If you're looking for commercial property for rent, what do you need to know?
Many businesses in the UK prefer to rent commercial property rather than buy it for their own occupation. The trend grew significantly during the last decade as businesses became increasingly hesitant to tie up capital and commit time to managing premises, according to the Property Data Report 2014. But the proportion of rented commercial property has stabilised since the late 2000s downturn.
When you start looking for a commercial property to occupy, you will need to decide whether to buy it outright or rent it from a landlord. Each case is different so it’s important to weigh up the options based on your business alone.
If, after careful analysis, you’ve decided that snapping up a commercial property for rent is the right route for you, then read on.
Find the right commercial property for rent
- Location, location, location
Location is one of the most important factors when deciding on new premises. You should thoroughly research the local property market dynamics, such as availability of property, tenant demand and rental values.
If you are looking for a restaurant, cafe or shop, you will want to ensure it has high footfall. If you are seeking a distribution warehouse, you will require good transport links. And if you are searching for office space, you will need a location that staff can easily commute to.
You might also want to look out for incentives and initiatives in the region, such as Business Improvement Districts (BIDs), Enterprise Zones and Local Enterprise Partnerships (LEPs).
- What type of commercial property is best?
You will need to decide which type of commercial property will best suit your business needs. Think about your business strategy: how much, and what type of space will you need? Will this change in the near-future? After all, your business will be more profitable and easier to run if you rent the right commercial property.
You should consider the number of employees on site, the processes used and any machinery needed. If you anticipate the business growing, will you need further space to expand into or will you relocate to another premises further down the line?
You may find, for example, that an open plan layout or hot desking will save your business space.
It is advisable to double check that any commercial property you are considering renting has the planning permission for the business you will do while in occupation.
You can find a comprehensive list of use classes on the Planning Portal, the planning and building regulations resource for England and Wales.
If you wish to make some alterations to the commercial property, you may need to get consent from your landlord first.
- Other considerations
There are other factors to take into account when inspecting potential commercial property, such as:
- Transport links: airports, trains, buses and roads
- Congestion charges
- Parking facilities and restrictions
- Delivery facilities and restrictions
- Proximity to customers, clients and staff
- Impression it gives to staff and clients
- Local amenities: cafes and shops for employees
- Staff facilities
- Equipment and furniture
- Broadband coverage
You should also check the overall condition of the commercial property, in the same way you would if you were renting a house. Look out for damp, cracks and plumbing issues, for example, and other defects.
The costs of renting commercial property
- How much rent can you afford?
Rent tends to be one of the main costs you will encounter when renting commercial property. It is normally paid quarterly in advance on March 25, June 24, September 29 and December 25. However, landlords are increasingly accepting rent payments on a monthly basis. Any service charge or insurance will usually be billed along with the rent. You may be asked to provide a guarantee for the rent and other obligations if your business is young or small.
A lease – particularly if it is a long one - may include rent reviews, typically every three, four or five years, which can alter the amount you pay over time. It’s important to note that rent can go up as well as down, depending on the terms of the lease.
It is therefore advisable to research rental trends and forecasts before you sign on the dotted line. You can also seek the advice of a commercial estate agent. You can find out more on Zoopla’s news site and by reading national and trade press.
However, there are other costs associated with renting commercial property. To find out more, read on.
- What will business rates cost?
You will need to factor in business rates, a tax on non-residential buildings in England and Wales. They are handled differently in Scotland and Northern Ireland. The rates cover shops, offices, pubs, warehouses and factories and are typically paid by tenants. Business rates tend to add around 40 per cent to the cost of renting a shop or office, according to the Property Data Report 2014.
There are two main factors used to calculate business rates. They are the rateable value - broadly the open market rental value - of the commercial property and the level of the uniform business rate (UBR). A revaluation to adjust the business rates to reflect changes in the property market usually occurs every five years. The most recent revaluation took place on April 1, 2010, and the next will be in 2017 in England, Scotland and Wales, and 2015 in Northern Ireland.
You can apply for exemptions, such as small business relief.
The local council sends the business rates bill in February or March each year for the following tax year.
There may also be supplements in addition to the UBR, such as the Crossrail business rates supplement in London to fund the construction of the high speed rail link. Meanwhile, BID levies are paid based on rateable value but are separate to the normal business rates liability.
