What Costs are Involved in Renting Commercial Property?

Have you found the perfect shop or office for your business? Renting Commercial Property is exciting but involves a sequential process and hidden costs. It requires more consideration than just choosing the right property. Estate Agents Ilford will guide you through the process and options for renting a business property that suits your long-term business goals.

What is the Process of Renting Commercial Property in the UK

Renting commercial property is not a simple procedure. Minor details can affect the growth and success of your business. The process requires careful planning and consideration before expanding your business.

Step 1: Find the Right Property

Just like residential properties, you need to view and visit the commercial properties before renting. Local estate agents provide premier commercial property services and evaluate the type of properties available.

You can also find suitable properties near your competitors for better client hunting, good transport, and connections for comparing rent prices. A few things must be considered when finding properties for your business:

1. Your Space Requirements: The space you need can be determined by keeping in mind the number of workers and desks. The amount of space depends on the type of business, equipment, and stock size, and plans to hire more staff.
2. Deciding on Your Business Location: The location of your business can be affected by many factors, for example, proximity to competitors, Wifi,  shops, restaurants, and public transportation. Easy-to-travel properties are ideal for commercial renting. 
3. You must consider research incentives to improve the local area for your businesses, like Business Improvement Districts (BIDs), Enterprise Zones, and Local Enterprise Partnerships (LEPs).

Step 2: Negotiate an Agreement

After you have selected the perfect property for your business, it is time to go for paperwork. It is advised to hire an expert commercial property solicitor to smoothly process the negotiation of the lease agreement. The terms of agreement you need to negotiate include:

1. Lease Term: It is the length of time you agree to rent the commercial property. The length of the lease depends on the business plans, and a short-term lease provides flexibility. However, committing long term lease is risky if the business needs any change or Corporate relocation. 
2. The Break Clause: A break clause tenancy agreement allows the end of the lease before the termination date. It depends on the market, type, and location of the property.  If your lease does include a break clause, you need to follow the tenancy rules carefully. Non-compliance to give proper notice or keep up with rent and maintenance can result in termination of the lease.
3. The Rent: The rent price is determined by comparing the rent with similar properties. The amount of rent can be negotiated based on the ongoing market rent rate. 
4. Repairs: Before signing the lease, ensure that repairs or maintenance are included in the commercial property. The better option is to perform a building survey to identify the problems. The landlord may fix them before you shift or may offer a rent incentive in return for repairs as a part of the agreement. 
5.  Alterations or renovations: It is a better option to mention in the agreement to confirm the alterations and their type in the property. If your business requires regular alterations, then you should decide in writing for changes in the agreement without the landlord’s permission. If you don’t decide for alteration in the agreement, the consent from the landlords includes professional costs each time. 

Step 3: Complete the Agreement

Once both parties are satisfied with the proposed agreement and property, the agreement is signed, and the relevant costs are paid. It is important to make sure to understand the terms of the agreement. Before finalising, you can ask questions about things like:

1. How much rent is paid? And decide how it is paid, like from Cash, cheque, PayPal, or BACS.
2. How and when will rent be reviewed? What costs and repairs am I responsible for?
3. Is there a break clause added in the agreement?
4. Are there any service charges, insurance, maintenance charges, or total costs, and whose responsibility is it? 
5. Will the lease not include the Landlord and Tenant Act 1954?
6. Do I need to pay a deposit? And how much is it?
7. How will the deposit get refunded at the end of the lease term?
8. Can the premises of the property be subleased?
9. Any third party or bank guaranteed, required or not?
10. Any repair, decorations or alterations limitation or obligations.
11. The lease should also mention in writing how the commercial property will be handed back to the owner.

Consider Building Security and Energy Standards

Security of the property is an inevitable part of renting commercial property. It is beneficial to check the standard of security cameras, alarms, and CCTV systems. Moreover, if the premises have security staff, it will affect your cost collectively. Also, clarify who is responsible for maintaining the security measures. 

Energy use is another important consideration because commercial properties consume a lot of energy. Before renting commercial property, landlords are obligated to provide an Energy Performance Certificate (EPC).  The criteria requies minimun EPC rating of E according to Minimum Energy Efficiency Standards (MEES). From 2028, the minimum rating required for commercial will be set to C, which will be hit B by 2030.  

Cost Involved in Renting Commercial Property

Renting commercial properties involves a list of hidden costs. It is advisable to consider your budget while renting commercial property. 

