Buying a Commercial Property – Stage 3: Buying or Renting?

• Posted onMay 1, 2020

This blog is the third in a series we are running around “Buying a Commercial Property”. It covers buying and renting in more depth and also some more thoughts around financing.

You can find the other instalments here:

Stage 1: Doing Your Research

Stage 2: Knowing the Market

Assuming you have now identified your desired location, whether it be in a thriving industrial estate or a bustling high street, at this stage you probably well placed and are beginning to hone in on your ideal property. Conversations with your accountant, bank manager and local agents are probably going well but you may have wondered why some properties are marketed as leasehold, whilst others are freehold.

Freehold versus Leasehold

In England and Wales we generally deal with property that is registered as freehold or leasehold. Reference to a freehold title effectively means that the owner owns the property fully, and for no restriction on time, whereas a leasehold title will mean that there is a lease, and the freehold is registered with another party.

Freehold

As mentioned above, a freehold interest is full ownership. A freehold would give an owner the highest degree of control in a property. This is not always a blank script to do as you wish as restrictive covenants may apply and will need to be observed. Some restrictive covenants can be relatively easily observed, such as not causing an obstruction or annoyance, whereas others may be more of a burden.

Although freehold properties do not attract rental payments, service charges or estate charges may still be payable. For example, if the property is located on a private road, or on an industrial estate, all owners may find that they need to contribute towards the maintenance of a road or drains if not adopted by the local authority or water board.

The owner of the freehold will be responsible for arranging the insurance, and for settling rates and other outgoings. Repair and decoration will fall to the owner.

Freehold titles may also have rights registered for their benefit, or be subject to reservations. As part of our review of the title at WSP, we will consider the impact these may have on the property and advise you accordingly.

Leasehold

Leases can be of a varying number of years.  A 999 year lease will be most similar to a freehold, as the lease will not expire by way of time in the foreseeable future, but a nominal rent would still be payable to the person who owns the freehold (the freeholder). A lease of this length is more likely to be granted by way of a higher premium/ purchase price, rather than a high annual rent. We would most likely see rental of up to a few hundred pounds in a long 999 year lease. A ground rent of ‘a peppercorn’ is not uncommon!

Where the freeholder wants to main control over the building and seek to recover its possession at the end of the lease, a shorter lease is more likely. Leases over 7 years need to be registered at the Land Registry and at WSP we can help you with the process. We often find that leases of shops are agreed for terms of 3, 5 or 6 years, whereas factories or offices may go for leases of 7 or 10 years. The time frames are not fixed and will vary on a case by case basis on what suits each business, and plans for the future.  We can discuss this with you to ensure you are best placed before proceeding.

In addition to rents, insurance payments and service charges for maintenance and decoration are common. Insurance rents may be charged at a percentage or a proportion. Service charges may be calculated in a similar way or set as a fixed charge per square foot. When considering whether to proceed with a lease over a purchase, these additional costs need to be considered to ensure cash flow can meet the business costs.

Financing you Commercial Property

If a business requires funding, it is most likely to come from a bank or mortgage company. We are always happy to assist and along with our colleagues in the Company Commercial department, we can assist with company resolutions and filing as may be required by the lender. In particular, where a company takes a charge, it must promptly be registered at Companies House. We prefer to do this by way of the Companies House on line portal, which we can access in conjunction with the company log on details.

SIPPs

Our Commercial Property team is also well experienced in acting for property transactions involving SIPPs (Self Invested Personal Pensions). Although there are strict rules and regulations around the types of property that can be purchased via a SIPP, planning ahead is crucial due to the limits on the sums which can be paid into a SIPP on a yearly basis. WSP have also helped with transactions where the SIPP has taken a mortgage, but in order to explore whether a SIPP purchase is a possibility, we recommend that you discuss with your financial adviser in the early stages.

However, you propose to fund your acquisition, we will discuss this with you at the outset as we will need a clear picture of how the transaction is being financed. The next blog in this series will be looking at “Proceeding to completion”.

As all commercial property transactions vary, our commercial property team offer a bespoke service and we are happy to help. You can get in touch with our Commercial Property team here or using the form in the sidebar of this page. Alternatively you can call us on 01453 847200