Commercial Property for Rent: The Ultimate Guide
Whether you’re looking for your first business premises or planning on expanding your existing operations, there are several factors to consider when searching for the ideal commercial property for rent. It can be beneficial to have a commercial property rental expert on your side before agreeing to a commercial lease agreement. In this article, we’re going to explain how commercial real estate works, and what you should be on the lookout for to ensure a relevant match for your business.
What do I need to know about renting commercial property?
Finding the right commercial property for rent can take patience and due diligence. While there may be many commercial properties to lease in your area, you will need to consider the following before agreeing to a lease:
Commercial property leases explained: budgeting for commercial property rental
Before finalising a commercial property rental, you’ll need to ensure that your business can sustain the cost of the associated fees. The overall cost of commercial property for rent in the UK typically encompasses the following:
1) Deposit
Commercial property rental deposits work in much the same way domestic ones do, except you will be expected to lay down anywhere between three to six months’ rent in advance. Commercial deposits are usually high to ensure the landlord is financially secure in the event of anything happening to your business during the terms of the lease.
2) Rental costs
The cost of commercial property for rent is agreed upon between a landlord and tenant by negotiation. Some commercial landlords will charge per square foot, whereas others will charge a flat rent for the use of a building typically based on rents charged for similar buildings. Rents may be linked dot annual inflation and/or have renew review interval s set out in the lease for increases in line with market rents for that type and location of property. Commercial property rents are usually paid each quarter under typical lease terms but may be payable monthly by negotiation.
3) Service charges
Commercial tenants sometimes pay a service charge on top of the rent. Service charges often (but not always) cover the maintenance, repair and general upkeep of things such as communal lighting, safety compliance, insurance and salaries of maintenance/groundskeeping staff. Before agreeing to rent a property, you should consult the contract to find out what your service charges entail. This may be particularly helpful in order to check that the buildings insurance that may be included in the service charge covers your proposed use of the building. If it doesn’t you may have to arrange and pay for this yourself.
4) Utilities
Utilities will come under the monthly operating expenses of your business. If you operate a business that requires high energy usage, you might need to work independently with a specialist utility provider to get a sustainable power load at an affordable rate. Commercial property for rent that already has the necessary power connection required is typically more attractive to those in industries like manufacturing and fabrication. It may be worth speaking to a commercial estate agent such as Fisher Wrathall Commercial if you have specific utility requirements.
5) Business rates
Business rates are payable by tenants who rent non-domestic properties over a certain value. In the UK, the average business rate in a commercial property for rent is around 50% of the annual rental costs for the property. However, it is worth noting that during the pandemic, the government introduced a business rates relief of 50% on any eligible retail, leisure and hospitality premises. This means businesses like shops, music venues, restaurants, pubs, gyms, spas and hotels are eligible for business rates relief until April 2023.
To help smaller businesses the Government brought out Small Business Rates relief – you should check to see if your premises qualify in which case you could be reduced business rates or no business rates at all.
5) Stamp duty
Some commercial landlords take a hands-on approach to covering taxes, which is reflected in the amount you can expect to pay in rent and service fees. Others leave the tenant to pay for any associated stamp duty taxes.
Understanding the rental market for your area
Rental costs can vary from postcode to postcode, and even from street to street. Incentives can sometimes be provided for tenants on a lease by way of reduced rent, especially if they need to invest in improving the condition of the property before they can start trading.
Some tenants might have a three-year or five-year rent review clause, so it is important to be clear on what the rent could be increased to following a rent review. This will help your business assess future affordability. Annual RPI uplifts in rent can also build up rental liability and they need to be evaluated.
Proposed use of a property
The lease will set out what restrictions there are on the use of the premises. You may wish to consider how your business may evolve and try to make sure the use restrictions won’t hinder this evolution.
Use is also governed by planning, so you’ll need to make sure that your proposed use has planning consent. This is even more relevant if you are changing the use from the existing/previous use category.
What should commercial landlords do?
Commercial landlords have a responsibility to ensure any fixtures and fittings they own are safely installed and maintained. Commercial landlords are not responsible for the safety and maintenance of any fixtures and fittings installed by the tenant, and the responsibilities of both the tenant and the landlord should be clearly stated within the commercial property rental laws in the lease.
What do commercial landlords have to provide?
There are certain legal responsibilities that all commercial landlords must abide by. In most cases, the tenant has a greater level of responsibility when it comes to health and safety – but this all depends upon what is written in the lease agreement. Under the Health and Safety at Work etc. Act (1974), it is the responsibility of the tenant to comply with Fire Safety Regulations and to ensure the workplace has the following:
- Toilets/washing facilities
- Drinking water
- Adequate space, lighting and ventilation
- Safe equipment
- Reasonable temperature
Landlords must provide adequate health and safety provisions to communal areas, which will be detailed in the lease of any commercial property for rent.
