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Commercial Premises: To Buy or To Lease? - 12th May 2017 - Click for larger version Commercial Premises: To Buy or To Lease? - 12th May 2017

We now live in an age of great technological advancement and we are relying more and more on our IT systems, allowing us greater flexibility in working hours and location of employees and customers alike. Nonetheless, most businesses still require actual bricks and mortar premises.

Therefore, a conundrum which most businesses face, in respect of their commercial premises, is whether to purchase the freehold or take a commercial lease. In this article, I intend to discuss some of the pros and cons which should be considered when weighing up each option.

When the purchaser acquires the freehold ownership of the property they are thereafter free to deal with same (within reason) as they so wish. This flexibility, together with the potential to benefit from any capital appreciation in value, makes this an appealing proposition.

In terms of the legal process, the purchasing solicitors will carry out the usual diligence exercise (reviewing titles, searches, surveys, etc) whilst negotiating the missives (purchase contract). Once the parties are ready to complete, the purchase price is paid, (together with VAT as applicable) and thereafter the purchaser will require to pay the LBTT (stamp duty) on the purchase price, before their title can then be registered with the Land Register. It is worth noting that VAT will be payable on the purchase price, by the purchaser, where the seller has written to HMRC and waived the VAT exemption on the property, thus obliging them to charge VAT on the sale price. Where this is the case, the purchaser will require to pay the LBTT on the gross price paid (ie purchase price plus VAT). The main negative with purchasing the freehold, is obviously that it then ties up substantial funds which could possibly be better utilised in advancing the business.

As a result of the foregoing, many businesses elect to lease their premises. This avoids the need for such substantial initial investment.

Having said that, there will probably be some initial costs (over and above rent or maybe, a rent deposit), due to the expense required in fitting out the premises, as well as other ancillary costs, such as LBTT. Whilst it is well recognised that stamp duty is payable on the purchase of premises, it is much less commonly known that many lease transactions will also attract stamp duty. The stamp duty liability on a lease is payable by the tenant and the sum due (if any) will depend on the rental level and lease duration. The higher the rent paid and the longer the lease term, the more likely that stamp duty will be payable. Again, as with purchases, the duty is payable on the gross sum payable (including VAT).

Once the lease is up and running, the tenant will be entitled to exclusive occupation of the premises and will hopefully enjoy undisturbed possession, provided that they comply with their lease obligations. These will generally include an obligation to meet any running costs at the property (rates, utilities etc) as well as general maintenance. It is also worth noting that where the tenant wishes to vary the arrangement in any way (for example, by altering the property or transferring the tenancy to a third party) they will generally require landlord’s consent. Whilst most tenants look upon the rent as being the main cost attributable to a lease, dilapidations can also be a substantial cost. This occurs where the tenant has not maintained the property to the standard required by the lease and the landlord serves a notice upon the tenant, requiring that the premises be upgraded to this standard. This can happen during the term of the lease, but most commonly occurs at expiry, when the landlord is carrying out their final inspections before releasing the tenant from their leasehold obligations. In the case of larger properties, which have been allowed to deteriorate to a poor standard of condition, the costs to the tenant can be substantial. However, wording can often be inserted into the lease, at the negotiation stage, to protect the tenant from this major expense and it is therefore well worth seeking legal advice before entering into such an arrangement.

Our Ian Anderson specialises in both sale and lease transactions and would be happy to discuss any queries relating to the foregoing (or, for that matter, in relation to commercial property generally) as required.

Last updated: 4.25pm, Thursday 11th May 2017

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