Buying Commercial Property (Key Considerations!)

If you’re considering buying commercial property, there are many financial, practical and legal aspects to work through before committing to the transaction.

In this guide, we examine some of the advantages and disadvantages of buying business premises, as well as the practicalities and legalities involved with purchasing commercial premises.

 

What is classed as commercial property?

 

Commercial property is a broad description that covers a lot of different property types such as:

 

a. Offices – a building used for professional, administrative, or commercial work

b. Leisure – such as cinemas, hotels, gyms, and restaurants or pubs.

c. Retail – including supermarkets, shopping centres, individual shops such as post offices or hairdressers, and retail warehouses

d. Industrial – factories and warehouses

 

Advantages of buying business premises

 

Whilst many businesses will opt to lease commercial property, there are significant advantages to buying business premises:

 

a. Capital investment – buying your own premises can prove to be a lucrative financial investment and help future-proof your business. It can provide a valuable commercial asset in the long-term, with potential capital to reinvest with any rise in property value.

 

b. Other financial benefits – whilst the initial capital outlay in buying business premises can be significant, mortgage repayments will typically be lower than comparable rent prices. By fixing the interest rate on a commercial mortgage you can forecast your business expenditure and avoid the uncertainty of rent increases that are common under commercial leases.

 

c. Security and stability – buying rather than leasing commercial property can provide greater certainty for your business, particularly as any landlord may seek to restrict your security of tenure. By buying business premises you will avoid the disruption and cost of relocating your business upon expiry of your lease in circumstances where there is no viable option to renew.

 

d. Freedom and flexibility – by buying business premises you will not be restricted by the terms of a commercial lease, for example, prohibitions against assigning or sub-letting. Subject to planning regulations, lending conditions and any restrictive covenants, you may sell, lease, sublet or otherwise dispose of your premises as you see fit.

 

e. Alterations and extensions – as a proprietor you will be free to carry out structural alterations or extend your premises to suit your business needs, again planning permission and restrictive covenants permitting. A commercial lease, on the other hand, will normally limit the type of alterations you can carry out as a tenant. You may also be required to reinstate the premises at the end of the lease term.

 

Disadvantages of buying business premises

Needless to say, there are also some disadvantages when buying business premises that will need to be factored into your decision-making process:

 

a. Financial outlay – the initial capital outlay when buying business premises can be significant. Even with finance secured, lenders will only typically loan up to 70% of the property value, as such a substantial deposit will still be required. You will also need to factor in any arrangement or valuation fees, legal and land registry costs, as well as stamp duty land tax.

 

b. Financial risk – just as property value can rise, it can also fall, potentially leaving your business premises with negative equity. Further, a variable mortgage rate will expose you to increased repayments and, in turn, the threat of repossession if you default on your commercial mortgage.

 

c. Operational costs – when buying business premises you must consider day-to-day running costs in addition to any capital outlay. As the owner, you will be responsible for maintaining, repairing and insuring the premises. That said, under many commercial leases the cost of maintenance, repair (structural or otherwise) and insurance costs can commonly fall to the tenant.

 

d. Disposing of the property – although buying business premises can provide you with greater security, selling the property at short notice may prove difficult. This can cause practical or cash flow problems in circumstances where you wish to relocate or release working capital. In commercial premises, there may be an option to end your lease early by way of agreement, assignment or sub-letting.

 

Buying commercial property: freehold vs leasehold

 

As is the case with residential property, commercial property can be either freehold or leasehold. This is referred to as the tenure of the property.

Freehold: best described as complete ownership of the commercial property, without anyone above you having control or ownership. When buying commercial property that is freehold, you are therefore likely to be solely responsible for any maintenance and repair work.

Leasehold: leasehold property is often offered when the premises are part of a bigger complex, with another party owning the freehold to the entire complex.

If you considering buying commercial property that is leasehold, there can be advantages and disadvantages to this. For example, the freehold owner may take responsibility for some associated costs, such as repairs to common areas and certain aspects of building maintenance. However, there is usually an additional cost of ground rent for leasehold properties.

