For those using commercial property, you need to take stock of some fundamental factors about how to best and most profitably use your space. In the frenzy of finding that ideal area to run your business, whether a high street shop, a workshop unit, or larger office area, it’s easy to get caught up and agree to things that you may end up paying for dearly in the future. That great initial rent and area agreed now, may soon be swamped with unexpected costs and hassle later.
This is typically when you rent space, so as a tenant you’re letting from a landlord through a commercial property lease. However, similar principles can apply for those who own the property and use it themselves, particularly if held in a slightly different vehicle like a pension fund and there are leases back to their business. The principles of what you’re hit with as an occupier are different to those as an owner or investor.
This is also applicable at all ends of the scale, whether this is your first business space and you’re only used to working from home in a residential property to date, or you’re a larger business moving into bigger and better premises. The expertise of knowing how business property ticks in your new situation is critical to getting this right, and although this is best done before you even begin, you can still benefit from these being understood and applied afterwards.
10 Factors to Make or Break Occupation of Your Commercial Property
So here are 10 key factors to bear in mind. These stretch across a range of property management issues, to make sure you see the bigger picture and not become tunnel-vision on just one aspect like the lease or property condition:
1. Know the True Rent
So although you will hopefully know the basic amount of rent, which is often quoted as an annual figure, there’s still two other important aspects to consider which are often missed, particularly by those who are used to residential property.
The first is whether VAT is due, as this may or may not be applicable for commercial properties. If you’re not VAT registered yourself, and VAT is added on top, then this is another 20% on the rent that isn’t necessarily made clear at the outset. Check out more details here on this VAT double-whammy.
The second is when these payments are actually due. With residential it is often monthly in advance, although the common scenario with commercial property is every three months in advance, on set ‘quarter days’. This can cause cash-flow issues, with needing to find a large three monthly amount in advance, and therefore may be worth agreeing a more manageable breakdown into, say, monthly payments.
2. Negotiate Incentives
With residential properties, you tend to be straight in with paying rent from day one, after first paying a deposit along with any letting fees, and then being left to move in however you need to. With commercial lets you tend to be committing more for a longer period and with additional obligations, which although can mean greater responsibilities and liabilities, does mean you can often agree more favourable letting terms.
So it is actually the norm to agree an initial rent-free period of maybe a few months, for both a general fit-out of the space (that tends to be substantial), but also a general inducement for taking the lease. It’s always nice to have this at the beginning of the lease to help ease the endless moving-in bills, but you may be able to agree this further into the lease as well. And maybe even a capital premium payment from the landlord towards, say, any building works.
3. Long Lasting Leases
As above, a commercial property lease tends to be longer, and more years long rather than months long. Although this trend has reduced over the years as businesses need greater flexibility, it is often still three to five years long as an average.
Each situation is different though, so being able to agree longer terms will actually benefit a landlord and it’s therefore worth agreeing a greater incentive for this, and likewise you may need to go more flexible and almost month-by-month for, perhaps, a serviced office or workshop basis.
Another popular feature though of a commercial lease is a break option for both or either the landlord and tenant, which can work to your benefit with the length of lease. So if you can only commit to two years ahead, then rather than agree a two year lease and then have the cost and hassle of renewing you could agree a longer four year lease but with two year break option to finish early if needed.
One word of caution though with such break options, is to make sure they are easy to break with no conditions, as missing these can cause them to be invalid and you being left with a longer commitment.
4. Having All The Costs
This is so often missed, and therefore it’s worrying the degree that business occupiers can be stung for property costs afterwards that they didn’t expect. Right from the outset these need to be known, and it probably stems from people’s assumptions about residential properties where the landlord often gets landed with property costs themselves for short-term tenants who simply pay the rent.
Reality though for commercial property is different in that the tenant usually ends up paying for everything either directly, or indirectly through a separate service charge to the landlord or one-off recharge. In addition to repair costs for the main structure and services, there’s also the building insurance premium and any costs of the landlord in landlord-tenant matters.
