When you set up a new business, one of your biggest overheads will be your premises and you should think carefully before entering into any potentially expensive and legally binding contracts.
Rent or Purchase?
As a new start up, you have no idea if your new venture is going to be a success. Whilst it makes more sense in the long term to purchase your premises, businesses generally start off by renting.
Renting requires far less up front capital than purchasing a property would. Additionally, any lender would likely want to see trading accounts before offering you a mortgage to purchase a property.
Lease or Licence?
If you have decided the rent your premises, you then have an option of how you will do that.
Leases are generally a more long term option which ties a tenant into a fixed rent, for a fixed period of time. Unless otherwise agreed, a lease is also within the Landlord and Tenant Act 1954 which offers you security of tenure once the lease expires.
A licence on the other hand is a more flexible option which can be terminated by either party often with just a few weeks notice. Licences are a popular option when taking space in a serviced office block as they allow the area you lease to be changed easily meaning that if your business expands, you could take more space in the same building.
Rent is usually paid quarterly but you can generally negotiate for this to be paid monthly or even weekly which can assist with cashflow.
Unless you are taking occupation of a whole premises you can expect to pay service charge. Service charge is paid for services provided by the landlord in respect of the upkeep of the building or the estate. This can include things like security, lighting communal areas and even landscaping.
It is wise to ask to see the previous 3 years service charge accounts so you can get an idea of what costs you are likely to incur. You should also check with the landlord if there are any planned works which would causes a significant increase in the service charge, for example painting the whole building.
Repair and Maintenance Commitments
A lease will have far more stringent obligations in respect of this than a licence will.
As a tenant you are responsible for the upkeep and maintenance of the whole of the premises that you lease. Therefore, if you rent a whole property and there is an issue with the roof, this is your responsibility to deal with. If you are only rent part of a building, the Landlord will likely maintain it but you will pay the cost of this by way of your service charge. It is very important to check your obligations in respect of this as it can get costly.
When returning a property you will have to do so in good repair and condition. It is therefore prudent to get a Schedule of Condition agreed with the Landlord. This would limit your obligations at the end of the term and you would only have to return the property in the same or better condition than evidenced in the Schedule.
If you take a lease or licence in your personal name then you are personally responsible for the rent, even if your business fails.
If you take a property in the name of a limited company, this does limit your exposure however any landlord, or lender if you are purchasing, will likely want further guarantees if the company does not have a proven trading history and satisfactory accounts.
A lender or landlord may require that you personally guarantee the lease or the mortgage. This means that if the company is unable to meet the obligations of the mortgage or the lease, you must do so instead.
Alternatively, a lender may request that their interest is also secured against any other property interest you may own (such as your residential home). If the company fails to make the mortgage payments, the bank could enforce their interests against both the company’s property and your own and repossess these.
Finally, a landlord may request that the company or indeed you, if you are taking the lease in your personal name, enters into a rent deposit. A rent deposit is a sum of money, usually 3 or 6 months rent, which the landlord holds for the length of the lease and is able to dip into if the lease commitments are not fulfilled.
For legal advice on buying your first commercial property or negotiating a commercial lease or license, speak to Farleys Commercial Property Solicitors 0845 287 0939 or email us. We have a team of experts who can advise you on all the legal aspects of your start up journey, from commercial contracts to employment law, so get in touch today.