Factors to bear in mind before buying commercial property that is leasehold therefore include:

 

a. How long is the lease term? In other words, how many years before it expires and a new lease has to be bought? A new lease typically offers between 99 and 999 years. Leases can be expensive to renew, so the more years left on the lease at the time of purchase, the better.

b. How much is the ground rent? Ground rent is paid annually to the freeholder and can vary in cost. If the ground rent is described as a ‘peppercorn rent’, this means the amount is nominal. However, ground rent can also be quite a significant sum, with some reaching in excess of £500 a year.

c. How often is the ground rent likely to be increased? This is usually anything from every few years to every 25 years.

 

Steps to buying commercial property

 

Find the best time for buying commercial property

 

You want to avoid buying property during a peak market time when commercial property prices are high. You should research the market, ensuring you follow both local and national trends. This includes monitoring:

a. The value of commercial property sales

b. The supply of commercial properties within the market

c. The availability of mortgages when buying commercial property with a loan

d. The competition: how many investors are buying commercial property at any given time?

e. The rental prices and tenancy demand, where you intend to let the property

 

Decide which features & facilities you need the property to have

 

If you are debating buying commercial property, this requires a lot more consideration than simply determining which category of property you wish to invest in. It is a big decision and you should also bear in mind how the property meets business needs, either for you or your tenant.

So, some questions you may wish to ask include:

 

a. Are there parking facilities?

b. Does the property offer proximity to clients, businesses, and suppliers?

c. Are there adequate transport links nearby?

d. Are there any local shops for staff members of the business?

e. Will staff members and visitors have to pay congestion charges to access the building?

f. Does the property have tenants in place, and if so is there a lease agreement?

 

When buying commercial property, you also need to ensure that any work done within the property you intend to purchase meets the legal criteria in terms of planning use. Planning use is classified according to the Town and Country Planning (Uses Classes) Order 1987. Categories include specific uses, for example, A3 is for restaurants and cafés, A5 is for takeaways, B8 covers storage and distribution, and C4 covers houses in multiple occupation (HMOs).

If the current category varies from your intended use of the property, you may need to obtain planning permission to redevelop the premises. There are certain exceptions to this, for instance, since 2013 the government has allowed offices to be turned into homes under specific circumstances with limited planning permission.

However, if you plan on buying commercial property and changing the use of the building after the purchase, then you should still get feedback from your commercial estate agent as well as the local council to determine the likelihood of any changes successfully occurring.

 

Legal considerations

 

Once an offer has been accepted, you will need to instruct a lawyer to undertake enquiries and carry out searches. These will include:

 

a. Checking the title

b. Rights of way, easements or restrictive covenants

c. Responsibility for maintaining boundaries

d. Existing neighbour or any other disputes

e. Planning or local authority issues

f. Inclusion of fixtures and fittings

g. Utilities, ie, the supply of gas, electricity and water

h. Mining and environmental searches.

 

Once the results of all these enquiries have been received, your lawyer will provide you with a ‘Report on Title’. This may help you to renegotiate better terms when buying business premises, including a price reduction to counter the cost of any structural, legal or practical problems identified.

 

Arrange funding

 

When buying business premises you may need to secure a commercial mortgage or business loan. Commercial mortgages generally run over a much shorter term than residential loans. They also carry higher interest rates as lenders regard commercial borrowing as higher risk.

Interest rates and repayment options will vary according to the lender, although most commercial mortgage schemes offer both variable and fixed rates. You will need to budget for any fluctuation if you opt for a variable rate.

Each mortgage application will be considered on its own merits based on affordability, the loan to value of the property and credit checks on those responsible for running the business. As such you will need to provide detailed financial information about your business including:

 

a. audited accounts

b. business bank statements

c. current financial performance

d. a profit and loss forecast

e. a business plan including cash flow projections

f. details of each director, partner or co-owner

g. asset and liability statements for each applicant.

