If you’re thinking about acquiring commercial property, you’re probably weighing up between buying or leasing your premises. Depending on your specific circumstances, you may be leaning towards one over the other. But before you finalise anything, it’s advisable to consider a few factors. In this blog, we explore the relative benefits and drawbacks of leasing versus buying commercial property.
Leasing Commercial Property
Leasing a commercial property means your business, the ‘tenant’, rents your premises from a landlord. The lease will give your business the legal right to use the property in question for the set contract period. It will also outline the agreed rent and the responsibilities of each party.
Pros of Leasing Commercial Property
- Opting for a fixed rental rate increases certainty over general cash flow.
- Greater availability of funds for business start-ups is possible due to reduced initial costs.
- Property maintenance and repair costs can be minimised if the landlord is responsible for specific property aspects, particularly if leasing only a portion of a building.
- The potential for negotiating rental terms allows opportunities such as a rent-free period.
- Flexibility is provided by a short-term lease (or a longer lease with a break clause) in case of the need to relocate or downsize/upsize the space.
- Finding a commercial property to lease is easier since commercial properties are typically leased rather than sold.
Cons of Leasing Commercial Property
- Heads of Terms are often overtly “landlord friendly”, which is why you should always seek legal advice before agreeing on terms
- Restrictions on alterations and other changes may be more stringent.
- If market value increases, a rent review may make leasing more expensive (rent reviews tend to be “upward only”).
- A service charge will be expected dealing with such things as internal maintenance and common areas. Agreeing on a service charge cap is always advisable.
- Since the property is not owned, there’s a lack of long-term stability. The landlord may refuse to renew the lease, requiring relocation.
- Returning the property to its original state upon leaving can be an expensive process (the dreaded “dilapidations claim”). The importance of a schedule of conditions cannot be over-emphasised.
Buying Commercial Property
Buying commercial property means your business becomes the legal owner of a premises. This means you’re not answering to a landlord or paying someone else for the right to use their property. This does, however, usually come with a higher up-front cost.
Pros of Buying Commercial Property
- Ownership provides long-term stability.
- The owner has complete control over the property.
- The property may appreciate in value, providing a potential return on investment.
- Rental income can be generated by leasing unused space or leasing the premises as a whole if the space is no longer required.
- Property-related expenses may be tax-deductible.
Cons of Buying Commercial Property
- Upfront costs can be significant, including down payments, closing costs, and necessary renovations.
- Property values can fluctuate, leading to potential financial loss.
- The owner is responsible for repairs and maintenance, which can be expensive.
- Selling the property can be challenging if market conditions are unfavorable.
- There’s less flexibility if relocation or downsizing is necessary.
Commercial Property Lawyer
Understanding how commercial property tenancy and ownership works can be complicated. Without expert guidance, it can be tough to know the best way to go. As we’ve seen, both leasing and buying commercial property have benefits and drawbacks. Before making a decision, consult with one of our expert lawyers to better understand the pros and cons and how they relate to your specific business needs.
And if you want to learn more about commercial leases, check out Darren Firth’s article explaining Heads of Terms (HOTs).