Our general commercial property FAQs have been designed by our commercial property solicitors to give new and existing commercial landlords and tenants a grounding in commercial property law, with answers to our clients’ most common questions.
Click to jump to individual commercial property FAQs:
- Definitions of freehold and leasehold: understand the difference
- Buy or lease: Pros and cons
- Commercial property and industrial property: understand the difference
- What are commercial property standard enquiries?
- Commercial property surveys: are they necessary?
- Environmental issues: policies and legislation you need to be aware of
- Do you need consent for alterations on a commercial property?
- What if you want to install CCTV in a commercial property or business premise?
- Selling a leasehold commercial property
- Subletting part of a commercial property
- Is Stamp Duty Land Tax (SDLT) payable on commercial property?
- Repair: what happens if the property you want to buy or lease is in poor repair?
- Can you buy a commercial property with a tenant already in occupation?
- Can a commercial property be an active asset?
- Can you buy or rent government property?
- What is a surrender of a lease?
- Commercial property and residential property: understanding the difference
- Insurance: what is required for a commercial property?
- What is a leaseback?
- Is there a register for commercial property leases?
- What does ‘as is’ mean when buying commercial property?
Definitions of freehold and leasehold: understand the difference
Freehold commercial property means the absolute title to the entire property and land meaning you are the property owner.
Leasehold is an interest in the land created by a lease, meaning you are a tenant which has the right to occupy the property for a fixed duration.
There are other occupational interests in land but the FAQs are limited to the two principal interests. If you require further information on these interests, please contact our commercial property solicitors.
Buy or lease: Pros and cons
The following table contains the advantages and disadvantages of buying a freehold property:
|Pros of buying freehold property||Cons of buying freehold property|
|You don’t have to undergo rent review which could increase rental payment in line with the market.||Mortgage repayments will be around the same amount as rental payment.|
|If the value of property goes up, you can benefit when you sell.||If you don’t maintain the property, the value could fall and ultimately affect the profit you make if and when you sell it.|
|You can exploit the property by sub-leasing part of it. If you have a mortgage, you may need to consult the lender to ensure it does not affect their security.||You will need to pay a large deposit upfront which will reduce the availability of finances for business start-up.|
|You will have long-term stability as you won’t have to worry about the landlord resisting a renewal of lease.||You will have responsibility for management and maintenance of the property. The cost of regular repairs will have an impact on your overall profits.|
|It’s easier to make changes to the property as for example there will be no restrictions on alterations.||If you have too little space, there’s less flexibility to adapt. Unless there is a connecting property available to extend into or for which you can take on an additional lease (or purchase), you may have to instead look at relocating to gain more space.|
|It’s easier to find commercial property to lease than to buy.|
|It may be hard to obtain a mortgage for the commercial property.|
The pros and cons of buying can be compared to the advantages and disadvantages of leasing a commercial property, in the table below:
|Pros of leasing commercial property||Cons of leasing commercial property|
|Fixed rent means you have greater control over monthly outgoings.||You’ll be subject to more restrictions on making changes such as alterations.|
|Reduced upfront costs means that you’ll have greater finance available for your business start-up.||Rent review may make leasing more expensive because if the market value increases, your rent could increase in line with this.|
|Responsibility for maintenance of some parts of the property may lie with the landlord meaning you save costs on maintenance and repair. This is more common if you’re only leasing part of a building. Find out more in our advice article, Is a tenant responsible for repairs and maintenance in a commercial lease?||You will need to pay utility costs and contribute to other internal maintenance, as well as any common areas.|
|A short-term lease gives flexibility if you need to move or enter a new lease for a smaller/larger area.||Since you don’t own the property, you lack long-term stability. The landlord may resist the renewal of your lease meaning you would need to relocate.|
|There is greater room to negotiate the rent; you may even benefit from a rent-free period.||When you leave the property, you’re responsible for returning it to its original state – this can be a costly process. Read more about this in our advice article, Is a tenant responsible for repairs and maintenance in a commercial lease?|
|There’s a larger market of commercial properties being leased rather than sold, meaning it’s easier to lease a commercial property.|
Commercial property and industrial property: understand the difference
Commercial property is property used to generate a profit, and includes office buildings, property, hotels, retail stores, farm land, warehouses, garages and industrial.
Industrial property is therefore a type of commercial property. Industrial properties can range from small ‘Flexs’ or ‘R&Ds’ to larger warehouses and ‘big box’ industrial properties. A common characteristic for industrial properties is ‘clear height’. This is the actual height, to the bottom of the steel girders in the interior of the building.
