Over my 24 years in business with Andrew Idle Associates, I have been involved in many discussions about the merits of leasing as opposed to buying commercial premises for occupation.
To help you make an informed decision, here is a summary of the main plus and minus points of each option. For further advice on commercial property investment please feel free to give me a call on 01274 743884 or browse the properties we have available to let and for sale in West Yorkshire and beyond.
Buying a commercial property
- Can be done tax efficiently through a self-invested personal pension (SSIP) which protects against income and capital gains tax.
- Often a good long-term investment though it usually pays to take independent advice before committing yourself.
- If you buy with funds already in place then you can borrow on the property and the supply of loan facilities is gradually improving.
- You are in control and will not have the uncertainty of knowing whether your lease is to be renewed or whether, in the case of multiple occupation premises, the Landlord brings in another tenant who clashes with you and your business.
- You will not have the headache of rent reviews which crop up on longer leases, especially if the Landlord is very mercenary, although we have seen this from both sides of the fence.
- If you buy a commercial property that has space excess to your requirements and you cannot manage to let the additional space you will end up paying substantial unoccupied rates. This has been a massive burden for some although there is sometimes scope for applying for a reduction.
- Mortgage payments cannot be offset against business profits, unlike rentals.
- You will have the responsibility of property maintenance which can be burdensome in the case of older buildings especially.
- If you do buy through a SIPP wrapper, be aware that annual administration costs can be considerable and the SIPP being a separate legal entity can sometimes make decisions regarding the property that you don’t necessarily agree with.
- You have full responsibility for compliance with health and safety including issues such as fire protection and safe working practices for contractors carrying out repairs and asbestos.
- If the property is not in a SIPP then, depending on what legal entity owns it, capital gains tax due on sale can be significant thus wiping out some of the growth in value.
Leasing a commercial property
- If the lease is properly drafted to suit your business circumstances then it gives you the flexibility to relocate when the nature of the business changes.
- Rent is an allowable business expense.
- If you are in a ‘business centre’ type complex then the Landlord is often responsible for maintenance overall even though you pay a service charge, and so if the building is properly managed you can concentrate on the running of your business rather than the minutiae of building maintenance.
- If you are on a full repairing lease with no schedule of condition to protect you and your business then potentially your liabilities for maintaining the premises can be huge.
- At the end of the lease dilapidations, liability and disputes can be a headache.
You will, in many cases, have to pay the Landlord’s building insurance premium, though this is normally a modest sum in relation to repair costs.
If your lease is contracted out of the Landlord and Tenant Act then there is no guarantee the Landlord will entertain a renewal.
- Tenant Break clauses in some older leases can be troublesome as neglect of a few minor repairs or failure to pay rental up to the specified date has been known to invalidate such a break with catastrophic results.
- If you have taken over the lease from another party you may find that they had carried out various alterations which must be reinstated at the end of the lease and this can be very costly.
- Sometimes in a case where you have assigned a relatively long lease and the new occupier ceases trading, you might find that you have some continued liability for payment of rent under an Authorised Guarantee Agreement.
There are many other factors to consider but those cited above often crop up.