Rent or Buy Premises?
Buying - Pros:
• Generally appreciates as an asset, and so increases the value of the business over time.
• Avoids unpredictable rent increases.
• Provides security.
Buying – Cons:
• A large amount of capital is needed.
• Can be substantial security against which to borrow.
• Mortgage payments may be high.
• Ties up cash that could be used elsewhere in the business.
• Interest rates may go up.
• Attracts capital gains tax on sale.
Checklist for buying:
• Over how many years are you able to take your mortgage?
• Do you understand what the survey is telling you?
• Will you be able to let part of the premises?
• How much deposit will you require?
• Can you get the interest rate on your borrowings fixed for a period of time?
• Can you save money on legal costs by undertaking some of the work yourself?
• Are you confident, when all costs are taken into account, that you can afford the mortgage?
Leasing - Pros:
• Ties up less capital than buying, leaving more for use in the business.
• Cost not affected by increases in interest rates.
• No concerns about capital gains tax.
Leasing – Cons:
• Paperwork/contracts may be complex.
• Rent increases may be unpredictable.
• Could tie you up for longer than you would wish.
• You must spend money maintaining an asset that belongs to someone else.
• Provides no security against which you may borrow.
Checklist for leasing:
• Can the premises be used for the type of business you are planning?
• What is the length of the lease?
• How often are rent reviews scheduled?
• Will you be able to sub-let part or all of the premises?
• Who is responsible for repairs and insurance?
• Is it necessary to provide a personal guarantee?
• Is it possible to rent on a monthly basis rather than sign a long lease?
• Do you need to make a deposit or payment in advance?
• Do you have to pay the landlord’s legal costs?
N.B. Negotiate if possible via a solicitor.
Read the leasing agreement carefully. It will cover such things as the length of time the lease will operate, the amount of the rent, dates of reviews, responsibilities involved, and transferability. Bearing in mind the fact that the lease could be for a considerable length of time, you need to be sure that you are able to pass it on without penalty should the business either hit problems or outgrow the premises. With no get out clause, you could find yourself responsible for payment of the rent for the entire length of the lease period, despite vacating – or wishing to vacate – the premises.
When checking the document, do not be afraid to negotiate with the landlord, and do not sign until you are happy with the terms and confident you can afford to do so. (ie Make sure your finance is secure, not just agreed in principle.)
The cost of leasing premises may be considerable. Check for any common charges for which you may be liable, and remember that your landlord may well be willing to negotiate.
If you are responsible for dilapidations (repairs to the building), arrange to have a survey done; it is also likely to be a good idea to take some photographs showing the condition of the building when you took it over.
Good retail sites may attract an extra charge known as ‘key money’. This is a one-off payment made for the privilege of taking over a desirable lease.
Uniform business rate (UBR) - England, Scotland and Wales
Under the UBR, central government sets a rate that is the same per pound of the rateable value of the premises for all businesses in England. Different rates apply in Wales and Scotland.
England and Wales
For further information contact your valuation office. You can find your valuation office by checking with the Valuation Office Agency (VOA).
Business rates in Scotland are managed by Scottish Assessors. For further information contact your local Valuation Authority.
Northern Ireland has its own system for rating business premises. For further information contact the Valuation & Lands Agency.