Business premises – lease, licence or buy?

business premisesWhich is more important for your business: security, stability or flexibility?

This is an important question to answer when a business is considering the commercial premises it needs for its operations and under what type of agreement.

Basically, there are three options and these are ownership, a lease or a licence and each has its advantages and disadvantages.

Buying a commercial property

Realistically, a business would need to have existed for some time and be reasonably confident of its future to consider owning its premises.

However, the building is a tangible asset and provided it is kept well-maintained and in an established business location it can be an insurance for the future. Owning business premises is a long-term option and for an owner-occupier it can be used as part of a pension scheme.

But, it also ties up business capital and it does mean that the owner is responsible for maintenance & repairs, for safe access, insurance and health & safety which need to be factored into any cost of ownership. As will the cost of selling or vacancy if the premises is no longer suitable for the business.

Generally ownership should be regarded as a form of investment by the owners of a business who value assets and security more than growth where they prefer to tie up capital rather than invest in growth.

Leasing commercial property

Formal leases are governed by the Landlord and Tenant Act 1954 although a lot of landlords provide lease agreements that require tenants to contract out of the Act in a way that benefits the landlord.

Leasing tends to provide for longer-term security of occupation although, according to some commercial letting agents, the average term of the lease has been reducing from approximately 25 years to between five and eight. Nevertheless, if a business needs the security of longer term occupation a lease is likely to be the best option where the lease term and its renewal can be covered in the lease agreement.

Under a leasing arrangement both landlord and tenant have legal obligations and these should be clearly outlined in the leasing agreement.

By law, tenants must take care of health and safety within the premises, including fire and electrical safety and gas safety if applicable.  The tenant is normally required to take care of internal maintenance and repairs and there is usually a clause in the lease about paying for repairs at the end of the lease such as returning the property to the state it was in when you first rented it.

While leases can be quite long, flexibility can also be included in the contract by having a break clause that gives the landlord and the tenant an option to give notice during the fixed term of tenancy.

Generally, a lease provides stability by giving the tenant a legal right of occupation and renewal at the end of the tenancy.

Licensing

For a start-up or a small business expecting to grow rapidly, it may not be possible to forecast sales and in particular staffing or premises capacity requirements. This is where flexibility becomes the primary consideration and licensed occupancy provides for the right to vacate with minimal notice.

In addition a lot of licensed premises include additional services such as power, servicing, web access, even access to copying and printing.

There are a large number of business hubs that supply communal support services which for start-ups and many SMEs may be the best option. Equally it may be that a business like an online retailer wants to trial a fixed site retail proposition by renting one as a pop-up shop for a short-term opportunity like Christmas or to test the market for its products or services.

The licence is the most flexible of the three options, but it gives no right of renewal at the end of the rental period and it tends to be more expensive.

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