What are commercial property standard enquiries?
The Commercial Property Standard Enquiries (CPSEs) are a set of standard pre-contract enquiries responses of which are provided to the buyer (or tenant, if leasing) to ask a seller (or landlord) about the property which will help a buyer (or tenant) decide the value of the property and whether they want to purchase (or lease) the property.
It’s important not to rely on CPSEs as an alternative to inspecting the property yourself. The CPSEs are just an additional way to find out more about the property, and should be used alongside all other relevant property searches, which includes obtaining a surveyor’s report.
Also bear in mind that the seller (or landlord) isn’t under a duty to answer the CPSEs but does have a legal duty to disclose latent defects which affect the property and to provide truthful responses, which the buyer (or tenant) can rely on.
Commercial property surveys: are they necessary?
Absolutely. A survey allows you to ensure the interest you’re buying (or leasing) matches the price you’re paying.
We highly recommend clients considering purchasing a commercial property (or leasing a commercial property) to obtain a survey. A survey ensures you’re aware of all the issues that affect the property, including hidden structural problems or any unseen costs.
Although it seems expensive, failing to check for these details could lead to you spending more money to remedy these issues later when they become apparent after the purchase of the freehold or entering into the lease.
Environmental issues: policies and legislation you need to be aware of
One key piece of environmental legislation you need to be aware of is the Environmental Protection Act 1990 (EPA) and the contaminated land regime under Part 2A of the EPA. Under the contaminated land regime, if land is contaminated, the occupier is liable to remedy this contamination. As a result, if your use/occupation of the commercial property has caused contamination, it’s highly likely you’ll be served a remediation notice requiring you to clean up the contamination. This is a difficult process as it is costly and time-consuming. For this reason, you should ensure your business activity causes as little damage to the environment as possible.
A second consideration also arises when you buy or occupy commercial property and the property is contaminated before you acquire or move in. In this case, you may be liable to remedy the contamination as a class B individual. So even if you are innocent, you’ll still incur significant costs for cleaning up the contamination.
This is why it’s important for you to identify any contaminated land before you acquire the property or enter a lease. If and when you do discover contamination (before buying or leasing), you should ask for a lower purchase price/rent to account for the lower value, make the transfer conditional upon the seller/landlord cleaning up the contamination, or require the seller/landlord to indemnify you for the cost of cleaning up.
Do you need consent for alterations on a commercial property?
Whether you need consent for property alterations depends largely on whether the alterations require planning permission, and whether you own the freehold or lease the property.
1. If you own the freehold
As an owner you’re free to make alterations subject to obtaining any planning permission and building regulations approval where relevant.
2. If you are a tenant under a lease
As a tenant, if you wish to make alterations and lease the property, it is necessary to identify the type of alteration you wish to make. Your alteration may be:
- Structural – for instance changes to weight-bearing walls
- Non-structural – for instance changes involving non-weight-bearing walls
- Internal demountable partition – partitioning which can easily be put up and removed without damaging or affecting the premise and walls
You should check the lease and identify whether any of these alterations have been prohibited or restricted. It may be the case that the landlord has prohibited the alterations, but alternatively, the landlord may make the alteration conditional on the landlord’s consent being given.
When you are entering a lease, the requirement that the landlord’s consent is ‘not unreasonably withheld’ should be included in circumstances where consent is required.
Generally speaking, it’s common for structural alterations to be prohibited, for non-structural alterations to usually require landlord’s consent and for internal demountable partitioning to be permitted.
What if you want to install CCTV in a commercial property or business premise?
Many businesses owning commercial or business property install CCTV on their property. If you wish to use CCTV on your premise to protect your property, you need to comply with the Data Protection Act when doing so.
You can find out more about data protection compliance in our Data Protection FAQs, but broadly, to be compliant when using CCTV, you must:
- Put up a sign which informs people that CCTV is being used and the reason it’s used for
- Have a system which allows you to provide images of anyone you’ve recorded within 40 days
- Have a system which allows you to share images with the authorities like the police if requested
- Keep images only as long as your business needs them
Selling a leasehold commercial property
Selling (otherwise known as assigning) a leased commercial property is essentially the same process as selling a freehold commercial property. The difference is that you must inform the landlord if you are selling (otherwise known as assigning) the lease.
You’ll have to check your lease to know whether you’re able to assign the lease to another party.
We can handle this as part of our conveyancing services. Contact our commercial property solicitors.
Subletting part of a commercial property
Subletting part of a commercial property will be slightly different if you’re a tenant instead of the owner of the property.
