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Guide to buying commercial property

If you're looking to buy commercial property, our practical guide will help you every step of the way.

Words by: Property News Team

The British are known for their love of owning property. Many people aspire to own a house or flat. After all, the bulk of the UK’s buildings are homes.

But have you considered buying commercial property? It now accounts for around 13% of the value of all buildings across the UK, according to the PIA Property Data Report 2017.

The majority of the commercial property sector is made up of:

  • Offices: any building that is used for commercial, professional or bureaucratic work

  • Retail: shops, supermarkets, shopping centres and out-of-town retail warehouses

  • Industrial: warehouses and factories

  • Leisure: restaurants, pubs, cinemas, gyms and hotels

More alternative commercial property types include petrol stations and schools.

If you're looking to buy commercial property, then this comprehensive guide will help.

1. Find a property

If you can, choose a good time to buy commercial property. You don’t ideally want to do it at the top of the market when prices are high. It is advisable to look at the trends in the local and national commercial property market, such as:

  • Value of commercial property

  • Supply of commercial property

  • Availability of commercial mortgages

  • Appetite of competing investors

  • Tenant demand and rental values, if you plan to let the commercial property

A commercial agent will be able to give you advice.

The location and building type are also key factors when it comes to deciding which commercial property to buy. The major considerations include:

  • Type of property: retail, offices, leisure or industrial

  • Type of investment: freehold or leasehold

  • Size

  • Location

You should think about how the commercial property will suit business needs, be it yours or a tenant’s:

  • Transport: air, sea, rail and road links

  • Parking facilities and restrictions

  • Delivery facilities and restrictions

  • Congestion charges

  • Local amenities for staff

  • Proximity to pool of potential employees, including colleges and universities

  • Closeness to other businesses, suppliers or clients

  • Facilities, equipment, furniture and other services

  • Space configuration

  • Impression it will give to potential employees and clients

You can search for commercial properties to buy on Zoopla. 

Commercial property is divided into use classes under the Town and Country Planning (Uses Classes) Order 1987. The legislation determines how each commercial property is occupied. Make sure that any business carried out in the commercial property you plan to buy is in line with its planning use.

The following list gives an indication of the use classes:

  • A1 shops

  • A2 financial and professional services

  • A3 restaurants and cafés

  • A4 drinking establishments

  • A5 takeaways 

  • B1 business

  • B2 industrial

  • B8 storage or distribution

  • C1 hotels

  • C2 residential institutions

  • C2A secure residential institution

  • C3 homes

  • C4 houses in multiple occupation

  • D1 non-residential institutions

  • D2 entertainment and leisure

If you plan to redevelop the building or alter its intended use, you may require planning permission.

However, there are exceptions to the rule where legislation allows some changes between use without full consent.

For example, the Government introduced permitted developments rights in 2013 to allow offices to be converted into homes without the need for full planning permission.

It is important that you always seek advice from the local council and a commercial estate agent on the feasibility.

2. Work out the costs of buying a commercial property

Generally, a deposit is required when contracts are exchanged to buy commercial property. The remainder is then paid when the deal completes.

However, there are several other costs to consider when it comes to buying commercial property. These can include:

  • Advice: Most buyers need assistance from professionals, including a commercial estate agent, lender and solicitor

  • Stamp Duty Land Tax: You must pay the tax if you buy commercial property valued at more than £150,000, the current threshold in England and Northern Ireland. The SDLT on the portion up to £250,000 is 2% and a sale price above that incurs 5%.

  • Stamp Duty has now been replaced with the Land and Buildings Transaction Tax in Scotland and Land Transaction Tax in Wales

  • VAT

  • Fees associated with arranging a commercial mortgage

  • Decorating and refurbishing the commercial property

  • Buying and fitting out the space with furniture and equipment

  • Hiring a firm to help transport furniture and equipment

  • Setting up facilities, including establishing IT

And the bills don’t end there. You should consider the ongoing costs of maintaining commercial property too. If you plan to let out the commercial property, you will likely want to share some of these bills with your tenant.

