Renting business premises

Finding the right premises for your business is crucial.

A key decision is whether to buy or rent property. Renting premises ties up less capital than buying which means you can invest it in the business instead. It can also give you flexibility to relocate easily should you need to.

The type of premises you rent and the location will be partly dictated by the type of business you are running. The amount you can afford – taking into account extra costs such as business and utility rates, and building insurance – will also be a deciding factor.

This guide outlines the things you should consider before deciding whether renting is a better option for you than buying. It highlights the practicalities you need to consider as a tenant and the type of expert help you can get to make the renting process as trouble free as possible.

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The advantages of renting premises

Buying business premises is a big commitment and it’s important to consider carefully whether renting is a better option. Renting can provide more flexibility for your business as it grows. You are not locked into property ownership and you can usually agree with your landlord the length of the lease that you require, or have a break clause included in the lease. This will let you end the lease (usually on a specific date) if, for instance, you want to relocate.

Financially, renting can make good business sense. Upfront costs for leasing premises are often relatively low, though you may pay a premium to purchase the lease. Sometimes you may also have to provide a refundable deposit. But generally renting ties up less capital than buying, freeing up cash that could be used elsewhere in the business. See the page in this guide on the practicalities of renting premises.

You are not exposed to interest rate rises, although your rent may rise periodically as a result of rent reviews. Always check to see how rent is reviewed before you sign the lease. See our guide on renewing and ending your business lease.

There is also less potential for unexpected financial shocks – unless you wish to sell the remaining term on your lease to someone else, falls in property value will not affect you. Also, you will have no concerns about Capital Gains Tax unless you decide to sell your lease for a premium.

You may have less responsibility for the building if you rent rather than buy, although this will depend on the terms of your lease. You may have to look after repairs and maintenance inside the building but external maintenance is more likely to be the responsibility of the landlord, particularly in multi-occupancy premises, though you may have to pay a service charge. See our guide on commercial property: responsibilities of business tenants.

Renting can also give you space for negotiation. You or your agent can negotiate any aspect of the lease, either at the start or if you want to renew it after the lease ends. The Code for Leasing Business Premises helps promote fairness in commercial leases. Although the code is voluntary, its use is strongly supported and monitored by the government. The code contains useful advice that can help you negotiate favourable lease terms if your landlord does not offer a code-compliant lease. Find the Code for Leasing Business Premises on the RICS website [opens in a new window].

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Finding the right premises to rent

It is essential to match your premises to your business needs. There are a number of ways to search for appropriate premises to rent. You could consider:

• agents’ letting boards outside the premises
• local newspapers
• the internet
• your local council – through their Economic Development Unit
• estate agents
• trade associations – if an existing member is retiring or selling up

Another good way to find suitable premises is through appointing a commercial agent or commercial surveyor. You can find one in phone directories, or via a trade association, the Royal Institution of Chartered Surveyors website (RICS) or a local Chamber of Commerce.

Commercial agents and surveyors have expertise on the property market in the area and can keep you up to date with any new developments. They will also send you detailed specifications of suitable premises, which can prove invaluable, particularly if you are limited by time.

Commission is payable to a commercial agent for acting as an intermediary between you and the landlord or seller. You will need to fully brief the agent, manage the relationship well and maintain regular contact to ensure that they find you the most suitable premises.

When employing an agent to act on your behalf, you should also draw up a contract, even if the relationship is informal. This will help to set out expectations and clarify your legal obligations to them. See our guide on how to choose and manage a commercial agent.

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Types of property rental agreement

You can rent business premises by leasing them. If you require premises for a short term – for instance, to complete a large order – then consider a licence rather than a lease.

Leasing

Leases typically have agreements of between three and 25 years and can offer long-term stability. However, lease lengths are getting shorter and recent research suggests that the average length of a business lease is below eight years.

You will probably be able to negotiate this with your landlord and should certainly check before signing the contract.

