To Rent or Buy Your Property? What Small Businesses Should Consider

The challenge of acquiring space can seem daunting to even the most experienced business owner. So here's what you need to consider...

To Rent or Buy Your Property? What Small Businesses Should Consider

Successful businesses are often faced with the challenge of outgrowing their current premises, and needing to relocate to a larger space. One of the fundamental decisions to be made at this juncture is whether to rent or buy. Securing a property which suits the structure of the business is crucial to its future success.

The nature of the business’ requirements and the local market are both factors to give regard to when deciding whether to rent or to buy. However, there are many additional issues to consider.

Choosing to rent

Many businesses choose to rent their commercial premises due to the fact that there are generally a far greater number of rental opportunities in the market place and a significantly lower amount of upfront capital is required.

When a business rents premises, they usually enter into a lease with the landlord.  Consideration should be given to the proposed terms of any letting, such as the length of the lease, whether rent can be increased, if the company is responsible for any repairs, whether the layout of the premises can be changed and if there is an additional charge for buying the lease.

Businesses should consult a reputable commercial solicitor to go through the lease with them and to point out any pitfalls or issues of note. They would also benefit from consulting a Chartered Surveyor, who may be able to negotiate favourable lease terms. This could include incentives such as a rent-free period, or capping liabilities such as rent, insurance and service charges for a period of time, to give greater certainty over budgets.

Renting, particularly in the case of a short-term lease/licence or a letting with regular break options, provides a business with greater flexibility to move again, which could be particularly important if the company is in a fast-growing industry with the potential to expand rapidly over a short period of time.

Buying your premises

The fundamental consideration when deciding whether to buy or rent is whether the business has the capital available to buy, either via its own funds or a commercial funding arrangement.

In addition to the monies needed to purchase a property, additional capital is often needed in order to cover potential commercial mortgage set up costs, repairs, solicitors’ fees, building surveys and stamp duty.

If you do have the capital available, there are some obvious advantages to purchasing rather than renting. In a strong market the value of the asset is likely to appreciate. Furthermore you will have control over the property (how long you remain there, what work you do to the property) without being answerable to a landlord.

Should you find a property that the business can grow into over time and on the assumption funds are available, it may also prove viable/profitable to purchase premises and rent out any surplus space on short term lets. This generates an initial investment and provides flexibility should you require additional space in the future.

Conversely it is worth weighing up whether the use of capital to purchase commercial premises is in the best interest of the business or if the money would be better spent on growing the business and driving it forward?

As previously alluded to, consideration should also be given to how long the business is likely to remain at the premises. If the company is growing quickly it may be preferable to sign up to a shorter term lease and remain fluid as to future growth, rather than acquire a property and commit capital when a further move may be required in the short/medium term.

The perfect fit

Ultimately, there is no one size fits all approach and the individual requirements of a business need assessing before a prudent decision can be made. It is advisable to consult with experts who can recommend the best strategy tailored to your specific needs.

Simon Maddox is a commercial real estate specialist from Manchester law firm Slater Heelis LLP

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