1. Professional Fees are the first cost you face when looking for commercial property on rent. The solicitor ensures the terms and conditions of the lease agreement, which are suitable for you. It also incurs the extra costs of estate surveyors for viewing and visiting the desirable property. It can save money for the future because property agents will know what rents are being demanded in a similar market. 
2. VAT: Most commercial real estate is advertised without VAT. But some landlords choose an “option to tax,” which means tax will be added on top of the rent.  If the VAT applies, the cost will be higher than the rent. If the business is VAT registered, it can claim back  VAT from HMRC.  
3. Rent Payments: Rent payment is only a part of renting commercial property. Other costs, such as utility bills and maintenance costs, are not included. You need to check with the landlord before signing the contract to see what additional costs you are liable to pay. 
4. Rent Deposits: Security deposits are paid additionally to the rent. The deposit amounts are set by the landlord according to the lease length, and they may be used to cover any missed rent payments. 
5. Utilities: Businesses are responsible for paying utilities in addition to the rent, which are calculated on usage. 
6. Decorations and Repairs: Rental agreements state the responsibilities of tenants and landlords separately. This includes repairs to the property, ongoing maintenance, and decorating the space. It is advisable, before moving in create a photographic schedule of the condition of the property.  
7. Business rates or taxes:  They are taxes on non-residential properties. The business rates are calculated based on Valuation Office Agency rates and reviewed every 5 years. 
8. Service Charges: These include management, maintenance, and repairs of the rented commercial property. A good option is to ask the landlord about the last three years of the service charges and the current year’s budget. This helps you understand that costs are manageable and valid.
9. Building Insurance premium is paid by the tenant and obtained usually by landlords. Tenants also need to obtain contents insurance to protect their belongings. 
10. SDLT (Stamp Duty Land Tax) has to be paid by the tenants, and you must consider it as part of your budget. 

Renewal Rights of Commercial Property Lease

After the completion of the commercial lease, tenants have the right to renew their business lease. There are certain exclusions to this right, which include:

• Farm tenant.
• Mining tenancy.
• Service tenants of landlords
• Fixed-term leases for 6 months or less
• Waiving renewal rights at the start of the lease.

How Rent is Paid for Commercial Properties?

Rent for commercial properties is usually paid in advance on the quarter days. These are 25 March, 24 June, 29 September and 25 December. However, some landlords can adjust monthly payments and are permitted to do so in the lease. 

In long-term leases, the rent is reviewed every 3 to 5 years. This revision may increase or decrease the rent depending on the market conditions at the time. The leases are permitted only for upward review, as specified in the agreement. Choosing an up-and-coming area will increase your rent dramatically. 

Renting Commercial Property on Business Rates

All commercial properties in England and Wales must pay business rates in addition to the property rent. All the non-residential tenants include shops, offices, pubs, factories, and warehouses, pay the business rate. It costs around 40% of the cost of renting a shop or office. 

Business rate = The rateable value of the commercial property + the level of uniform business rate (UBR).

There are additional costs for businesses with a high rateable value. In 2010, for properties with a rateable value in excess of £55,000, a 2p levy was introduced on non-domestic properties in London. 

What Happens If You Can’t Pay the Rent?

Not paying rent for commercial properties may result in serious consequences. The landlords can take legal actions against tenants and personal guarantors. Legal advice is available to determine the rights of tenants in commercial properties. 

• The landlord will notify the tenants about the missed rent payment or breach of contract. 
• An opportunity will be provided to tenants to answer the notification before the legal action is taken.
• It is a good practice to inform your landlord about the ongoing potential issues to minimise disruption to your business and the end of the lease.

Common Commercial Lease Types

The types of commercial leases are classified on the basis of how operating costs and financial responsibilities are divided between landlords and tenants.

Tenant Responsibilities While Renting Commercial Property

When renting commercial property, the tenants are legally responsible for some actions depending on what is mentioned in the agreement. 

Health and Safety

They must carry out a health and safety risk assessment while renting commercial property and take action. As a tenant, you will be responsible for:

1. Fire and electrical safety
2. Gas safety (annual safety checks by a registered gas safety engineer).
3. Asbestos management
4. Reasonable temperature, space ventilation, and lighting.
5. Washing and toilet facilities.
6. Drinking water and safety equipment.

Landlords are responsible for the aspects mentioned in the lease agreement. If you don’t follow the safety rules on the premises, you can be prosecuted.  

Repairs and Maintenance

It is mentioned in the agreement that you’re responsible for the maintenance and repair of the commercial premises. When moving out, you have to pay for certain repairs. In simple terms, you are required to return the property in the same condition as when you first rented it.

Conclusion

Renting commercial property in the UK is a crucial part of your business development. It requires careful planning and negotiation. The location of the property, lease rights and legal responsibilities should be clearly understood. The hidden costs, such as VAT, business rates, service charges, insurance, and repair obligations, can impact the budget. A well-structured lease agreement and a clear understanding of costs and legal rights will provide you with stability and flexibility in business.

Frequently Asked Questions