- Other considerations
You will typically be expected to cover all or part of the service charges on the commercial space you rent. Service charges tend to include the maintenance of common parts of the commercial property and a share of any repair or redecoration work. If your landlord is responsible for insurance, you may be required to share the cost too.
Energy costs will also come into play. Shops are the largest consumer of energy in commercial property. However, they tend to be more efficient, according to a Government source in the Property Data Report 2014. Your landlord is required to provide you with an Energy Performance Certificate (EPC) showing you how energy efficient the commercial property is.
Other factors to work into your budget may include:
- Professional advice from commercial estate agents and solicitors
- Local authority charges
- Deposit to secure the commercial property
- VAT, which is payable on some buildings
- Stamp Duty Land Tax on commercial property valued above a certain threshold. It is based on the premium and rent
- Moving costs
- Decoration, repairs and ongoing maintenance
You can seek capital allowances, a form of tax relief. If you buy an asset to use in your business, you may be able to claim a capital allowance to cover the cost.
Negotiate a commercial tenancy agreement
You will typically rent a commercial property by signing a lease agreement or licence.
A lease is a legally-binding contract which sets out the terms and conditions of the tenancy agreement between landlord and tenant. It offers long-term stability compared with a licence (see below).
The average length of a new lease is now 4.5 years compared to 6.8 years in 2003, according to the Property Data Report 2014. However, it can be 25 years.
Leases have become more flexible in recent years. Rent-free periods have become more prevalent, as have break clauses, which give you and the landlord an option to serve notice during the tenancy without facing a penalty. You should give your landlord two months’ notice if you plan to exercise your break clause. Your landlord can only use it if you agree.
You will need to agree on a host of factors when negotiating a lease, such as:
- Lease length and any break clauses
- Rent and any rent-free periods
- When and how rent reviews will be calculated
- What the service and maintenance charges total and include
- Who will take responsibility for service and maintenance charges
- When and how bills will be paid
The Royal Institution of Chartered Surveyors (RICS) advises taking particular note of what the proposed contract contains on service charges, rent reviews, subletting space, assigning the lease, repairing and decorating obligations and personal guarantees.
Licences are available if you are seeking a commercial property to occupy for a short period of time. They can be a good option if you are a start-up. The licence fee – equivalent of rent – might be due monthly in advance or even weekly. Licences tend to last up to six months and have fewer onerous conditions than leases. You will have no right to renew the licence upon expiry.
Licences are available on a variety of commercial property types, such as pop-up shops, warehouses refurbished and divided into office space, and industrial buildings.
Service contracts tend to be granted on serviced office space. They range from short to long-term arrangements, and may include the provision of desks and secretarial services as well as office space itself.
Agree an offer
It is commonplace to submit an offer on a commercial property to the landlord’s agent. It is up to you and the landlord to agree the terms of the lease; it can be subject to extensive negotiation.
Once you have submitted an offer and had it accepted, you may want to ask the landlord to refrain from marketing the commercial property any further. It will help prevent other interested parties from negotiating with the landlord.
A document containing the key points of the agreement will be drafted up in a document, known as heads of terms. It is not legally-binding. However, it is considered a draft of the main contract and generally includes:
- Type of agreement
- Description of the deal
- Rental value, currency and payment arrangements
- Proposed timescale, including the date of completion
The legal work begins when both you and the landlord agree the heads of terms.
It is advisable to carry out a building survey so you are fully aware of the condition of the commercial building and any likely repair or maintenance costs. A survey normally details all aspects of the commercial property, including the walls and floors. It will also flag up anything that has not been inspected and causes for concern.
You should set up a Schedule of Condition report to detail the exact condition using photographs, and attach it to the commercial tenancy agreement.
A local search is also a good idea to establish if there are any plans that may impact the commercial property you plan to rent and the wider area. The search shows entries kept by the local council, and usually cover:
- Planning and building regulations
- General matters
You can undertake other searches to gain a more comprehensive view, such as flood risk assessments.
Exchange contracts and complete the deal
You will exchange contracts once the money to do the deal is in place and your commercial agent and your solicitor are satisfied with the state of the commercial property as well as the contract. The deal will be legally-binding when the contracts are exchanged. However, in Scotland, the letting only becomes legal upon completion.
Completion – set out in the heads of terms document – occurs once the balance is paid.