To rent or not to rent is key business question

NOW may be the best time to consider renting commercial property – but not before doing plenty of research and thinking.

The latest commercial property survey carried out by chartered surveyors organisation RICS for the second quarter of 2011 showed headline rents were expected to fall.

And landlords were offering great inducements to get tenants in occupation.

Renting commercial property, instead of buying it, offers more flexibility now than it has done for some time.

The government help organisation, Business Link says lease lengths are getting shorter, with the average now less than eight years.

Leases typically have agreements of between three and 25 years, offering flexibility or long-term stability, and can be negotiated with the landlord before signing on the dotted line.

Licences of up to one year can also offer more flexibility and can be terminated at short notice – but they aren’t automatically renewable.

So leases and licences tie up less capital than buying outright, which means more cash can be invested in the business. They can also give flexibility.

Although rents may rise periodically, say every three or five years, they mean businesses are not exposed to interest rate rises that are expected to happen over the next few years.

But there are still considerable financial commitments when renting. These can include rental costs, service charges, utility bills, maintenance and repair, a deposit – typically equivalent to three or six months’ rent – stamp duty, which is payable on all commercial leases, and business rates.

Normally, the landlord will request references to confirm a prospective tenant is able to pay rent and rates. It could be advantageous to have a guarantor for rent and other liabilities.

Contracts to sort everything out can be incredibly complex, involving all kinds of responsibilities of a tenant, including possibly repairs and maintenance and service charges.

Invariably it means that tenants should consider engaging professional help from a solicitor or chartered surveyor. Mistakes can be costly to remedy.

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.

Tenants have the right to remain in occupation of the premises and renew the lease once it expires, unless the tenant and landlord have agreed otherwise. However, there are specific cases when the landlord can refuse to grant a renewal.

Finding appropriate premises in the first place could be a time consuming challenge. The pages of Business Monthly, the council and trade associations can be useful places to start.

Business Link also says appointing a commercial agent or surveyor is a way of keeping up to date with any new developments in the market. They will also send detailed specifications of suitable premises.

But commissions are payable to commercial agents for acting as intermediaries between landlord, seller and potential tenants.

Agents will need to be fully briefed and managed, with regular contact, to find the most suitable premises.

A contract should be drawn up even if the relationship is informal, is the advice from Business Link. This will help set out expectations and clarify legal obligations.

Other issues to consider outside any legal or financial considerations with the landlord include planning. If alterations are needed, consent may have to be given by the local council.

This may also include finding out if there are any restrictions on delivery or loading times. There may be other restrictions or covenants in the lease or imposed by the local authority, for example on rubbish disposal, parking, noise, lighting and litter.

Planning permission is not always required if you wish to make alterations to the property – for example, changes to the inside of the building or minor alterations to the outside.

Also, a specific application is not needed if tenants want to put up low walls or fences, although its advisable to check whether building regulations are required by contacting the building control section at the relevant local authority.

Permission is generally required if tenants want to extend, convert or change the external nature of the premises.

Then there is 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.

Over and above this, there is the dreaded health and safety law to comply with, even if people work on their own,

This includes maintaining a suitable temperature, keeping the property clean and free of waste and providing sanitation and washing facilities.

Tenants must also carry out an assessment of risks in the workplace.

Landlords and managing agents may share these responsibilities if they have any control over the workplace.

It’s important to check the lease but Business Link says often the responsibility will lie with the tenant.

Occupiers of workplaces are responsible for gas safety and must ensure gas appliances are maintained according to the manufacturer’s instructions.

Tenants also have responsibilities for fire safety including measures to prevent fires and training staff in fire safety.

Responsibility for electrical safety is likely to be decided by the type of agreement. Tenants will have to carry out a risk assessment of use of electricity at work and ensure safety is. However, tenants are unlikely to have to take care of wiring systems and electrical equipment, which will be the responsibility of the landlord.

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