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To lease or to buy

One of the biggest overheads facing many businesses is the cost of their premises.  Business owners whose lease is about to expire should take stock and consider their options.

The value of commercial property has taken a big hit in recent months, with some valuers quoting a 20 to 30% drop in some areas!  The market is awash with empty property available for letting and/or purchase.

One of the first questions to ask is instead of renting again should I look to purchase?  If a suitable property is available and you have the resources or the ability to borrow to finance the purchase then now may be the appropriate time to buy.

However, the minimum lending ratio appears to be currently 60% funding to 40% equity which means that only those with cash in the bank are able to borrow.  There is also the danger that the market may well soften further, making the price you negotiate today look expensive compared with a few months time.  However, in the long run a purchase should, assuming there is a confident market in the future, always be a good investment.

For most businesses purchase is not a realistic option and they will continue to lease premises.

If you are occupying under a lease which is coming to an end shortly or may have already expired, the chances are the landlord will be perfectly happy for you to continue in occupation holding over under a business protected tenancy and paying the current rent.  This is because the market rent is likely to be lower at the moment than that which you are paying and so it is not in the landlord’s interest to bring the tenancy to an end.

If your tenancy is not protected by the provisions of the Landlord & Tenant Act 1954 then you will not have the right to hold over after the expiry of the contractual term and so you will be obliged to negotiate with your landlord terms for a new tenancy.  If that is not possible or only possible on terms which are not attractive you will have no alternative but to look elsewhere and make arrangements to vacate on or before the contractual termination date of your tenancy.

If you are holding under or holding over under a protected tenancy or shortly will be, the first step is to commission a qualified surveyor experienced in the type of property that you occupy to prepare a report dealing with:

  • The current market rent for your premises;
  • The current market rent for adjoining or nearby premises, and
  • What other premises in the area might be available that might equally suit your business.

Once you have such a report available you can then decide to:

  • Serve a Section 26 Notice on the landlord to terminate the business tenancy giving not less than six nor more than twelve months notice so to do; and
  • Invite your surveyor to open negotiations with your landlord for the grant of a new tenancy at the current market rent.

The surveyor will have a shopping list of requirements that typically will include:

  • Each party to pay its own costs;
  • A rent free period of, for example, six or more months to reflect the condition of the premises or market conditions;
  • A tenant only break at three and six years
  • The tenancy to be at the current market rent; and
  • Schedule of condition to limit repairing obligation.

If you decide it is in your best interest to move then please do not overlook the fact that the landlord will have the right to call upon you to put the premises back into their proper state and condition under the terms of the tenancy and this could mean a hefty dilapidations bill!

Dilapidations are a complex issue and my advice would always be to seek the advice of an expert in this field as it may not always be the best policy to incur the cost of the repairs.  Sometimes a cash settlement is perfectly achievable with the landlord at a great deal less than the repairs cost!

Paul Burbidge is a Partner in the Commercial department at Gullands Solicitors. He can be reached by email: