best possible position for the investment:

Type of Property – Is the commercial property you are going to buy a leasehold of freehold?

This is really important to know as there are some key differences to be considered.

Freehold – If you own the freehold of the property this means you will own the whole of the premises and are free to use, alter or sub-lease part or the whole of the property as you wish (subject to any lender and / or planning authority consents). As a freehold owner, you will be responsible for all maintenance, repair and insurance of the property together with any additional costs that may become due from use of any private roads or shared carparks with adjoining neighbours.

However, owning a freehold will likely mean a large initial outlay for your business in respect of the purchase price.

Leasehold –  If you own the leasehold of a property you will occupy the whole (or part) of a property under a lease for a contractual term. As a leasehold occupier of part you will only be responsible for the repair and maintenance of the part of the property you occupy with the Landlord responsible for the repair and maintenance of the exterior and remaining parts of the property (and such costs will most likely be recovered via a service charge).

The length of each lease can be negotiated to reflect the wishes of both parties and can also include assignment clauses and break clauses to protect you should you wish to terminate or transfer your lease at an earlier stage. Leases can therefore provide businesses with greater flexibility in their premises arrangements. The lease will govern any subletting and alterations.

It is important to consider which type of ownership would be more suitable for you or your business needs. For example, you may wish to consider if a short term lease of commercial property would be a better option in the first instance, particularly if your business is a new start-up.

Having decided that purchasing a property is the most suitable route for you, you may want to consider instructing a Buyer’s Agent. A Buying Agent can assist with negotiating key commercial terms and submitting the offers on your behalf. They can also provide advice on the suitability of the property for your needs.

Location

Location is key for commercial property not only in respect of whether a property is suitable for you or your prospective tenant but also in respect of external factors such as whether the property or the vicinity is prone to flooding, or is subject to planning and conservation designations or other restraints which may affect your intended use. Most of these factors will be picked up in the property searches.

Transport links and / or car parking to support both employee and client access should be properly considered. It is also prudent to consider the services available at the property and whether any additional works will be required to install or update services which are insufficient or unavailable.

Survey

Just as an individual may undertake a survey for residential property before they move house, it is always advisable for a prospective purchaser to commission a survey before proceeding with the purchase of a commercial property.

A survey would identify any potential issues with the premises, whether you are acquiring a freehold or leasehold interest in the property. This can be potentially beneficial if you are taking on a full repairing and insuring lease. The results of a survey can ensure that any issues are dealt with post-completion or may lead to a re-negotiation in price. Further, the results may persuade a landlord to accept a tenant’s repairing liability is limited by way of a schedule of condition. The schedule will document any specific defects that will fall outside of the tenant’s repair covenant.

Purchasing Entity

Having found the right property, you will want to consider how the property is to be owned. Buying a commercial property as an individual or partnership is commonplace but there may be reasons why buying a property as a limited company, limited liability partnership or through a SIPP may be preferable: speaking to your accountant or tax advisor is advisable before committing to buy the property.

Option to Tax and VAT Position

Tax plays an important consideration in commercial transactions. The default position for the sale of land and buildings is that they are exempt from VAT meaning that no VAT is payable by the buyer in addition to the purchase price. However, a Seller may have opted to tax the land or property. Once someone has opted to tax land or buildings then all supplies (including a freehold sale or leasing the property) would usually be subject to VAT on a standard rated basis. This is not usually a problem if the purchaser is themselves VAT registered.

There are circumstances where VAT will not be payable in addition to the purchase price where there is a valid option to tax and your accountant or tax advisor should be able to provide advice on whether these exceptions apply.

You may wish to check the VAT position in respect of the property before proceeding with any purchase.

It is also important to remember that SDLT is calculated and payable on both the purchase price and any applicable VAT on the purchase price. 

Searches

Searches are typically commissioned in advance of exchange of contracts to ensure as much information as possible about the property is gathered and enquiries raised accordingly. A buyer is free to decide if they wish to commission searches unless the purchase is subject to finance in which case a lender will require that searches are commissioned (to include an environmental search, local search, drainage and water, highways and chancel).

SDLT

In addition to the VAT implications of a purchase, Stamp Duty Land Tax (SDLT) is payable on non-residential property where the purchase price (also referred to as ‘consideration’) paid is £150,000 or more. You may wish to do a quick calculation to give an idea of additional purchase costs or, we can do this on your behalf.

Service Charge

It is a common misconception that when buying a freehold property that there will never be a service charge payable as it is often misunderstood to be applicable to leasehold property only. There are circumstances where a freehold property, such as those on an estate, may be liable to pay an estate or other service charge for maintenance of the common parts. It is worth checking with the agent when negotiating the purchase to see if there are any estate or other service charges payable.

Financing

There are numerous options available when considering how best to finance any proposed property acquisition. A mortgage broker can often advise you on the most appropriate mortgage to suit your relative needs in line with your proposed timeline and objectives.

Alternatively, you may wish to consider raising capital through investors or other third-party funding. Investors may be happy to accept shares in the company or a profit percentage in return for their initial investment, this may benefit your business given that the capital, which would otherwise have been expended into the property, can be used elsewhere.

Each transaction is unique. Our team has experience in a wide range of sectors including offices, retail, industrial and leisure.

Please get in touch if you feel that we can assist you in purchasing your first commercial property or, if you are thinking of adding another property to your portfolio.