In addition to establishing what all these costs are, try and agree any exclusions or at least limitations, for example a cap on the service charge.
5. Maintenance and Services
The issue of maintaining the property needs to go a step further, with any commercial occupier knowing that they tend to get lumbered with it all. So even the parts outside their main lease ‘demise’, for example the main structure and shared areas in communal building, will probably get paid for by them anyway through a service charge.
But even those within the tenanted area will be a direct responsibility, often under a ‘full repairing’ basis. So as it says on the tin, everything has to be done, and not just reactive repairs.
At the end of the lease it will probably have to go back in tip-top condition, even if it wasn’t originally in that condition, with all previously painted parts all freshly painted and any fit-out works possibly taken out. One way around this is to limit certain items in the lease, have the opportunity to leave fixtures in at the end if needs be, and limiting the repairing liability to the original condition through a Schedule of Condition.
6. The Initial Fit-Out
Although as already mentioned in earlier points, this is definitely worth re-instating as it will be a notable cost and time-factor when you first move in. In the frenzy of getting the letting past the post, this detail can be missed.
The three most important factors are firstly to see what you’ll be left with when you take the lease, and if any former tenants items will be left or taken. Secondly, clarify what these fit out works will be and what the expectation is to remove any of these at the end of the lease, often through separate legal document called a Licence of Alterations. Thirdly, ensure that this is reflected in your rent, for example you’re not having to pay additional rent at any rent review by valuing these works, and any initial rent-free period to allow these to first be instructed.
7. Business Rates
Instead of paying council tax for residential properties, you need to pay Business Rates for business properties. These normally come in at just under half the rental level, therefore a huge expenditure cost to bear in mind. There can be exempted buildings, and relief for, say, small businesses and vacant periods, but otherwise you’ll need to pay up.
Your local authority will raise the charges, but the valuation Office will set your level, or Rateable Value, which may be worth looking into and seeing if this can be appealed.
8. Bottom-Out Utilities
Although this might seem straightforward, they can cause real technical and cost issues afterwards.
Get to the bottom early on of what supplies are already there, typically your main water, gas, and electricity – but also any additional ones such as phone lines and internet.
Then see whether you will take direct accounts on to deal with, or any additional recharges exist through the service chair or additional charge if they are shared with other tenants.
And lastly, look at arranging the best deals with suppliers, based upon what actual use is at the property and not just estimated reads, and looking into longer term contracts for greater savings.
9. Prepare For Alienation
This may sound strange, but this is the technical legal word for how you might need to transfer the lease over to others in future if things don’t work out. This might be just ‘assigning’ the lease and transferring it over to someone else, maybe if you sell the business or move to another location, but also just sub-letting out all or parts of this to someone else.
This part sub-letting can be a real help in larger buildings and for example separate floors you’re not using, but make sure the lease allows for it, you’re aware of all the landlord’s conditions for doing it, and that the building can practically accommodate another occupier through separate utility meters and access points, for example.
10. Providing Up-Front Support
Taking on a commercial lease can be a huge responsibility, and therefore an important factor to the landlord over and above the rent is what they call ‘covenant strength’. This means that the actual business name on the lease is good for their money, and so a lease let to, say, Tesco will be classed as more valuable than a small business start-up corner shop.
There are ways to help with this, and basically offering the landlord more security up-front. This can be through a rent deposit, even if just for a certain time period before being released. You can also have guarantors to help back-up the lease and cover anything that does go wrong.
Prepare For Your Occupation
In summary, it’s important to begin understanding and agreeing the lease or other basis of your occupation, before then going through all the practical issues like the bills and services. After you have flushed these out, then use the opportunity to amend any documentation, or clarify matters under separate cover.
Once all agreed, you can then plan and budget for. As with other business interests, you will need future forecasts of your liabilities, and carefully mapping this out now will enable you to fully use your space how you really need to.