What to consider when purchasing a property for your business

Posted by Tony Coyne on
Whether you are a new tech start-up or a more established company, property will be important to your business, in some shape or form.

Location and premises

Location can be critical for your business to succeed. You will need to be at the physical heart of your market place in terms of proximity to your customers, suppliers and staff. The current hot spot is "Silicone Roundabout" (Old Street, London EC1) which in recent years has become a magnet for companies and creative talent in the high-tech sector. Experienced property agents can help you find the right premises in the right location for your business and negotiate the terms of occupancy. We can recommend a suitable agent from our contacts.

Points to consider when assessing the suitability of premises include:

  • Do they allow for the maximum flexibility and use of space eg open plan/hot desking?
  • Do they have the latest tech kit eg availability of high speed broadband?
  • Do they have all necessary amenities eg utilities, parking, ability to use meeting rooms, reception areas and storage space?

Legals

So having found premises you like, what next?

Depending upon how much flexibility you are looking for, you may be offered either a licence or a tenancy/lease arrangement (these terms are broadly speaking, interchangeable).

The longer the period of occupancy you are seeking and the more mature your business, the more likely you will be looking for a tenancy/lease rather than a licence arrangement.

The terms of a licence agreement are normally more flexible and usually deal with a short term period of occupancy.

Whatever the arrangement, the document setting out your agreement with the property owner will deal with important legal issues which will place financial and other obligations on you. It is advisable to seek independent legal advice to guide you through the pitfalls.

Points to consider when settling terms with the property owner include:

  • Rent: normally tenants are expected to pay rent quarterly in advance. This may be difficult from a cash flow perspective particularly for start-ups. Try to negotiate monthly payments. If your lease is for longer than five years, the owner is likely to require the rent to be reviewed after five years and to increase to market value if rental values have risen. However, it is normal for reviews to be "upwards only" so the rent cannot decrease
  • Rent free: try to secure a rent free period to cover the cost of any alterations you want to carry out or as an incentive to take the premises
  • Works: if you need to carry out any works to adapt the premises for your business (eg cabling, partitioning) seek the owner's consent in advance to avoid delays after you have completed
  • Break clauses: these provide flexibility in enabling a tenant to break its lease early if for example, there is a downturn in business or the premises are no longer suitable because the business has grown and you need a bigger space elsewhere. The property owner may seek a higher rent in return for this flexibility
  • Repairs: ensure that you are not assuming onerous repairing obligations for the premises, particularly if they are old and in need of repair. Often a lease will contain a provision stating that a tenant is to keep premises in "good and substantial repair and condition". This means that even if the premises are in disrepair at the start, you will be obliged to carry out works to put them into that condition. It is recommended that before you sign anything, you hire a surveyor to inspect the condition of the premises and if they are found wanting, agree with the owner to have your repairing obligation limited
  • Service charge: most leases of multi-occupied premises will include a service charge. This means that you as one of the occupiers, will contribute a proportion towards the upkeep of the structure and exterior of the building. As this can be an open ended cost, try to negotiate a cap (ie maximum annual payment) on service charges. These are usually payable quarterly at the same time as the main rent
  • Use: check that the lease allows you to use the premises for your intended purpose ("office/high-tech use"). Separately, your lawyer will need to check with the local authority that your use complies with planning legislation. Office/high-tech use would fall into what is known as a "B1" planning use
  • Insurance: whilst the owner will insure the premises (you will ordinarily pay a contribution towards that insurance) you will be responsible for insuring your own contents
  • Business rates: rent, service charge and insurance are not the only outlays that you will have. You will also need to pay business rates to the local council which can be a significant expense
  • Other expenses: you will also ordinarily be responsible for paying for your own gas, electricity and other consumption costs. These costs will not normarily be included in the rent. However, if you are entering into a more flexible short term licence arrangement, these costs (and the costs of for instance providing a reception, meeting rooms etc) may be included in the overall fee.

SDLT (stamp duty) is payable on a new lease, once the aggregate rents over the term exceed a certain level. You will need to factor this into your costs of acquiring the premises.

Your legal advisor can help you navigate through the perils of your lease or licence negotiations.

About the Author

Tony is a partner and heads the London Real Estate team and is also lead partner for Property Finance in London.

Tony Coyne
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020 7814 5413

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