If you are looking to buy a commercial leasehold property as an existing business in the UK, keep reading.
While buying commercial leasehold properties as an existing business can be a promising but more affordable investment starting point, like any investment, it also comes with issues that buyers should consider thoroughly before making a decision.
Written by Jackie Lam, Solicitor
Residue Lease Term
One of the main considerations when buying a commercial leasehold is the length of the residue lease term. If the remaining lease term is short, it can significantly affect your business prospects, as well as the value and potential for leasing out the property. You may find it difficult to further expand your acquired business if you have a short term left.
In most cases, assignment of the existing commercial lease is excluded from the protection of sections 24 to 28 of the Landlord and Tenant Act 1954, which means that you have no security of tenure upon expiry of the original lease term. This lack of security can be problematic, especially for long-term investments or businesses that rely on stability. You might be required to vacate the property or pay significantly higher rent, which could make it difficult to plan for the future.
Limited Control Over the Property and Constraints
As a leaseholder, you are bound by the terms of the existing lease agreement, which may include restrictions on how you can use or modify the property. Many leases contain clauses stipulating the permitted user and preventing structural changes, subletting or assigning the lease without the landlord’s consent. If you intend to change user, make improvements or changes to the property, or assign your lease to somebody else, you may have to obtain approval from the landlord and bear the costs of approval, which can be a lengthy and costly process.
Dilapidations and Repair Obligations
Commercial leases often require the leaseholder to maintain and repair the property, even if they don’t own it. The unexpected cost may pose a financial burden on you. In addition, upon the expiry of the lease, you may be required to return the property to the landlord in a certain condition, which can lead to substantial costs. These dilapidations could include repairs and maintenance of HVAC (heating, ventilation and air conditioning) systems, the replacement of floorings and/or removal of signs, fixtures or fittings.
For your own benefit, you should carefully check the lease terms and ask the landlord if there is any schedule of conditions at the commencement of the lease to avoid any future argument.
Rent Reviews
Most commercial leases include rent review clauses that allow the landlord to increase the rent periodically, often based on market rates or inflation. It can be a financial burden for the commercial leaseholder, especially if rent rises becomes too high relative to market conditions. In such situations, you may struggle to afford the increased costs, and the business could become unprofitable. Such an increase could put financial pressure on the business and affect its ability to find incoming tenant.
Conclusion
While commercial leasehold properties can offer affordable investment opportunities, buyers should always conduct thorough due diligence and carefully review lease terms. They should also be prepared to cope with potential costs related to rent increases, repair and maintenance.
Consulting with legal property experts can help mitigate certain risks and ensure that your investment is sound and sustainable over the long term. Lisa’s Law continues to deliver good outcomes to our clients, please do not hesitate to contact us should you require our commercial property services.
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