 

Make an offer

 

Once you have decided on the property you would like to buy, you then need to put in an offer. The offer should be written down and is usually sent to the seller’s estate agent.

If your initial offer is refused by the vendor, then you may find they provide a counter-offer. For example, if a property is on the market for offers in the region of £300,000 and you make an offer of £290,000, the vendor may make a counter-offer of £295,000.

At this stage, you may wish to agree to the counter-offer or make a second offer and negotiate until you reach an agreed sum.

Bear in mind that the vendor will be considering other factors beyond the offer itself, such as how quickly you can complete the purchase. For instance, if you are buying commercial property without a mortgage or other form of loan, then this is likely to be a faster transaction, which may appeal to the seller more than a slightly higher offer that could take longer to complete.

That being said, whether you are buying commercial property with or without a mortgage, once your offer is accepted, you should ask for the property to be taken off the market. This will stop anybody else who may wish to make an offer from doing so before the deal is finalised.

You will also need to provide proof of funds at this stage, so the seller has peace of mind that the transaction can go ahead before taking the property off the market. Proof of funds can take different forms. For example, it could come from bank statements with official confirmation being provided by your bank, as well as confirmation of alternative funding agreements. It is needed to satisfy the seller, as well as those acting on their behalf, that you can afford the property.

Once proof of funds is obtained, you have now reached the stage of buying commercial property where you should choose a solicitor. Each party will have a solicitor to act on their behalf and handle the paperwork.

If you need time to carry out checks, such as a property survey, then you may wish to ask for exclusivity in the form of a lock-out agreement. This arrangement will provide you with a specific amount of time to conduct such checks, with the assurance that in the meantime the vendor will not negotiate with other interested parties.

When buying commercial property, purchasing a property survey is a very important step, as this will assess the property’s structure and inform you of any potential concerns that have been overlooked until now. Property is bought in the UK on the basis of ‘buyer beware’. This means the vendor does not have to inform you of any issues with the property; instead, it is up to you to find out via the necessary survey and searches.

As you are buying commercial property, rather than selling it, your solicitor will arrange the necessary searches to make sure the property is in satisfactory condition. It is, however, up to you to arrange a property survey with a qualified surveyor.

When buying commercial property, you should ensure a local authority search is arranged. The purpose of a local authority search is to check whether there is anything concerning that could affect the premises or the surrounding area. The search will check for recent planning applications, any nearby contaminated land, and other aspects that could affect the value of the premises.

It is highly advisable to have any recommended searches done throughout the process when buying commercial property. After all, you definitely do not want to complete the purchase without being made aware of something that could later impact the property’s value.

 

Exchange and completion

 

Once your offer is accepted, a sale contract will be created. When buying commercial property, this document is referred to as the heads of terms, and it includes the main details of the sale.

The heads of terms will cover the type of agreement made, the financing involved, and the expected key dates for the transaction. It will also list the agreed price for the property.

Once this document has been created, your solicitor and commercial estate agent shall begin negotiating further details with the vendor.

If you intend to redevelop the property, then now may be a good time to obtain planning permission from the local council.

The exchange of contracts will take place once:

 

a. You (the buyer) and the seller are both happy with the terms laid out in the contract

b. You are happy with the condition of the property

c. All necessary finances to fund the transaction are sorted (although only the deposit is paid at this stage)

 

At this stage of buying commercial property, the transaction becomes legally binding.

There are further steps that usually take place around the point of exchange when buying commercial property. These include:

 

a. Arranging insurance

b. Paying any Stamp Duty Land Tax that is owed

c. Registering ownership of the property with the Land Registry

d. Determining if you must also register the property for health and safety reasons

 

You will be considered to have reached the completion stage once:

 

a. all necessary documents have been signed, dated, and exchanged

b. your solicitor has sent the money for the purchase to the vendor’s solicitor (less the deposit, which would have already been received)

c. you have been given the keys to the property

 

It is important to bear in mind that the completion date is part of the contract. So, if the completion date is not met, and you are to blame as the buyer, then penalties could apply. These penalties may include a daily interest rate charge on the outstanding money owed for the purchase, as well as loss of income and/or damages that you could be considered to owe to the seller. If as the buyer you are responsible for the completion date being missed, then the seller may also be permitted to take steps to terminate the contract and keep the deposit money in doing so.

