For any growing business, buying commercial property is a significant milestone. It’s an investment that can provide stability and solidify your presence in the market. However, unlike residential property transactions, buying commercial property involves a unique set of complexities, legal considerations and financial commitments.
At Cooklaw Solicitors, we understand the intricacies of commercial property law. Our aim with this guide is to empower you with the knowledge needed to navigate this journey successfully.
Types of commercial property
The UK commercial property market offers a diverse range of options, each suited to different business needs. Understanding these categories is the first step in identifying the right fit for your operations.
Offices are designed for administrative, professional, and corporate activities. They range from small, flexible co-working spaces to large corporate headquarters. When considering an office space, it’s important to think about factors such as size, layout (whether open-plan or cellular), accessibility for both employees and clients, and the quality of the IT infrastructure.
Retail units are properties specifically for businesses that sell goods or services directly to consumers. This category includes high street shops, units within shopping centres and retail parks. Key factors to consider are footfall, the visibility of the premises, accessibility and local demographics.
Industrial properties form a broad category that encompasses warehouses, factories, distribution centres, and workshops.
Leisure properties include a diverse group such as hotels, pubs, restaurants, cafes, sports facilities, and entertainment venues. Their suitability is often closely tied to their location, capacity, the availability of existing infrastructure (like kitchens or bars), and specific licensing requirements.
Healthcare properties encompass hospitals, GP surgeries, dental practices, medical centres, and nursing homes. These properties have specific requirements related to accessibility, hygiene standards and the need for specialised equipment.
Mixed-use developments are becoming increasingly popular. These developments combine various property types, such as retail on the ground floor with offices or residential units above. They offer a dynamic environment and can be beneficial for businesses seeking a blend of convenience and community.
Sui Generis is a classification that applies to properties that do not fall into the standard use classes. Examples include theatres, petrol stations, car showrooms, nightclubs, and large houses in multiple occupation. These properties often have very specific planning and licensing requirements due to their unique nature.
Beyond these categories, it’s also crucial to understand the Use Classes Order 1987 (as amended). This legal framework dictates how a property can be used, and any change of use often requires planning permission. Your solicitor will be able to advise you on the current use class of a property and the implications this may have for your business.
Key considerations
Once you have a general idea of the property type you need, a more detailed evaluation is essential. These considerations will significantly impact your business’s day-to-day operations and long-term success.
Location and facilities
Accessibility and visibility are key to being easily identified and reached by clients, customers and employees.
You should also consider the building’s proximity to local amenities such as banks, post offices, eateries and other services that would be beneficial.
Investigate the surrounding infrastructure to assess the quality of broadband, utilities and telecommunications. The security of the area and the property itself is also a key concern.
Finally, consider the competition from neighbouring businesses and how this could impact your business’s success in the vicinity.
Agile working policies
The rise of flexible and hybrid working models has a direct impact on property requirements, particularly for office-based businesses.
When buying commercial property, you should think about desk utilisation and whether hot-desking or shared spaces can be implemented. When viewing properties, assess whether there are sufficient collaboration zones for team meetings and brainstorming.
Consider technology integration potential and whether the property can support agile working needs, such as video conferencing and robust Wi-Fi.
If you’re on a growth trajectory, consider whether the space can be easily reconfigured as your business grows.
Storage areas
Whether it is office supplies, machinery or retail stock, it is important that you consider your current equipment and how projected growth may impact your storage requirements.
If you are planning on storing sensitive equipment or perishable stock on site, consider climate control, humidity and dust levels.
Size
Beyond desk space, areas for kitchens, breakout zones, reception, server rooms, and other essential functions are a key requirement. Ensure the property adheres to health and safety regulations regarding space per person.
Leasehold vs. freehold
One of the most fundamental decisions when acquiring commercial property is whether to opt for a freehold or leasehold interest. Each has distinct implications:
Freehold
Owning a freehold means, you own the property and the land it sits on outright, meaning you have more flexibility over future renovations and alterations.
The property is also a tangible asset that can appreciate in value, providing a long-term investment.
However, freehold requires a significant upfront cost. It also means that the responsibility for maintenance falls on your shoulders.
If your circumstances change, commercial property can suffer from illiquidity compared to other investments, making it harder to sell quickly.
Leasehold
Leasehold involves acquiring the right to occupy with exclusive possession and use a property for a specified period (the lease term) from a freeholder (landlord).
This requires a lower upfront capital investment compared to buying freehold, as you are not purchasing the underlying asset. Leases can offer greater flexibility, especially for start-ups or businesses with uncertain long-term plans. Shorter leases allow for easier relocation or expansion.
On the other hand, with a leasehold commercial property, you won’t benefit from property value appreciation. You may also be subject to rent increases and hefty service charges for the maintenance of commercial areas.
Leaseholds offer less control than freeholds and often contain covenants and restrictions on how you use and alter the property, which can be limiting.
While the Landlord and Tenant Act 1954 provides some security for business tenants, it’s crucial to understand your rights. Experienced commercial property solicitors like Cooklaw will be able to support you.
Additional costs
Beyond the purchase price or initial rent, acquiring commercial property involves a range of additional costs that must be factored into your budget. Here are some of the key costs to consider:
- Surveys: As discussed further below, commissioning professional surveys is crucial. Costs vary depending on the type and complexity of the survey and the size of the property.
