The costs of leasing a commercial property: does your budget take everything into account?

27 Sep,2018 | landlord and tenant |

The costs of leasing a commercial property: does your budget take everything into account?

There’s a lot more involved when budgeting for a leasehold commercial property than the monthly rent.

Here’s what you need to build in to your calculations.

Deposit

When you take occupation of a commercial property, it is common for the landlord to require a deposit. Typically, this will be the equivalent of 3-6 months’ rent.  You are usually entitled to get the deposit back when you vacate, providing that you have complied with the terms of the lease.

Legal fees

A commercial property lease is a legally binding document, so it’s important to seek independent legal advice on the content of the lease before you sign. Make sure the solicitor you choose is experienced in handling leasehold negotiations – or bring in a chartered surveyor with specific commercial property expertise for additional support.

As well as paying your own legal fees, you may also be expected to cover the landlord’s costs in preparing the lease and any other associated documentation.

Premium payments

It’s not unusual for landlords to ask for a premium payment (key money) up front in addition to the rent. Scenarios where this is likely include where the rent agreed is below market value rent, where the property is particularly sought after, and where there is goodwill or some other intangible asset associated with the property. You might also be asked to make premium payments to cover fixtures and fittings (on the plus side, you will then own these).

If you have the right to sell the lease on and choose to do so, you might be able to get some or all of the money back by applying the premium to the new leaseholder – but that will depend on market conditions at the time.

Sometimes, a landlord might apply a reverse premium – i.e. offer to pay the incoming tenant a sum of money as an incentive to take the lease. If you are offered a reverse premium, check the tax situation with your accountant as the value of the premium will depend on how HMRC decide to treat it. The situation isn’t straightforward.

Stamp duty

Yes, even though you’re not buying, you may still have to pay stamp duty. HMRC work out what’s due using a formula based around the concept of net present value (NPV). The NPV of a lease is not easy to work out – it’s not just the total rent due over the term of the lease.  To find out the stamp duty applicable (if any), you can use the government’s online stamp duty calculator.

Rent free periods

Rent-free or low rent initial periods can often be negotiated when taking on a lease. This can be a big help at a time when you are paying out the extra costs of starting out in new premises.

Commercial property leases are legally binding documents – check that you can afford all payments before you sign

Making good and keeping good

There’s a good chance that if the property needs repair work or basic updates – such as a new boiler – the lease will specify that you are liable for the costs. On top of this, most modern leases state that not only is the tenant responsible for keeping the property in the state of repair in which they took it on, they must also keep it in the state of repair they brought it to after any agreed initial work. And most leases also stipulate you should redecorate the interior and exterior every 3 or 5 years.

When you leave the property, your landlord will be likely to ask you to cover the costs of bringing it up to scratch if you haven’t maintained it as agreed.  They may serve you with a schedule of dilapidations which itemises the works and the costs of each one. Depending on the terms of your lease, they may also charge you for the cost of preparing the schedule.

To limit your repairing obligations at lease expiry, it’s well worth paying for a surveyor to prepare a schedule of condition at the start. This will clarify the condition of the property and prevent the landlord asking you to pay for repairs for problems that existed before you took occupation.

Initial fitting out and decoration

Going beyond any necessary repair work, you’ll also need to factor in any costs related to making the space suitable for your business. This might include updating staff facilities such as kitchens and toilets as well as decorating and putting in whatever fittings are necessary for the operation of the business.

Business rates

As the occupier, you’ll almost certainly be responsible for paying the business rates on the property. These can vary hugely, depending on the type and location of the property. Find out at an early stage what you can expect to pay. Note that if the property qualifies for any rate reliefs – for example, small business rate relief – then the rules around these reliefs are subject to change. Anything could happen at the next budget!

Utilities

There’s no getting away from gas, electricity, water, waste collection and broadband costs. Shop around to find the best deals for you.

Insurance

It’s the norm for the landlord to insure a commercial property, but you can expect to be charged a share of the cost. The lease should specify what this will be, so make sure you check.

Lease renewal

If you want to renew your lease when the time comes, you’ll have a new set of legal costs. The shorter the lease, the sooner the point at which you’ll need to find more cash.

If you’ve found a property in the northwest you’re keen to lease, we can give independent advice on lease terms and prepare a schedule of condition to help you in your negotiations and protect your interests. If you’re still searching, take a look at our list of currently available properties.

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