If you’re the owner you can enter into a lease with anyone you wish to enter a lease with. You then become a landlord.
If you’re a tenant, you’ll have to check your lease to know whether you’re able to sublet part of the premise to another party.
If the landlord allows you to sublet with their permission, legislation modifies this condition so that the landlord can’t unreasonably withhold permission.
When you want to sublet, you’ll need to make a written request to your landlord asking for consent. The landlord should respond within a reasonable time, stating whether permission is given. If the request is denied, a reason must be given. Although a reasonable time will depend on the circumstances, 28 days is considered reasonable in most circumstances. The landlord will also insist you enter a licence to sublet, as this will establish a direct contractual relationship between the landlord and the sub-tenant. If it is in the lease, you will also be responsible for paying the landlord’s costs in relation to the licence to sublet.
Is Stamp Duty Land Tax (SDLT) payable on commercial property?
When you buy any property, you need to pay Stamp Land Duty Tax if the purchase price (or the premium for the lease) exceeds the relevant threshold.
For any property which is commercial or mixed (such as part residential and part commercial), you will need to pay the following current rates* of SDLT:
|Property price||SDLT rate|
|Up to £150,000||Zero|
|£150,001 to £250,000||2%|
* these rates are subject to change from time to time and you are advised to check the latest rates with HM Revenue and Customs’ SDLT calculator:
When you obtain a lease of a commercial or mixed property through assignment, you’ll need to pay SDLT on the price of the lease.
However, if you obtain a new lease for a commercial or mixed property, the amount of SDLT will depend on the amount of premium you pay and any rent due. For more information on what SDLT will be payable on your purchase of a lease, contact our specialist commercial property solicitors.
|Nominal rent: i.e. you pay a premium but only a nominal rent||SDLT is paid on the premium only|
|More than nominal rent: i.e. you pay a premium and more than a nominal rent||SDLT is paid on the premium and the value of rent payable for the term, at present value|
You must remember that SDLT is payable within 30 days of the purchase, so you must have sufficient funds to make this payment. A failure will lead to you incurring a 10% penalty on your payment if you are up to 12 months late. This penalty increases to 20% if you’re between 12 to 24 months late, and 30% if you’re more than 24 months late.
In addition to the penalty, you’ll need to pay interest on your SDLT at the official rate. Ensuring you’re prepared to meet your SDLT obligations allows you to avoid these heavy financial penalties.
SDLT is a tax return and needs to be completed by your own accountant/tax adviser to take into account all of your tax affairs. In this kind of situation, Harper James will not be held liable for any issues which results in any consequential penalties issued by HMRC as a result of incorrect information provide to Harper James to complete the SDLT form.
Repair: what happens if the property you want to buy or lease is in poor repair?
If the property you want to buy or lease is in poor repair, it reduces the value of the property, and means you’ll incur greater costs in setting up the property for your business.
Buying and repairs:
This loss of value should be addressed before the transaction completes. A few options include:
- Asking the seller to make repairs before the sale and/or making the transaction conditional on the repairs being carried out
- Asking the seller to reduce the purchase price or rent to account for this loss incurred
- Asking the seller to reimburse you for the repair you carry out after the transaction
Leasing and repairs: If you’re leasing a commercial property, find out more about whose responsibility repairs and maintenance are in our advice article, Is a tenant responsible for repairs and maintenance in a commercial lease?
Can you buy a commercial property with a tenant already in occupation?
Yes – it’s possible to buy a commercial property with a tenant already in occupation.
When establishing whether a freehold commercial property is subject to leases, you can check the property’s charges register (available from the Land Registry for a small fee) in the Official Copy of the Register, which contains details of all registerable leases (leases running for a duration of over 7 years).
Short leases (7 years or under) are not registerable. These will not be included on the charges register.
For buyers of commercial property, it’s important to inspect the property (and have a survey) to discover whether there is anyone in actual occupation. Otherwise, the short leaseholder (the one in occupation) will be an overriding interest and you’ll acquire the property subject to the lease you weren’t aware of.
Can a commercial property be an active asset?
All assets which are used in a business’s daily or routine operation are an active asset. As a commercial property is usually used on a daily basis, commercial property is an active asset.
As an active asset, your commercial property can be listed as assets on the balance sheet. You should seek advice on this from your accountant/tax adviser before making business changes.
Can you buy or rent government property?
Yes – it’s possible to buy or rent government property. The Government website allows you to search for government-owned property, buildings, or land in the UK. If this is an option you’re considering, you can choose between buying or leasing.
