To buy or to Lease?

This may seem a very simple question but in many instances business owners should give greater consideration to it.

The simple approach to it is if I had the money I would buy the property. If I don’t have the money then I will have to rent it. However, arguably much more consideration should be given to whether or not a business owner should rent a business premises, given the legal obligation the follow from a Lease.

Before you enter into a long term full repairing and insuring Lease (FRI Lease) you must consider how much it will cost you over the term of the Lease both in terms of rent, but also in terms of repair, maintenance and insurance. With a short term letting agreement the main expense is the rent.

Assuming that the term of the Lease will be for more than five years you will need to consider whether or not you should be negotiating a break clause and whether or not you wish to acquire statutory rights to a renewal of the Lease. Also, the issue of whether or not Vat will be chargeable on the rent is something that should be considered for longer term Leases.

Another important consideration is who will be responsible for repairing the property. If it is that the Lease is for a term in excess of five years then the tenant will ordinarily be responsible. If the Lease is for less than five years then ordinarily the tenant will only be responsible for internal repairs. This is particularly relevant if the property being leased is an old building. There could be problems with the building that would not be immediately apparent which could involve significant costs.

Once it is that you have signed the FRI Lease then you, the Tenant, are responsible for the repairs. Also if it is a full FRI Lease then the Tenant will either be obliged to put in place buildings insurance or more likely required to pay the premium by the Landlord to his Insurance Company. Again the premium can vary wildly and will depend on whether or not there were previous claims and also on the nature of the business and the building. If it is that the Tenant is paying the insurance premium then it is essential that the Tenant, prior to entering into the Lease, is aware of the nature of the Policy and what the likely premium is going to be. In the normal course of a letting the Tenant would be responsible for putting in place a Policy of Insurance to cover against Public Liability, Employers Liability and the contents but they would not (excepting where there is a FRI Lease) have to pay the Buildings Insurance.

What is the impact of carrying out works to the property? Do I need the Landlords consent to it? If I am improving the building am I potentially creating a situation that the Landlord will seek a higher rent when the rent review comes up? These are all matters that should be given serious consideration.

If you decide to retire can you sell on your Leasehold interest to another party? This is something that will arise where it is that the Tenant has been in the property for a long period of time and had a business interest in it. In normal circumstances a Tenant can assign/sell their interest in the Lease to a third party but you need the Landlords consent. A normal FRI Lease provides that the Landlords consent cannot be withheld unreasonably. However, what reasonableness is depends on the circumstances of each case.

A couple of other matters that will arise in certain instances are Services Charges and Personal Guarantees. Whether or not there are service charges will depend on the nature of the property being rented and whether or not there are common areas and or a Management Company. You will need to know what the service charges are before you enter into the Lease.

If it is that you are taking the property in the name of a Company then the Landlord may require you to give a Personal Guarantee in respect of the Company’s liabilities under the FRI Lease. This will serve to remove the protection that you would ordinarily have if you operate your business through a Limited Liability Company. Essentially if the Company cannot pay what they owe the Landlord then the Landlord can pursue the individual guarantor for any loss incurred by a failure on the part of the Tenant Company to meet their obligations under the Lease.

It is important that you know and fully understand that the Landlord can pursue you if it is that you breach the terms of the Lease and hand back the property. You are liable for the rent for the entire term of the Lease and this could run to a significant sum of money.

All of the foregoing are reasons why you should carefully consider whether or not it is preferable to purchase a property instead of leasing one.