The Code for Leasing Business Premises helps promote fairness in commercial leases. Although the code is voluntary, its use is strongly supported and monitored by the government. The code contains useful advice that can help you negotiate favourable lease terms if your landlord does not offer a code-compliant lease. Read the Code for Leasing Business Premises on the RICS website [opens in a new window].

Other than the rent itself, key areas of the contract that you should study include:

• lease length
• break clauses
• service charges
• dilapidations (an amount payable to the landlord at the end of the lease)
• responsibility for maintenance and repairs to the building and external areas

Lease length

Rent is usually paid quarterly in advance. However, you may be able to pay monthly. This can form part of negotiations with your landlord. If your business is new, you may want to consider a short lease of three years or less or ask for a break clause.

Service charges

Check how much these are and what services they cover, such as cleaning and heating. Establish what facilities you may be sharing with other tenants. Service charges are an additional cost to the rent and can be more expensive than if you organise them yourself. You have the right to challenge service charges. Find a code of good practice on service charges on the Royal Institution of Chartered Surveyors (RICS) website [opens in a new window].

You have the right to remain in occupation of the premises and renew the lease once it expires, unless you and your landlord have agreed otherwise. However, there are specific cases when the landlord can refuse to grant a renewal. Read our guide on renewing and ending your business lease.

Licensing

A licence could be of benefit to a small business looking for a short-term property solution, of up to one year. Licences generally offer more flexibility and can usually be terminated at short notice on both sides. However, you would not have an automatic right to renew a licence and it is always advisable to seek professional advice, eg from a chartered surveyor or solicitor.

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Practicalities of renting premises

Contracts can be complex, so consider professional help from a solicitor or chartered surveyor. While this can be expensive, mistakes can be much more costly to remedy.

You can find a surveyor in your area on the Royal Institution of Chartered Surveyors (RICS) website [opens in a new window], or find details of local solicitors on the Law Society website [opens in a new window].

Planning

Before renting a property, make sure you have planning permission to make any changes you need to the property. See the page in this guide on alterations to the property. You should also investigate whether the building has asbestos. Find out more about asbestos on the Health & Safety Executive website [opens in a new window].

Find out if there are any restrictions on delivery or loading times that may affect your business. There may be other restrictions or covenants in the lease or imposed by the local authority – for example, rubbish disposal, parking, noise, lighting, litter.

Land registration

All new leases – or existing leases which are assigned or sold on – with seven years or more left to run must be registered with the Land Registry. As part of the registration process, a scale plan of the premises with its exact location must be submitted, including the full address and postcode of the premises, a scale measurement bar, a scale location map and a north point. Find information on land registration requirements on the Land Registry website [opens in a new window].

Insurance

The lease will state whether you or the landlord need to arrange insurance for the premises. If the landlord arranges this, you will pay the premiums as part of the service charges. Therefore, you may need to take out additional insurance to cover risks, such as loss or damage to contents, which are not covered in the building policy. See our guide on how to insure your business and assets – general insurances.

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Financial considerations when renting premises

Your financial commitments when renting can include:

• a premium to purchase the lease
• rental costs
• service charges
• utility bills
• maintenance and repair bills
• a deposit – typically equivalent to three or six months’ rent
• stamp duty, which is payable on all commercial leases – Find out more on stamp duty land tax payable on leases from the GOV.uk website [opens in a new window]
• business rates – see our guide: business rates – an overview

Normally, the landlord will request references to confirm you are able to pay your rent and rates liability. You may find it advantageous to have a guarantor for your rent and other liabilities under the lease.

Energy Performance Certificates (EPCs)

All landlords of commercial buildings are now obliged to provide prospective tenants with an EPC. An EPC indicates how energy efficient a building and its services are and can act as a good indicator of likely energy costs. See our guide on Energy Performance Certificates – business properties.

In particular, air conditioning systems and boilers can have a significant effect on your overall energy bills. You can make considerable savings by keeping these well maintained and having them regularly inspected by a qualified engineer. See our guides on how to use air conditioning systems efficiently and use heating and hot water systems efficiently.

