Commercial Property Transactions and Your Business
A guide to the property transactions' legal process for small businesses renting, buying or selling a commercial premises
When selecting commercial premises, make sure there are no restrictions preventing you from carrying out your business. In particular, check the planning permissions, commercial classification (e.g. A1 for shops and A4 for pubs), restrictive covenants, and any use restrictions imposed by the landlord.
License to Occupy vs Lease
You can rent commercial premises through a lease or license. Some differences include:
- a lease allows the landlord to enter the property under restricted circumstances (eg. to do repairs) whereas with a license they can come and go freely
- with a license you may be sharing the property with other businesses
- licenses are for a shorter duration and easier to terminate
When renting commercial (as opposed to residential) premises you have little legal protection. Therefore, be careful to read all the terms of the rental agreement. Some key points:
- who is responsible for repairs and maintenance? If it is you, commission a surveyor’s report before agreeing to rent the property
- what is the duration of the rental period? What are the “break” clauses allowing early termination? Consider having break clauses where your turnover hits a specified amount (meaning you need to downsize or move to larger premises)
- how are rent increases determined? Basing increases on the property’s open market value has more potential for dispute than objective criteria like a link to the RPI
Buying and Selling
The buyer will make an offer conditional on satisfactory due diligence checks and securing financing for the purchase. It is common to make a “lockout” agreement at this point. This means that the seller agrees not to negotiate with other parties during the due diligence process. In return, the buyer may be subject to a financial penalty if they do not go through with the purchase despite the due diligence being satisfactory.
The buyer (normally through their solicitor) will make a number of checks including on the state of the building; that the seller has legal title to the property, and restrictive covenants or planning rules affecting the use of the building. The seller may put together a pack of documents (e.g. environmental reports, local searches, business rates) to speed up the due diligence process.
Exchange of Contracts
The contract for sale is drawn up and signed by both parties. The “exchange of contracts” takes place and the buyer pays the deposit on the purchase price. At this point the purchase becomes legally binding and the buyer or seller could be subject to tough penalties if they do not go through with the sale. On the arranged completion date, the buyer will transfer the purchase price to the seller, pay stamp duty, and finally register their ownership with the land registry.
Commercial property transactions are legally complex and the cost of getting it wrong can be huge. It is strongly advisable to seek advice from commercial property solicitors at all stages of the process.
See more small business advice articles on property: Finding the Right Business Property, Buying Premises and How can a Chartered Surveyor help my small business?
This article was written by Dominic Higgins from Contact Law