Buying versus Renting - Benefits compared

Many business owners choose to rent a commercial property rather than buy one for their business. The benefits of renting include:

• initial capital investment is lower than buying premises;
• less capital is tied up in property for the long-term; and
• less time is taken up managing the premises.

A brief explanation of freehold and leasehold property: the freeholder of a property owns it outright, including the land it’s built on; with leasehold, you own the property, but not the land, for the length of time determined in a lease agreement with the freeholder and when the lease ends, ownership returns to the freeholder unless an extension is possible under the lease agreement.

Practical considerations

This is not an exhaustive list of practical considerations, but it is a good starting point when thinking about renting a commercial property. We recommend getting professional assistance before signing any leases.

• Location – this will depend on the needs of the business. Different businesses may need good transport links, high footfall, proximity to customers, etc. Some areas may be particularly popular, which could affect the availability of property and the cost of rent.
• Incentives – some areas may have local incentives or initiatives offering additional benefits. These include Business Improvement Districts (BIDs), Enterprise Zones and Local Enterprise Partnerships (amongst others).
  • BIDs –areas in city centres in which businesses are required to pay an additional tax in order to fund projects within the district’s boundaries. Businesses benefit from the improvements made to their local area as a result of this funding.
  • Enterprise Zones –a government scheme that invests money into building commercial property in various zones across the UK. Businesses located in these zones can also access benefits such as business rate discounts, simplified local authority planning and superfast broadband.
  • Local Enterprise Partnerships –voluntary partnerships between local authorities and businesses to determine local economic priorities. Businesses can benefit from increased economic growth and the generation of jobs in the area.
• Type of property – this will depend on the needs of the business. Things to take into account include how much space the business will need and the type of space needed (e.g., offices, cooking facilities, parking spaces, broadband coverage, etc.). It is helpful to look into the different ‘Use Classes’ (summarised in the table below).
• Condition of the property – when viewing the property, check that it is in good condition. Things to be aware of include damp, cracks, defects and plumbing issues.
• Cost – consider whether the rental payments are affordable. Commercial rents are usually paid quarterly in advance on 25 March, 24 June, 29 September and 25 December. Landlords usually charge tenants a deposit, an annual ‘service charge’ (for general maintenance) and insurance. Check to see if the rent includes VAT.
• Business rates – this is a tax on non-residential buildings in England and Wales. Paying business rates will usually add around 40% to the cost of renting a shop or an office. Business rates are usually billed in February or March each year.
• Stamp Duty Land Tax – this is usually payable on commercial property valued above a certain threshold. This is dependent on the premium and rent.
• Bills – consider the likely cost of energy, heating and water (if not included in the lease).

Legal considerations

• Planning permission – it is useful to check the type of planning permissions the property has been granted, as often this will determine the kind of improvements that can be made to the premises.