Should I buy or lease a commercial property?

The decision to buy or lease your commercial property is a fundamental one. At the risk of sounding vague, there is no straight answer. We’ve outlined the cases for both buying and leasing below. See what fits your circumstances.

BUY

FREEDOM: It’s your building to amend, expand, to do with what you like – subject to planning permissions. You don’t need to get landlord’s permission for changes, saving you both time and hassle.

RELATIVELY FIXED EXPENSES: You will not be subject to upward rent reviews, though you will of course be at the mercy of mortgage interest rates. This also means you won’t need to devote time or energy to rent review negotiations (typically every five years), or indeed resort to arbitration should you fail to reach agreement.

NO DILAPIDATIONS: No need to argue dilapidation claims if you move on.

 

What are dilapidations?

Dilapidations are repairs you may be required to carry out by our landlord at the end of a lease to repair damage to the property or return it to its original state. When entering into a lease, make sure you are agreeable to the dilapidation terms set out before signing.

 

COSTS OF MOVING: If your business requires large plant or specialist technology, moving premises will be costly and not something you will want to do often. Buying premises, or at least taking a long lease, would be a better option.

GOODWILL: Buying premises allows you to avail of the goodwill generated by being at the same location for a period of time. This can be particularly important in retail where moving premises could lose you your customer base.

ASSET: If you own your property, it is an asset at the end of the day. Should your asset increase in value, this could be a useful path to extending credit or securing finance.

AVOID SPIRALLING RENTS: Another consideration is how rents are behaving. If they are spiralling and look like they will continue to do so, it may be best to protect yourself by purchasing your property in the belief that you will avail of capital appreciation over the long term.

LEASE

FLEXIBILITY: If you are starting a business, it’s hard to know for sure how your needs will change over time. If you see your business growing gradually, leasing, certainly on a short-term basis (for one or two years), might be a better option for you. If and when you need to upscale, you can move on easily without having to sell.

MOVE WITH THE TIMES: If the facilities provided by your building become obsolete, again, you can move on relatively easily to somewhere more appropriate.

BALANCE SHEET: Leasing does not just suit start-ups; many larger companies favour leasing because they prefer to have their capital employed in the business rather than in property. Having said that, there are times when the ROI on property outpaces business growth (such as The Celtic Tiger years here), but the challenge is recognising when is the right time to sell.

There are advantages to both approaches. In either case, there are certain costs you will have to bear, including:

INSURANCE: Either way you will still have to insure the building. You’ll also want your own public liability, employers’ liability and contents insurance.

RATES: As long as the building is in use, you will be liable for rates as an owner. If you’re a tenant, you’ll be paying all or some of the rates for the landlord.

MAINTENANCE AND REPAIR: As a tenant you may be responsible for all property upkeep or just internal repairs – check the lease for the specific terms.

SERVICE CHARGES: You may be liable for a service charge in respect of common areas.

STAMP DUTY: Stamp duty is payable on purchases (currently 2% on non-residential property) and leases (between 1% and 12% depending on the length of the lease).

I hope that has been helpful. We are always at the end of the phone if you are having this dilemma yourself. A good chartered surveyor– and particularly one who specialises in commercial property – will be able to offer sound advice based on intimate knowledge of a local area. Call us with any queries on selling or leasing commercial premises on 045 856604.