What is a premium when renting a commercial property?
When renting a commercial property, a premium is a sum paid to the landlord upon the granting of a lease. Premiums are normally met with rent payable unless the lease is determined to be less than full market rent. A premium will usually take the form of a cash payment, however, it can be formed on a “money’s worth” basis. For example, a tenant might agree to undertake remedial work on the building on behalf of the landlord, and for the benefit of the landlord.
Do you have to use a solicitor for a commercial lease?
The use of a solicitor is not a legal requirement when entering a lease for a commercial property for rent. Some tenants prefer to use the services of a solicitor for peace of mind, while others are happy to negotiate the contract themselves.
Whether you choose to use a solicitor for a commercial lease will often depend on how straightforward the lease is, whether it is cost-effective to do so and whether your time could be better spent on the day-to-day running of your business.
Can a commercial landlord put rent up?
Many commercial leases will specify that rent is adjustable “upwards only”. This means that your rent can stay its current level or increase during each rent review. With an “upwards only” clause in a lease, your rent will remain static instead of decreasing, even if market prices are falling.
What should I be asking when finding a property to lease commercially?
When seeking out a suitable commercial property for rent, you should be prepared to ask the following questions:
How long is the lease?
This may seem like a basic question, but it is nonetheless important. Typical commercial leases can last for anywhere between 3-10 years, with breakout clauses at certain points during the lease. Be certain to pin down precisely when the lease is due to begin and end so that you don’t end up paying for a lease while you’re not actively using the property.
How much is the rent, and is this figure likely to change in the future?
Be certain to get clear and concise answers on the nature of the rent. Is it a fixed amount during the course of the tenancy? Is it liable to change? Will the landlord charge VAT? Are there annual reviews in place, or can the rent change for other reasons?
It is crucial to get answers to these questions because rent is the least inflexible of the overheads faced by any business. This means you need to be prepared for any changes well in advance.
Is there a rent inflation linked clause in the lease?
Landlords may wish to protect against the rising costs associated with inflation by including an inflation linked rent clause within the lease. With such a clause, commercial landlords can increase rates in line with the Consumer Price Index or Retail Price index. As a tenant, such clauses are often negotiable – but only if you’re aware they exist and they are usually compound rent increases.
Who is responsible for insurance and maintenance?
If you’re in a commercial property with other tenants, often the Landlord will pay for the buildings insurance and recharge you a proportion. However you might find that the general insurance the landlord provides will not cover the specific needs of your business. To gain a clear understanding of what’s covered, it can be helpful to get a copy of the landlord’s insurance in writing, along with a list of any items, fixtures and fittings the landlord is responsible for maintaining.
Am I permitted to make any modifications to the building?
While some properties aren’t subject to modification clauses, others – such as listed buildings – may require permission. There are lots of reasons why businesses might want to modify buildings – to install shop frontage to increase brand awareness, as one example – but you should discuss this with your landlord first to avoid breaching any local planning laws or clauses within the lease. You may also be required to reinstate the property when you vacate.
Can I legally use the property for my business?
Commercial property leases generally limit the use of the property for a defined purpose, so it is vital that you understand what the property can (and cannot) be used for. It may be the case that you or your landlord may need to apply for a change of use change of use.
Can a commercial property be an active asset?
An active asset is an asset that is owned by a taxpayer and used for business purposes by the same taxpayer, an affiliate of the taxpayer, or another entity connected to the taxpayer (such as a tenant). Active assets can be tangible (such as commercial property) or intangible. As such, commercial property can be used as an active asset.
How is commercial property rental income taxed?
Tax on commercial property rental income, if owner privately, is calculated at 22 per cent or 40 per cent, depending on whether the landlord pays a basic rate or higher rate tax. However, it is possible for a landlord to utilise a company to pay corporation tax instead of paying personal income tax on a commercial rental property.
Is commercial rental property eligible for section 179 deductions in 2022?
For commercial property owners, depreciation is often a good form of tax deduction. Section 179 of the Income Tax Act (2007) permits commercial landlords to deduct the cost of rental buildings (excluding land) over several years. While depreciation generally takes time, landlords who operate under a registered company can use first-year expensing (also known as Section 179 expensing).
Should I become a commercial landlord?
Becoming a commercial landlord is something that needs to be approached methodically, and with expert advice. The dynamics of commercial property for rent are markedly different from residential buy-to-let investing. Ultimately, becoming a commercial landlord is worth considering depending upon your individual financial objectives and appetite for risk.
For further information on commercial leasing, to find commercial properties to lease, or to find out more about commercial rental property yield calculations and becoming a commercial landlord, why not contact Fisher Wrathall today? Our friendly and experienced team are ready and waiting to assist you in all aspects of commercial estate sales, lettings and surveys in and around Lancaster and surrounding areas.