- Stamp Duty Land Tax (SDLT): This is a significant tax payable on the purchase of land and property in England and Northern Ireland. The rates for commercial property differ from residential properties and are calculated on a tiered basis based on the purchase price. For leasehold properties, SDLT is calculated on the lease premium and the net present value of the rent.
- Legal fees: Solicitor fees will cover due diligence, contract negotiation, property searches and registration.
- Fitting out costs: Unless you are acquiring a ready-to-use property, you will likely incur costs for fitting out the interior to suit your business needs. This can include partitioning, flooring, lighting and IT cabling.
- Mortgage fees: If you are financing your purchase with a commercial mortgage, there will be arrangement fees, valuation fees and potentially broker fees.
- Valuation fees: Lenders will require a professional valuation of the property to assess its market value and determine the loan-to-value ratio.
- Agent fees: If you use a commercial property agent to find the property, they will charge a fee, usually a percentage of the purchase price or annual rent.
- Insurance: You will need comprehensive commercial property insurance, including buildings insurance, public liability insurance, and potentially contents insurance.
- Business rates: These are taxes levied on non-domestic properties by local authorities. The amount you pay is based on the “rateable value” of your property, which is set by the Valuation Office Agency.
- VAT: Commercial properties can be subject to VAT, especially if the seller has opted to tax the property. This can significantly impact the purchase price, though for VAT-registered businesses, it may be recoverable. Our solicitors can advise on this matter.
- Environmental search fees: To identify potential environmental liabilities, such as land contamination.
Why surveys are important
Engaging a qualified surveyor to conduct a thorough commercial property survey is an indispensable part of buying commercial property. A survey provides vital insights into the property’s condition and long-term liabilities, protecting your investment and preventing costly surprises down the line.
Detecting hidden defects
Many issues in a commercial building are not immediately apparent. A professional surveyor can uncover structural defects, damp, asbestos, roofing problems, issues with HVAC, plumbing and electrical systems.
Informing negotiations
A survey can provide strong leverage for negotiating the purchase price or lease terms. If significant defects are found, you may be able to request a price reduction or ask the seller to undertake repairs.
Assessing compliance and safety
Commercial buildings must adhere to health, safety, and accessibility regulations (e.g., fire safety, asbestos regulations, Equality Act 2010 compliance). A survey will highlight any areas of non-compliance, enabling you to address them before or shortly after purchase.
Avoiding legal liabilities
For leasehold properties, a survey (often a “schedule of condition”) is crucial for providing a baseline record of the property’s condition at the start of the lease. Without this, you could be held responsible for pre-existing defects.
Tailored advice
Different types of surveys are available, from basic condition reports to detailed building surveys. Your surveyor can advise on the most appropriate type for the property in question, considering its age, construction, and your intended use.
Navigating commercial property financing
Securing the right financing is another critical step in buying commercial property, as most businesses require external funding. Below is an overview of common financing solutions:
- Commercial mortgages are long-term loans secured against the property, like residential mortgages, typically requiring a 25-40% deposit and offered by various lenders.
- Bridging loans provide short-term finance, usually up to 18 months, for quick purchases or refurbishment projects, acting as a bridge until long-term finance is secured, however, they come with higher interest rates.
- Secured loans use other business assets like machinery or invoices as collateral to fund property purchases or deposits.
Other options include business loans for smaller amounts, and venture capital/private equity for businesses experiencing rapid growth. There is also the potential to use Self-Invested Personal Pensions (SIPPs) or Small Self-Administered Schemes (SSASs) for tax advantages, though these are complex and require specialist advice.
Subletting
Subletting allows a commercial tenant to grant a new, shorter lease to a subtenant for all or part of their premises. This strategy is ideal for managing surplus space or reducing overheads. However, the ability to sublet is nearly always subject to the head lease terms and often require the landlord’s consent, which cannot be unreasonably withheld.
Landlords can impose reasonable conditions, such as financial criteria for the subtenant or ensuring their proposed use aligns with the head lease.
A legally binding sublease agreement must be drafted, and legal advice is essential to navigate clauses and mitigate risks for all parties.
How Cooklaw Solicitors can help
Buying commercial property is a pivotal moment for any business. It presents exciting opportunities for growth and stability but requires expert legal guidance to protect your investment.
Our experienced team offers personalised, honest and practical advice, empowering you to make informed decisions that align with your business objectives.
Our services cover:
- Advice on the initial Heads of Terms, ensuring your interests are protected from the outset.
- Comprehensive property searches, investigating title deeds, reviewing planning permissions and identifying any potential risks.
- Contract negotiation and drafting all legal documents, including sale contracts, lease agreements, and any associated deeds.
- Working closely with commercial mortgage advisors to guide you through the legal aspects of securing finance.
- Clear advice on your Stamp Duty Land Tax obligations and potential reliefs.
- Reviewing lease terms and advising on covenants, break clauses and the legality of subletting
By choosing us, you gain a dedicated team committed to securing your business’s future in the right commercial property. We demystify the legal process, minimise risks, and work tirelessly to achieve a successful outcome for you. Contact us for a free consultation.
