Commercial Property – to buy or to rent?
25th May, 2017
Fast growing businesses face the challenge of acquiring space from which to operate.
The nature of the business requirements and the local market will determine whether it is better to buy or to rent.
Securing and retaining the right property needs to be on the right terms for you, and potentially allow an exit route and/or flexibility for if the shape and size of your business changes.
Cash flow is often a major driver. Renting can usually help you spread costs. Buying will have an up-front capital cost, which may include funding costs, but it could work out as less costly in the long term. Capital allowances, for example, offer tax relief on acquired assets for owners of buildings.
In a lease you may be able to negotiate incentives (a ‘golden hello’) such as a rent-free period, and cap liabilities such as rent, insurance and service charge for a period of time to give you certainty to budget.
Generally, buying is for the longer term. If you want to exit then you may not be able to influence whether the market will see you make a profit or a loss when selling on.
You may be able to negotiate a lease term to suit you, and include an option to terminate early or at intervals if needed, or an ability to take more space if business growth exceeds expectations. Leasing can enable you to control certain benefits and burdens for a specific period to suit you.
You may need to carry out alterations. In addition to consents such as planning permission, building regulation approval, and from neighbours, under a lease you are likely to also need authority from a landlord and its insurers and mortgagees. A landlord may require full reinstatement of alterations when you exit, which can be costly.
Carrying out development works may increase capital values and so ownership may enable you to realise that return by sale or refinance. Ownership can also mean an increased exposure to ongoing maintenance costs.
Making the right decision for your business, and then documenting these arrangements correctly, is essential to guarantee the flexibility and platform that fast-growing businesses require. Leave this to chance and it can carry great risks.
A cost-effective way to secure future additional space that might not be needed immediately is to agree an option agreement or pre-emption with the owner/landlord over property to allow for future expansion.
With this, you could move quickly at the right time. You will need to decide whether to fix the terms at the outset. This can work whether leasing or buying.
Always ensure your property arrangements fit in with any funding, accounting and operational requirements of the business and its stakeholders.
Use of conditional contracts to buy and/or lease can ensure that you control any factors relevant to you before you are committed to complete.
This is where investment in the right professional advice can really pay dividends.
* This article first appeared in the Ward Hadaway Greater Manchester Fastest 50 Awards Supplement 2017.
For more information on the issues raised, please contact Andrew Dunn.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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