 

Costs of buying commercial property

 

As is often the case with big purchases, buying commercial property can be expensive. There are several costs you need to consider before buying commercial property, including the following expenses:

 

a. A deposit is needed at the point of exchange, and the remaining sum is paid upon completion

b. If you are not paying cash for the property, then bear in mind that mortgages when buying commercial property are usually offered at a lower loan-to-value rate compared to residential mortgages

c. Fees associated with arranging a commercial property mortgage, such as the lender’s property survey and valuation

d. Conveyancing solicitor, commercial estate agent and lender fees

e. If you are buying commercial property worth over £150,000 in England, then you will need to pay Stamp Duty Land Tax. This also applies to ‘mixed’ property, that is properties with residential and non-residential purposes, such as a post office with a flat above it

f. Will there be a VAT charge?

g. Will capital gains tax apply to the transaction?

h. Renovation costs, such as decorating the property

i. Furniture and any equipment needed

j. Setting up IT services and any other necessary facilities

k. Removal van costs

l. Business rates: tax paid on commercial property

m. A bill for your business rates is given to you by your local council on an annual basis. There are some exemptions you may qualify for, including rural rate relief and small business relief.

 

If you are considering buying commercial property, then you also need to factor in additional expenses that will be ongoing as a result of the purchase, such as:

 

a. Any insurance needed in relation to the building

b. Ongoing repairs and building maintenance

c. Cleaning costs

d. Security staff, if needed

e. Charges from the local authority, such as rubbish collection

f. A commercial estate agent you may choose to employ to manage the premises

g. Commercial mortgage repayments if you used a loan to purchase the property

 

In situations where you opt to let out the premises shortly after buying commercial property, you may wish to split certain costs with your tenant.

When buying commercial property, just like residential property, you should obtain a copy of the Energy Performance Certificate (EPC) from the seller. The EPC will help you answer questions like, how energy efficient is this property? And, perhaps more importantly, what are my energy bills likely to be?

An EPC is valid for 10 years, but make sure the one provided is as recent as possible.

As part of the process of buying commercial property, you should check if you may be able to claim capital allowances to help pay for your business running costs in relation to the premises too.

 

Questions to ask when buying commercial property

 

Although we have already covered some of the questions you may have, buying commercial property is a complicated matter. So, here are some further questions that you should ask if you are considering buying commercial property in England or Wales:

 

Who will I need to get advice from when buying commercial property?

 

When buying commercial property, you will need to instruct a solicitor, but you may also need to consult with a chartered surveyor, a valuer, and an estate agent.

 

How is ownership recorded?

 

Ownership of the majority of properties in England and Wales is registered via the Land Registry. The register, which is available to the public, will include information regarding any rights that benefit or impact the land, as well as confirming the property owner and their title to the property.

 

Should I seek tax advice when buying commercial property?

 

Yes, this is always advisable, as a qualified specialist will be able to advise you on the most tax-efficient way to purchase commercial property, as well as confirm which taxes will apply to a specific transaction.

 

Is an exclusivity agreement always beneficial?

 

Not necessarily. Exclusivity agreements, also known as lock-out agreements, can be hard to negotiate, which can slow down the process of buying commercial property. Furthermore, remedies available to you as the buyer, if the terms of the agreement were breached by the seller, would usually be limited to recovering any costs involved in the making of the agreement.

 

How long does buying commercial property take?

 

There is no typical length of time for commercial property transactions. Factors that can affect the timeframe include the type of property being purchased and how complex the transaction itself is. When buying commercial property, it is advisable to inform your solicitor of the timeframe that you hope to work towards.

 

Legal disclaimer

 

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.