commercial property tips buying business premises
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Tips for buying commercial propertyTRANSCRIPT
Setfords Legal Guides
Top tips for buying business premises
For businesses
T: 0845 450 6135
Setfords Legal Guides
T: 0845 450 [email protected]
Top tips for buying business premisesMany businesses will consider the requirement to operate from or own commercial premises and often this will form a key part of the business plan. The decision of whether to lease or buy commercial property will usually depend on the financial viability of the business but there are also a number of other factors associated with buying or leasing commercial premises which should be considered.
Advantages of buying commercial property
FlexibilityOwning the premises from which you operate has the advantage of being able to use and manage it without having to obtain the consent of the landlord. This would include not requiring consent to change how you use your premises or if you wanted to make any changes or alterations to the premises either internally or even externally. The flexibility to make these changes may be an important factor in your business plan and may also include allowing you to sell and move when you wish or even lease the whole or part premises to another company in the future.
However, you must be aware that even without having to obtain the landlord’s consent you must still ensure that you have the prior consent of the local authority to use the premises as you wish to, including any changes of use. In addition, you must take advice from a surveyor or architect as to any alterations to the premises and the requirement to first obtain the consent of the local authority’s planning and building regulation department.
Another point which must be considered before buying or carrying out any changes either physically or change or use to the premises is whether there are any restrictive covenants affecting the title which could prevent the operation of your business or make a future sale of the premises difficult and therefore reduce the flexibility. In some circumstances there are ways to overcome restrictive covenants which include investigating the person or company with the benefit of the covenant or taking out a restrictive covenant title insurance policy.
Investment and TaxAll businesses will need to consider the way in which the premises are held and the impact on their balance sheet. Specifically, you must consider the implications of profiting from any increase in value of the premises. Capital Gains Tax is chargeable on gains made by UK resident individuals whereas companies pay Corporation Tax on any chargeable gains. This potential liability for Tax should be carefully considered and advice taken from an accountant before deciding on the best mechanism to take commercial premises.
Many individuals use the opportunity of acquiring commercial premises to start or increase their Self Invested Personal Pension (SIPP). This is a tax efficient mechanism by which an individual and not a pension plan provider or trustee, determines the investment strategy. Often individuals will buy the premises and then grant a lease of the whole of the premises to their own company (i.e. a company in which they own shares and/or are a director) or another company and benefit rental income as part of their individual pension scheme. It is very important that professional advice is taken on whether such a SIPP is a suitable investment vehicle for an individual and also the implications on the tenant company.
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Disadvantages of buying commercial property
RiskAs with most investments you must also consider the risks associated with ownership which include the potential exposure to a downturn in the property market and therefore a decrease in the value of the premises. Many companies and individuals in recent times have found that the value of their commercial premises has decreased from the original acquisition value and consequently they are in negative equity. This potential risk should be considered, particularly where a commercial mortgage is in place which exposes the potential for a forced sale or repossession if payments are not maintained.
Maintenance and liabilityIt is the responsibility of the owner of the commercial premises to manage the ongoing repairs and maintenance of the premises as well as pay for them. The reality of property ownership can be that organising a continued program of decoration and repair to both the exterior and interior of the premises is time consuming and often costly. As well planning for maintenance works there are often the unpredictable repairs which are simply a consequence of property ownership and may or may not be covered by your buildings insurance policy. Associated with the costs of such works may be the cost of professional advisors such as surveyors and even scaffolding. It is as a consequence of the time involved in managing a property that many commercial property owners will employ the services of managing agents, although you must be aware that as with any professional service they will charge for their time in carrying out the management.
Associated with the ongoing maintenance is the requirement of a commercial property owner to comply with current regulations. Although in some cases not unique to the ownership of premises, these include the responsibility to comply with the duties imposed under the current Management of Health and Safety at Work and Fire Regulations and the duties imposed under the current Asbestos Regulations which must be adhered to.
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Cost of BuyingIn considering the benefit of buying premises as opposed to leasing, you must consider the up front costs as well as the ongoing implications of the finance arrangement. You must take professional advice on this point as part of your early consideration in the process.
If you are entirely self financing the purchase then you must be prepared to accept cash flow consequences of having that money invested in the premises. We have already highlighted the potential for a fall in the value in the premises.
If you are financing the purchase through a commercial loan then it is arguably even more important to consider the issue of cash flow for any sum that may be required as a contribution from you in addition to the loan and equally the issue of a down fall in the market value remains live.
In the majority of cases it will be a requirement of any commercial lender to undertake a minimum of a valuation survey so that the lender can be assured that the loan to equity ratio is at a satisfactory level. However, we always advise that any prospective buyer of commercial premises commissions a full structural survey prior to exchange of contracts.
A survey will be able to identify any potential defects in the building or problems which could be costly to repair in the future and otherwise you would buy the premises in its actual state and condition. A surveyor may not be the only professional advisor that you employ and you will certainly need to take account of the legal fees from your solicitor and disbursements such as searches or enquiries of the local authority.
You will need to consider the liability to pay Stamp Duty Land Tax which arises on the acquisition of a chargeable interest and this is calculated by reference to a percentage of the purchase price which could be up to 4% for commercial premises over £500,000.00. The SDLT is usually payable on completion or substantial performance of the contract.
Following completion of the purchase your interest as proprietor must be registered at the Land Registry for which a fee is payable and once again this fee is calculated by reference to the price paid for the property and could be up to £920.00.
Finally, on completion it may be that works need to be carried out to the premises by way of fit out or alterations to the premises generally in order to make it suitable to occupation by your business. Such works can be costly and advice should be taken from the outset as to the proposed works and this must include compliance with any local authority requirements such as planning or building regulations.
Ongoing costsYou will also need to consider not only the initial costs of buying the premises but also the ongoing costs of owning the premises. These costs include not only the every day running costs but also the liability to pay Business Rates which are based on what the property would rent for at a given date.
The premises must be insured under a sufficient Building Insurance Policy to cover any potential risks associated with the premises as a whole. The requirement for a Buildings Insurance Policy will also be stated as a term of a commercial loan.
Setfords Legal Guides
T: 0845 450 [email protected]
Conclusion
Purchasing a commercial property will be an important decision for any business no matter how big or small the company is. It is a long-term commitment which can lead to positive or negative impacts on the company as a whole. If you are thinking of purchasing a commercial property, the main factors to consider are:
• Costs of buying and running the premises: including the initial costs associated with the acquisition and also the future running and maintenance costs.
• Use and alterations of the property: it is necessary to check whether there are any restrictions on this by way of restrictive covenants, you will also need to check whether you need consent from the Local Authority regarding any changes in use of the building and also for internal or external alterations.
• Restrictive covenants: if there are any to overcome, is it possible to investigate the person or company with the benefit of the covenant or would it be best to take out a restrictive covenant title insurance policy?
• Survey: ensure that a full survey is completed so you understand the state of the property. The future maintenance and repairs of the building will be your responsibility.
• Regulations: have you complied with the relevant commercial property owner regulations for your business?
• Future of the property: taking into account the sale price and the current market give thought into whether the property will be a good investment in terms of future value. It is also worth researching the potential rental income that the property could generate for either part or the whole of the premises in case the business chooses to go down this route in the future to generate income from the premises.
• Tax: what affect will the purchase of the property have on the corporation tax liability? Also will a SIPP be a suitable investment vehicle.
T: 0845 450 [email protected]
Contact Us
For more information on buying and selling commercial property please contact:
David RogersT: 01483 408 780E: [email protected]
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