1. Setfords Legal GuidesFor businessesTop tips for buying business premisesT: 0845 450 6135info@setfords.co.uk

2. Setfords Legal GuidesTop tips for buying business premisesMany businesses will consider the requirement to operate from or own commercial premises and often this will forma key part of the business plan. The decision of whether to lease or buy commercial property will usually depend onthe financial viability of the business but there are also a number of other factors associated with buying or leasingcommercial premises which should be considered.Advantages of buying commercial propertyFlexibilityInvestment and TaxOwning the premises from which you operate has the All businesses will need to consider the way in whichadvantage of being able to use and manage it without the premises are held and the impact on their balancehaving to obtain the consent of the landlord. This would sheet. Specifically, you must consider the implicationsinclude not requiring consent to change how you useof profiting from any increase in value of the premises.your premises or if you wanted to make any changes Capital Gains Tax is chargeable on gains made by UKor alterations to the premises either internally or even resident individuals whereas companies pay Corporationexternally. The flexibility to make these changes may be Tax on any chargeable gains. This potential liability for Taxan important factor in your business plan and may also should be carefully considered and advice taken from aninclude allowing you to sell and move when you wishaccountant before deciding on the best mechanism toor even lease the whole or part premises to anothertake commercial premises.company in the future. Many individuals use the opportunity of acquiringHowever, you must be aware that even without havingcommercial premises to start or increase their Self Investedto obtain the landlords consent you must still ensure Personal Pension (SIPP). This is a tax efficient mechanismthat you have the prior consent of the local authority toby which an individual and not a pension plan provideruse the premises as you wish to, including any changes or trustee, determines the investment strategy. Oftenof use. In addition, you must take advice from a surveyorindividuals will buy the premises and then grant a leaseor architect as to any alterations to the premises and of the whole of the premises to their own company (i.e. athe requirement to first obtain the consent of the local company in which they own shares and/or are a director)authoritys planning and building regulation department. or another company and benefit rental income as part of their individual pension scheme. It is very important thatAnother point which must be considered before buying professional advice is taken on whether such a SIPP is aor carrying out any changes either physically or change or suitable investment vehicle for an individual and also theuse to the premises is whether there are any restrictive implications on the tenant company.covenants affecting the title which could prevent theoperation of your business or make a future sale of thepremises difficult and therefore reduce the flexibility.In some circumstances there are ways to overcomerestrictive covenants which include investigating theperson or company with the benefit of the covenant ortaking out a restrictive covenant title insurance policy. T: 0845 450 6135info@setfords.co.uk 3. Setfords Legal GuidesDisadvantages of buying commercial propertyRiskAs with most investments you must also consider the risks associated with ownership which include the potentialexposure to a downturn in the property market and therefore a decrease in the value of the premises. Many companiesand individuals in recent times have found that the value of their commercial premises has decreased from the originalacquisition value and consequently they are in negative equity. This potential risk should be considered, particularlywhere a commercial mortgage is in place which exposes the potential for a forced sale or repossession if payments arenot maintained.Maintenance and liabilityIt is the responsibility of the owner of the commercial premises to manage the ongoing repairs and maintenance ofthe premises as well as pay for them. The reality of property ownership can be that organising a continued programof decoration and repair to both the exterior and interior of the premises is time consuming and often costly. As wellplanning for maintenance works there are often the unpredictable repairs which are simply a consequence of propertyownership and may or may not be covered by your buildings insurance policy. Associated with the costs of such worksmay be the cost of professional advisors such as surveyors and even scaffolding. It is as a consequence of the timeinvolved in managing a property that many commercial property owners will employ the services of managing agents,although you must be aware that as with any professional service they will charge for their time in carrying out themanagement.Associated with the ongoing maintenance is the requirement of a commercial property owner to comply with currentregulations. Although in some cases not unique to the ownership of premises, these include the responsibility tocomply with the duties imposed under the current Management of Health and Safety at Work and Fire Regulations andthe duties imposed under the current Asbestos Regulations which must be adhered to.T: 0845 450 6135 info@setfords.co.uk 4. Setfords Legal GuidesCost of BuyingIn considering the benefit of buying premises as opposed to leasing,you must consider the up front costs as well as the ongoing implicationsof the finance arrangement. You must take professional advice on thispoint as part of your early consideration in the process.If you are entirely self financing the purchase then you must be preparedto accept cash flow consequences of having that money invested in thepremises. We have already highlighted the potential for a fall in thevalue in the premises.If you are financing the purchase through a commercial loan then it isarguably