Main Points to Consider When Buying Business Property
The decision of whether to lease or buy commercial property will 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.
When you own your business premises, you can use and manage it without having to obtain the consent of the landlord. This means you can change how you use your premises or make any changes or alterations to the premises either internally or even externally. This type of flexibility may be an important factor in your business plan. It means you can sell and move when you wish or even lease the whole or part premises to another company in the future.
Be aware that 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. We recommend that you consult a surveyor or architect when making any alterations to the premises as they can advise you regarding local authority’s planning and building regulation requirements.
You should also consider 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. 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 Tax
You must consider the implications of 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. Advice must be sought 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.
You must also consider the risks associated with ownership such as the potential exposure to a downturn in the property market or the economy post-Brexit and therefore decreasing value of 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 Liability
It is the responsibility of the owner of the commercial premises to manage the ongoing repairs and maintenance of the premises and 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.
Cost of Buying
You must also consider the up front costs as well as the ongoing implications of the finance arrangement.
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 highlighted above 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 would 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.
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.
You will also need to consider not only the initial costs of buying the premises but also the ongoing costs of owing 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.
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, as highlighted above, the main factors to consider are:
- Costs of buying and running the premises – This will include 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.
- Are there any restrictive covenants to overcome? If so 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 and also will an SIPP be a suitable investment vehicle.
For advice on commercial property matters or any of the issues raised in this article, please contact Delfin Posada on firstname.lastname@example.org or 020 8405 4278.