Six costs to consider before leasing a business premises
Commercial property solicitor Abigail Clucas gives an overview of six costs to consider before leasing a business premises.
The majority of businesses in the UK require a business premises to operate from, whether it is a shop, office or warehouse.
Although some businesses own the property which they trade from, for the vast majority their business premises will be rented from a commercial landlord.
In order to grow a successful business, it goes without saying that you need to make sure the rent being paid is appropriate and that the business premises are required, but as a commercial tenant are you aware of all the costs which you could be liable for under the terms of your lease?
Anticipating the costs for your new business premises
At the outset of entering into a new lease for your business premises, it is advisable that you obtain legal advice on the tenant responsibilities (including financial obligations) which are imposed within the lease.
This is so that you are informed and your business (be that a company, partnership or sole trader) can budget accordingly for its business premises.
Through anticipating any costs which may be payable during the lifetime of the lease, sums demanded from your landlord should never be a surprise (in theory)!
1. Rent for business premises
As a starting point, a rent will be payable to the landlord for the use of the business premises.
Although a fixed sum is normally stated within the lease for the business premises, it is important to understand whether the rent is subject to a rent review and if so, how is this to be calculated?
In the majority of cases, if a rent review is included within the lease, the review will require the rent to increase by reference to some mechanism (be that an index or the open market rent).
It is important that you understand the terms of the review so that on the review date, the new rent for the business premises will not be prohibitively expensive.
2. Building insurance for business premises
In some form or another, the tenant will also be required to contribute to the buildings insurance for the business premises. This is usually arranged by the landlord by way of an insurance rent.
How much building insurance should I be paying for my business premises?
If the tenant is leasing a whole property, they will usually need to reimburse the entire premium.
If the tenant is only renting part of a property (i.e. the ground floor of a two-storey business premises) then they will only pay a specific percentage of the insurance cost.
In more complex properties, like a business park or office block, the proportion of the premium each tenant is responsible for is usually worked out using the square footage of the area of the building they are renting for their business premises
As a tenant, your solicitor should ensure that the insurance policy in place is not subject to an inflated premium which may make the monthly costs to the business unworkable.
3. Service charges for business premises
It is also worth bearing in mind that a service charge may be payable for business premises.
A service charge is common if a tenant is leasing only the interior of the business premises, or leasing only part of a larger building or industrial estate. Service charges apply in these situations because the roof, exterior, structure and any other common parts (such as shared access ways, hallways, corridors or stairs) need to be maintained by the landlord.
In larger premises, such as business parks, the service charge may include upkeep of the car parks or communal grounds. Often these payments are collected by a management company who is working for the landlord. The cost of the maintenance is then divided between the other tenants. Similarly to buildings insurance, this is usually calculated using the square footage of the let business premises.
Your solicitor should obtain at least the last three years’ service charge accounts to check for any abnormal fee increases and ensure that any outstanding costs have been fully paid by any outgoing tenant.
4. Costs when requesting a landlord’s permission
In the event that you wanted to transfer the lease, sub-let part of the property or assign your interest to a third party for the business premises, it’s a common condition that you need the landlord’s written permission before doing so.
It is common for the landlord to be able to recover a set cost for providing (or considering) this request and it is advisable to ask your solicitor to review the lease for any such clauses.
In the event that you wish to alter the business premises, and in order to do so you require the landlord’s written consent, the landlord may also be able to charge you for obtaining their permission.
It is important that clauses which require landlord’s consent are reviewed carefully, as in some instances the tenant may be required to meet the landlord’s legal costs and any surveyor’s costs (including VAT).
5. VAT payable on business premises
As the tenant, you should be aware of the VAT position.
If a landlord is registered for VAT and has ‘opted to tax’ the business premises, then VAT will also be payable on the rent, insurance rent and service charge.
All of the costs noted above can add up and render a prospective business premises prohibitively expensive.
6. Other costs when leasing business premises
Finally, as the tenant, it is highly likely that you will be responsible for the payment of the business rates, any utilities and any other outgoings in relation to the business premises.
Check your lease!
I cannot stress enough the importance of carefully reading the content of your lease. As a matter of course, Burnetts always provides a lease summary noting the main points and any unusual obligations which are contained within the lease for your business premises.
If you are a tenant and would like further information on the lease for your business premises, the Commercial Property team at Burnetts would be happy to assist you. For more information contact Abigail Clucas here.
About the Author
Abigail is a solicitor in Burnetts' property team.
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