even more important to consider the issue of cash flow for anysum that may be required as a contribution from you in addition to theloan and equally the issue of a down fall in the market value remainslive.In the majority of cases it will be a requirement of any commercial lenderto undertake a minimum of a valuation survey so that the lender can beassured that the loan to equity ratio is at a satisfactory level. However,we always advise that any prospective buyer of commercial premisescommissions a full structural survey prior to exchange of contracts.A survey will be able to identify any potential defects in the building orproblems which could be costly to repair in the future and otherwiseyou would buy the premises in its actual state and condition. A surveyormay not be the only professional advisor that you employ and you willcertainly need to take account of the legal fees from your solicitor anddisbursements such as searches or enquiries of the local authority.You will need to consider the liability to pay Stamp Duty Land Tax whicharises on the acquisition of a chargeable interest and this is calculatedby reference to a percentage of the purchase price which could be upto 4% for commercial premises over 500,000.00. The SDLT is usuallypayable on completion or substantial performance of the contract.Following completion of the purchase your interest as proprietor mustbe registered at the Land Registry for which a fee is payable and onceagain this fee is calculated by reference to the price paid for the propertyand could be up to 920.00.Finally, on completion it may be that works need to be carried out tothe premises by way of fit out or alterations to the premises generallyin order to make it suitable to occupation by your business. Suchworks can be costly and advice should be taken from the outset as tothe proposed works and this must include compliance with any localauthority requirements such as planning or building regulations.Ongoing costsYou will also need to consider not only the initial costs of buying thepremises but also the ongoing costs of owning the premises. Thesecosts include not only the every day running costs but also the liabilityto pay Business Rates which are based on what the property would rentfor at a given date.The premises must be insured under a sufficient Building InsurancePolicy to cover any potential risks associated with the premises as awhole. The requirement for a Buildings Insurance Policy will also bestated as a term of a commercial loan. T: 0845 450 6135info@setfords.co.uk 5. Setfords Legal GuidesConclusion Purchasing a commercial property will be an important decision for any business no matter how big or small the company is. It is a long- term commitment which can lead to positive or negative impacts on the company as a whole. If you are thinking of purchasing a commercial property, the main factors to consider are: Costs of buying and running the premises: including the initial costsassociated with the acquisition and also the future running andmaintenance costs. Use and alterations of the property: it is necessary to check whetherthere are any restrictions on this by way of restrictive covenants,you will also need to check whether you need consent from theLocal Authority regarding any changes in use of the building andalso for internal or external alterations. Restrictive covenants: if there are any to overcome, is it possible toinvestigate the person or company with the benefit of the covenantor would it be best to take out a restrictive covenant title insurancepolicy? Survey: ensure that a full survey is completed so you understandthe state of the property. The future maintenance and repairs ofthe building will be your responsibility. Regulations: have you complied with the relevant commercialproperty owner regulations for your business? Future of the property: taking into account the sale price andthe current market give thought into whether the property willbe a good investment in terms of future value. It is also worthresearching the potential rental income that the property couldgenerate for either part or the whole of the premises in case thebusiness chooses to go down this route in the future to generateincome from the premises. Tax: what affect will the purchase of the property have on thecorporation tax liability? Also will a SIPP be a suitable investmentvehicle. T: 0845 450 6135info@setfords.co.uk 6. Contact UsFor more information on buying and selling commercial property please contact: David Rogers T: 01483 408 780 E: drogers@setfords.co.ukSetfords Solicitors is a full servicenational law firm providing first classlegal services to both businesses andindividuals through a network ofexperienced lawyers.Our services for businesses coverall aspect of business law, fromcommercial property, generalcorporate/commercial, litigation,employment, IP, corporate finance,funds and equity funds. Services for businesses Purchase or sale of business Partnership Agreements Debt Recovery T & C of trading Security DocumentationCommercial ContractsExit Strategy Data Protection Distribution Agreements Franchise AgreementsE-CommerceIP Protection Corporate Finance Commercial Property Dilapidation costsRent Reviews Employee Issues Employee Handbook Health & Safety Credit Risk & Control Business Structure &Partner/Director/Share- Purchase or sale of Joint Venture Agreements Constitutionholder Disputes assets or sharesThis content of this guide is for information purposes only and does not constitute legal advice. For detailed legal advice please contact us and wewill be happy to assist. No liability can be accepted in relation to any reliance on the content of this guide. Copyright in this publication belongs toSetfords Solicitors. Extracts may not be copied without our express permission. Setfords Solicitors is a trading name of Meaby and Co Solicitors LLP.Our registered number is OC322672. Our registered office address is 2 Camberwell Church St Camberwell Green London SE5 8QY. We are regulatedby the Solicitors Regulation Authority SRA number 447880T: 0845 450 6135 info@setfords.co.uk