What is a surrender of a lease?
A surrender of a lease is an agreement between the tenant and landlord to bring the lease to an end (despite the term not having expired).
If you have a lease you wish to surrender, you need to use a deed for your surrender to be valid. However, a surrender can also occur by operation of law, when the conduct of the landlord and tenant amounts to acknowledgement that the tenancy has ended.
If you wish to terminate the lease at a time when the break clause isn’t exercisable (or you don’t have a break clause), you may agree to surrender the lease with the landlord. If the landlord isn’t happy with you surrendering the lease, you may be able to agree to sub-leasing or assigning the property to a third party (you should also check the lease to see if this is an option prior to offering the surrender). The difference between sub-leasing and assigning is that with assigning, you’ll no longer have any responsibility for the new tenant (subject to any guarantee provided).
You should note that if the landlord resists, you won’t be able to surrender your lease earlier than the term. It’s therefore important that you take care when negotiating a lease surrender.
Find out more about break clauses, see our advice post.
Commercial property and residential property: understanding the difference
The process for conveying a residential property is generally the same as conveying a commercial property.
You will agree the heads of terms, exchange contracts, and complete the transaction by signing the TR1 (Transfer).
The same searches will be used to investigate the property.
Some differences between transactions for commercial property and those for residential property include:
- The content of the contract. In residential conveyances, you’ll incorporate the Standard Conditions of Sale, instead of the Standard Commercial Property Conditions which are incorporated in conveyances of commercial property.
- VAT isn’t paid in a residential conveyance.
- A residential lease will be less detailed and is likely to contain restrictions that the property can only be used as a residential dwelling. A residential lease is also longer in duration and will impose greater repair responsibility on the landlord.
- In a residential conveyance, the standard property enquiries are less detailed and more residentially focussed.
Insurance: what is required for a commercial property?
If you own a commercial property, you need insurance to protect your property. Usually this will include the full premium cost, as well as cover for demolition, site clearance/protection, professional fees (for example, architects, surveyors and so on), public liability and insurance for loss of rent.
If you lease a commercial property, you may need to check the terms of your lease to check if either you or the landlord is responsible for providing insurance. You can try to limit the cost by stating the landlord can recover the cost of building insurance to the extent that the costs are reasonable and proper.
Commercial property insurance differs from domestic insurance because it is more complex and covers risks which are tailored and specific to your business.
Different types of insurance for commercial property may include (but not be limited to) the following:
|Building cover||Accounts for the type of building, which may consist of wooden barns, steel structures, flat roof, and asbestos.
The building may also have different types of heating systems or complicated electrical systems. Covering these unique features will mean your insurance will be costlier than a simple domestic building.
|Business contents cover||Will protect you if there are any fixtures or fittings that are stolen or damaged by fire/flood.|
|Public liability cover||Will provide protection if a third party is injured, or if the property is damaged in the course of you running your business.|
|Employers’ liability cover||Will protect you if any of your employees are injured in the course of their employment.|
|Rent receivable (highly beneficial for landlords)||Protects against the loss of rental income resulting from damage caused to the property such that a tenant can’t run their business at the property.|
What is a leaseback?
A leaseback structure is when a commercial property is sold by you and then the new buyer grants you a lease over the property. This is generally carried out for tax efficiency purposes and you should speak to your accountant/tax adviser for further advice on how to structure these transactions.
By selling the property and then renting it as a tenant, you can obtain a lump sum from the sale to use in the course of your business, whilst paying the monthly rent.
You may wish to enter this type of arrangement if you want to benefit from having a large sum of money available for your business. If the property you originally sold has an unpaid mortgage, the added benefit of renting the property is that your rent payment may be the same, or lower, than your mortgage repayment.
Is there a register for commercial property leases?
All leases (in either registered or unregistered land) that last for a duration of over 7 years must be registered with the Land Registry.
If you’ve taken a new lease and that lease has more than 7 years unexpired, you must register the lease with the Land Registry (and ensure a note of it is made on the landlord’s title).
Similarly, if the lease is already registered with the Land Registry and it is subsequently assigned to you, it’s important for you to change the register to note you as the new tenant with the Land Registry.
For this reason, an OS1 Search should be undertaken as this will reveal whether any entries of interest have been made against the property since the start of the transaction. We can handle this as part of our commercial property conveyancing services. You can also find out more about commercial property searches in our advice article, Conveyancing Searches for Commercial Property.
What does ‘as is’ mean when buying commercial property?
When buying a commercial property, ‘as is’ means ‘as it is in the current existing circumstances’.