Everything You Need To Know About Commercial Property Leasing
No one ever said that finding the perfect property for your franchise would be easy; and they’d be right. Setting up a franchise has many elements to it, but getting the right premises for your new venture can be tough. Even when you’ve found your dream property, the next challenge comes with signing the lease.
Investing in a franchise is costly enough, so you don’t want to add necessary expense to your outgoings by committing to the wrong property deal. Before you sign, you should consult a solicitor that specialises in commercial property. This will be money well spent and will save you a lot of hassle and worry further down the line.
What to look out for
There is more to a commercial lease than the payment of rent, so here are some key points to consider.
1. Length of the lease
The length of commercial leases range hugely, from just a couple of months to 25 years. Whatever term you choose it needs to be right for you and your business. It makes sense to align the length of the lease with the length of your franchise agreement, which is typically between 5 and 10 years.
A short lease with the option to renew may be a better fit for your franchise, but if a longer lease is chosen, make sure that you can end the lease before the term has expired. If this isn’t agreed ahead of signing the lease, and you want to end the term early for any reason, you may continue to be responsible for paying the rent. This is the case even if you’ve vacated the premises. Now, that’s a franchise cost that would be hard to swallow.
2. Cost of rent
When you find the perfect space for your business, it can be difficult to turn down the opportunity of working there regardless of price. But this is where the head must rule the heart. Your rent is likely to be your biggest ongoing franchise cost, and so you need to ask yourself - can you really afford the rent?
Consult your business plan and determine whether the payment of rent is sustainable based on realistic financial projections, not just the positive outlook. You may risk losing everything if you underestimate all the costs involved in setting up a franchise. Your rent is just one element, so it’s wise not to push this payment to your maximum limit of affordability.
Also, bear in mind that it’s likely you’ll pay VAT on top of the rental cost and the lease may include a rent review. Rent reviews are generally carried out every couple of years, and as a result the cost of your rent should be expected to increase, rather than decrease, following the review.
3. Additional charges
Depending on the type of property you’re leasing, you may be required to pay a service charge too. This is generally charged if you’re taking a lease of part of a building. Renting out office space in a larger block, for example, may see the landlord applying a service charge to contribute towards the upkeep and maintenance of common parts of the building.
An important franchise cost to consider is the protection that insurance will provide you and your business. The insurance necessary to cover the cost of the property itself will usually be paid for by the landlord and then added on to your rent or service charge.
Be mindful though that you’ll still have to purchase separate insurance to cover the contents of your commercial property, as well as any additional insurance that’s required for your business. The most common types of insurance those investing in a franchise need are public liability and professional indemnity.
A full repairing and insuring (FRI) lease describes a rental agreement in which the cost of all repairs and insurance are undertaken by the tenant. For this reason, when setting up a franchise in a commercial property, you should ensure that it is in an acceptable state before you sign the lease. This will give you some leverage in getting the landlord to agree to repair the property before you sign, or reduce the rental cost for you to carry out the necessary amends yourself.
Similarly, at the end of the lease, you’ll be expected to return the property to the state it was in when you signed the rental agreement. Any repairs or defects will be your responsibility and your landlord has the right to charge you if this is not done to an adequate standard.
6. Proposed use of the property
A common restriction in FRI leases is how the premises can be used. Ensure you ask for a copy of the planning permission documentation to confirm that use of the property that you’re proposing is permitted.
Establish if there are any limitations on the use of the property which may conflict with crucial activities associated with operating your business. This is where the services of an experienced commercial property solicitor are invaluable. Imagine investing in a franchise that you can’t operate fully due to an oversight in the commercial property lease.
As a tenant, you may be asked to enter a rent deposit deed. The rent deposit will usually be worth the equivalent of a couple of months’ rent and is to be paid upfront to the landlord. The landlord then has the right to draw funds from the rent deposit to reimburse any costs incurred, such as missed rental payments or damage that’s been caused. You would then be required to top up the rent deposit back to its original amount. In practice, the rent deposit would then be returned to you at the end of the lease.
8. Stamp Duty Land Tax (SDLT)
You don’t have to buy a commercial property to pay Stamp Duty Land Tax. SDLT is charged on property leases as well as purchases, where the value exceeds certain limits. As well as ensuring you can afford the rent for your chosen premises, this may be another reason to keep your property search to realistic levels.
The Editorial Team, Point Franchise ©
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