A Guide to Buying Business Premises
One of the biggest steps your business will take, get the lowdown on purchasing a commercial property here
One of the largest investments your business is likely to make, buying premises is a huge step, but one which can carry significant advantages for the right kind of business. If you have the capital to back it up and are reasonably confident of your firm’s ongoing success, buying a premises can provide you with security of tenure, a lucrative return on your investment, unparalleled flexibility, and more.
There are various aspects to consider when looking to purchase a commercial property, and this article will give you the lowdown on what to think about. We cover the advantages and drawbacks of purchasing, how to shortlist and choose the perfect building for you, how to use a chartered surveyor, and more.
What are the pros and cons of buying business premises?
Before you take the plunge, it is important to recognise that whilst buying can carry significant advantages – especially if you are a stable, established, growing business – it is not suitable for everyone.
The advantages of buying business
Overall the long term cost is lower. Whilst the initial deposit will represent a significant outlay, mortgage costs will typically be much lower than comparable rent prices, and you should expect to see significant savings after the first five years of ownership.
Also you may get a good return on your investment, if the value of your premises rises during your occupancy, you can decide to sell up at any time and pocket a tidy profit. Be aware that this depends heavily on a number of factors, including the nature of your property and its location, and prices can go down as well as up. And you can claim capital allowances on building renovation, for instance some tax relief is available for capital you spend on renovating parts of your building and other certain kinds of expenditure. Find out more here.
Another advantage is that you have complete control over your premises as, planning permission issues aside, you have almost total flexibility over how you set out your premises – especially if you are building from scratch. If you need extra funds, you can let part of the building to another business, or re-mortgage your own premises.
Finally you can use the property as part of a pension scheme, the rules of small self-administered pension schemes (SSAS) allow you to spend part of the pension fund on buying office premises, which then pays you and the other shareholders a commercial rent – effectively allowing you to use the pension to fund your own company.
The disadvantages of buying business premises
One of the main disadvantage is the high upfront cost. Deposits on commercial premises can be as high as 50% of the value of the property. If you cannot afford such a huge outlay, or the success of the buying venture is contingent on factors outside your control, it is best to look elsewhere. Furthermore, you may end up losing money. Just as with any investment, the value of your property can go down as well as up.
Also there’s a lack of flexibility. The advantage of renting or obtaining office premises on a licence is a high degree of flexibility. If the property turns out to be unsuitable, or you rapidly outgrow it, it is easy to move. If you buy a property, it is more difficult to move quickly.
Finally, you have to look after the property yourself – unlike with leased or licenced premises, the onus is on you to maintain your premises.
What additional costs are associated with buying business premises?
The upfront purchase cost is by no means the only one you will incur as a property owner. Other costs will include:
Stamp Duty Land Tax (SLDT)
This is an additional tax you have to pay based on the total value of the property – between 1 and 4% of the purchase price, depending on value. Find out more about SLDT here.
Just as with leasing and buying, you will probably have to pay business rates on your commercial premises. Find out more here.
Estate service charge
If your property will be located on an estate, you may have to pay a yearly service charge, which will usually pay for things related to the upkeep of the estate.
Land registry fee
You will have to pay the government a land registry fee which can be up to £910, depending on the value of the property.
In some cases, the seller may charge VAT on the sale price of your commercial property – although you will usually be able to reclaim this, you need to budget for the initial expense. Find out more about whether you can reclaim VAT here.
Bills and maintenance
You are responsible for the entire upkeep of the property as its owner, and as such you should budget for the cost of keeping the building running. If possible, obtain a copy of the previous occupant’s bills and see if there is anything you could do to reduce them.
How do I choose which premises to buy?
Start by deciding on a set of criteria for the premises you want. Work out what you need from your business premises, and what is most important to you – do you value location most highly, or is space more important to you?
Also circulate your criteria to a chartered surveyor and commercial property agents. They should be able to provide you with a number of premises they think will fit the bill. And try create a shortlist of properties, visiting each in turn. Devise some kind of objective marking system, like scores out of 10, based on your criteria. If possible, bring someone else along to the visits so you can compare notes and come to a more objective decision.
Finally investigate why the property is being sold. Is there a lot of interest in the property? If not, why not? If the previous owner is in a hurry to sell, investigate why.
How do I make an offer?
After you have chosen the building which suits your needs, the next step is making an offer. Assuming the property will not be auctioned, you should take the following steps.
Firstly make a conditional offer. You should be absolutely clear what the offer is conditional on at this stage to avoid confusion, disagreements and expense further down the line. Situations the offer might be contingent on could include planning permission or other approvals, the availability of finance, or final confirmation that the previous occupant is gone.
Also offer an initial price. The price should be at least a little lower than the asking price (and your maximum budget), to give you some wriggle room when it comes to negotiation. Doing your homework at this stage is vitally important; you want to come to the negotiating table armed with all the right information.
You may also want to negotiate a lockout agreement – this will prevent the seller from entering into negotiations with anyone else whilst discussions are still ongoing with you. In particular, you should find out the details of cheaper, comparable properties currently on the market; list the problems with the property that could drive value down and get quotes for any renovations or repairs you will need to make.
Should I use a chartered surveyor?
Employing the services of a chartered surveyor will normally be a worthy investment when looking to buy a property. Buying is a big step, and surveyors can provide you with expert guidance throughout the buying process.
In particular, a chartered surveyor can search for premises and draw up a shortlist. They will be able to provide an expert view on the investment value of properties.
One of a chartered surveyor’s main roles is to physically survey the property you propose to buy. The survey will typically report on the condition of fixtures and fittings, compliance with building regulations, the presence of any dangerous material such as asbestos, the estimated cost of renovations and repairs, and the actual square footage of the premises.
When choosing a surveyor, the first step is to look into the surveyor’s expertise. Chartered surveyors come under a broad umbrella, and the range of services and expertise they can offer is diverse. Make sure you pick a surveyor that matches what you are looking for. The Royal Institute of Chartered Surveyors (RICS) can help you find a surveyor. Also the surveyor’s reputation – see if you can talk to comparable businesses about their experience with a particular surveyor, and check who will actually carry out the work – although you may liaise with partners and senior people within the firm, the actual surveying work is often carried out by a junior.
Finally consider whether the surveyor’s report will be accepted by your bank. If you plan on getting a mortgage, talk to your bank to find out whether they will accept a report from the particular surveyor you wish to use.
What legal considerations should I be aware of when buying business premises?
You should always consult a specialist property lawyer when buying commercial premises – they will be able to deal with legal issues you may have overlooked yourself, and conduct the vital process of legal ‘due diligence’.
Legal due diligence will usually take in the seller’s actual ownership of the property and rights of access and restrictive covenants.
A lawyer will be able to investigate whether the purported seller actually owns the premises and has the right to sell it. Property deeds can reveal the existence of rights other people have over the property (such as a public right of way) as well as restrictions on its use (for example, a requirement that the building should never be used as a licensed public house).
It will also cover guarantees and warranties, planning issues, equipment and past problems and disputes. If renovation or pest-control work has recently been undertaken, there might be guarantees on this you can benefit from. This will cover whether planning permission has been granted or refused in the past, as well as any planning decisions that might affect you (such as the construction of a new footpath outside the building). A property lawyer should check which fixtures, fittings and equipment are included in the sale, such as boilers. And lawyers will look into whether the property has been the subject of past disputes, such as a boundary disagreement or issues with parking.
Buying a business may seem like a huge financial investment but it will give you stability and a tangible asset should you seek finance or run into trouble down the line, but make sure you and your business are ready to make the move.