Business Improvement Districts 

Businesses in Business Improvement Districts can agree to pay an additional levy on their business rates to fund local improvements, which can increase ongoing costs. However, you will benefit from improvements to the local trading area.

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Alterations to the property

Planning permission is not always required if you wish to make alterations to the property – for example if you want to make changes to the inside of the building or minor alterations to the outside. Also, a specific application is not needed if you want to put up low walls or fences, although you should always check whether building regulations are required by contacting the building control section at your local authority.

However, planning permission is generally required if you want to extend, convert or change the external nature of the premises. It is always a good idea to check with your local planning authority whether the development will require planning permission at the proposal stage. The majority of significant building work also has to conform to building regulations. See our guides: an overview of the planning system and building regulations – an overview.

Before you start any alteration work, you should check the details of the lease. You may need to get permission from the landlord. Unless the lease expressly prohibits improvements, the landlord may not unreasonably withhold consent to tenants’ improvements. Also, you should clarify whether you will be required to reinstate the property to its original condition before the agreement expires.

If you change the number of units that the property is divided into (for example dividing one shop unit into two or merging two into one), which include fixed services for heating, hot water, air conditioning or mechanical ventilation, an Energy Performance Certificate will be required when the work is completed. It is the responsibility of the person carrying out the building work to provide the certificate.

See our guide on Energy Performance Certificates – business properties.

Before any alterations are made you should consider whether asbestos might be present. Read about managing asbestos on the Health & Safety Executive website [opens in a new window].

You should also check whether the works you are planning will alter your rateable value. The rateable value of business premises is based on their open market rental value. Changing your premises may affect this. See our guide on changing your premises and business rates.

You also need to be aware of liability for repairs. If you rent workspace in multi-occupancy premises, liability for external repairs and maintaining common areas is likely to fall with the landlord. Check the terms of the lease to find out who is responsible.

You should also check the rental agreement to see whether there is any repair work pending. You may decide to commission a survey and ensure that any such work is finished before the rental agreement is signed in order to avoid paying the bill.

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CASE STUDY

Here’s how we decided renting premises was best for our business

Stewart White started out window cleaning as a sole trader in June 2003. Now a partner in White’s Cleaning Services, a contract cleaning and car-valeting company, he says operating from rental premises has enabled him to adopt a flexible approach to business development and growth.

WHAT I DID

Opt for short-term leases

“When I started out I rented because I didn’t know how long the business was going to last. You never know what’s around the corner and with short-term leases if you incur problems financially you can get out. I’ve never signed a lease lasting more than 12 months.”

Move to more appropriate premises as the business developed

“My first place was a unit where cars could drive in for valeting. But I decided to sell the valeting side of the business because contract cleaning was where the money was. Also, the unit was away from the main road and I had to spend a lot on advertising.

“As the unit’s lease was on a monthly basis I just gave one month’s notice and I took a 12-month lease on a small office. The business then only needed somewhere to file work and receive phone calls. I stored equipment at the premises we cleaned.

“Then the opportunity came up to rent a car valeting centre. It was in a prominent position on the main road and a good way to get back into valeting so I took it up. Initially I kept the office premises as well, as I didn’t know how things would go, but nine months later I moved the office here to save on money and travelling. Although there was still time to run on its lease the landlord let us out.”

Benefit from maintenance and security built into contracts

“A new landlord took over our old office while we were there and the building was given a complete makeover. The outside was painted, the premises thoroughly cleaned, and a new alarm, front door and intercom fitted. It didn’t cost us anything.

“The place we’re in now has also recently had a full paint job on the outside and security cameras put up. Our rent hasn’t gone up because of this.”

WHAT I’D DO DIFFERENTLY

Negotiate better terms

“When I went for our first premises I paid the rent that was asked for. It was only when I talked to others on our industrial estate that I realised some were paying less. I was a bit naïve. I didn’t realise we could negotiate and maybe get the rent a bit cheaper. Now I always negotiate when I meet landlords – and I always manage to get them down.”

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