The costs of owning a commercial property might include:

  • Insurance

  • Repairs and maintenance

  • Services, including security and cleaning

  • Local authority charges, including waste collection

  • Retaining a commercial property estate agent to manage the building

  • Commercial mortgage repayments, if applicable

Business rates are also a major consideration for owners of commercial property. They are a tax on non-domestic buildings. 

Business rates are worked out by multiplying the rateable value of the commercial property - set by the Valuation Office Agency (VOA) – by the Uniform Business Rate (UBR).

The VOA’s valuations are revised every five years. The most recent revaluation came into effect in England and Wales on April 1, 2017, based on the rateable values from April 1, 2015.

The local council will provide you with a business rates bill each year. There are exemptions available, such as small business relief and rural rate relief.

Another factor to consider is energy costs. The vendor will give you an Energy Performance Certificate (EPC). It will provide guidance on how energy efficient the commercial property is – and importantly, what your likely energy bills will be.

The EPC, valid for 10 years, will show the energy rating for the building from 'A' (most efficient) to 'G' (least efficient). For example, air con systems and boilers can have a significant impact on your energy costs.

It is worth exploring whether you can claim capital allowances towards some business costs too.

3. Secure a business loan to do the deal

You may require a loan to help boost your buying position. A commercial mortgage is widely considered one of the most common forms of finance used to buy commercial property.

There is now a range of lending sources. You should look across the market to compare mortgages and secure the best deal.

Lenders require a significant amount of information before agreeing a commercial mortgage. They will typically ask you for a range of details, which might include a business plan, commercial mortgage repayment proposal and business bank statements and accounts. 

Commercial mortgages typically range from three to 25 years. You may want to seek professional help from a commercial mortgage broker.

4. Put in an offer

When you have found a commercial property to buy, you will need to make a written offer – usually to the vendor’s commercial estate agent.

If the vendor refuses your offer, it is worth trying to negotiate to reach a mutually acceptable level. Remember that the seller has a number of factors to consider, including your price and the speed at which you can complete the deal. 

When your offer is accepted, politely request that the commercial property is taken off the market to prevent other interested parties from closing in on the deal.

You should carry out a local authority search to unearth anything that might impact the commercial property and the wider area.

The search may include details of relevant planning applications, building regulations, transport development and other issues, such as contaminated land.

After all, you don’t want to find a nasty surprise lurking further down the line that will impact the value of your commercial property.

5. Exchange contracts and complete on commercial property

You will now need the legal expertise of a solicitor. A document detailing the main points of the sale agreement will be drafted up once your offer has been lodged and accepted. It is called the heads of terms.

The document will include the type of agreement struck, how the deal will be financed and proposed timescales.

Your commercial estate agent and solicitor will then start to negotiate the final details of your contract with the seller.

You can request that an exclusivity agreement – otherwise known as a lock-out agreement - be put in place. It will allow you a specified timescale to carry out the due diligence knowing that the seller will not negotiate with another party.

A survey of the commercial property will typically be carried out to make sure it is structurally sound and there are no major flaws that have not been accounted for.

You may also want to use this time to secure planning consents from the local council if you want to redevelop the commercial property.

Contracts will be exchanged when:

  • both parties are satisfied with the contract

  • you are happy with the state of the commercial property

  • the finance to do the deal has been raised

This is when buying the commercial property becomes recognised in the eyes of the law. 

Other boxes to be ticked, which your solicitor can provide advice on, tend to include:

  • setting up insurance

  • paying Stamp Duty Land Tax

  • registering your ownership of the commercial property with Land Registry

  • verifying whether you need to register your commercial property for health and safety

The deal will complete when the formal documents are signed, dated and delivered. Your solicitor will hand over the remainder of the purchase price to the seller’s solicitor, and you will receive the keys to your new commercial property.

Have you got any advice on how to buy commercial property? Tell us by posting a comment below...

We try to make sure that the information here is accurate at the time of publishing. But the property market moves fast and some information may now be out of date. Zoopla Property Group accepts no responsibility or liability for any decisions you make based on the information provided.