Guide to renting Commercial Property

Whether this is your first time renting or if you already lease multiple commercial properties, our guide to renting commerical property contains some helpful pointers and questions to consider during your next move. 

Our guide provides information on planning use class, where to locate a business, property costs, business rates, leases, break clauses and rent reviews. 

Step 1Finding the right commercial property 

What is my Planning Use Class?

You should focus your search for properties with the correct Use Class or the potential for it. The Town and Country Planning (Use Classes) Order 1987 (as amended) puts uses of land and buildings into various categories. 

In some instances there are Permitted Development Rights for Change of use, for example you may be able to convert a Hot Food Takeaway (A5 Use Class) into a Barbers Shop (Use Class A1) without planning but not vice versa. 

If you are unsure if a property will be suitable for your use, we recommend you speak to the letting agent before booking a viewing.  The agent may refer you to the Local Planning Authority or an independent Planner. Planning Permission for alternative use is not guaranteed. Remember you will also need Owner consent to change the use of a property.

How much space do I need? 

There are no hard and fast rules on calculating how much space you will need but there are several areas which need careful consideration;

  • How many employees do you currently have?
  • How many fixed desks do you need?
  • How much equipment or stock do you have to accommodate?
  • Can your stock be racked?
  • Do you plan to take on more staff in the next few years?
  • How will you operate in regards to COVID-19?

It is important to note there are different methods for measuring property use types. The Royal Institution of Chartered Surveyors (RICS) Code for Measurement Practice sets out a system of guidelines for area measurement.

An office or a shop will typically be measured on a “Net Internal Area” basis so only the useable areas are included. Lobbies, corridors, stairs, toilets are usually excluded from the NIA measurement.

A warehouse will be typically measured on a “Gross Internal Area” basis so the whole of the internal space is included within the GIA measurement.

Property measurements will usually be expressed in Square Meters (Sq. M) or Square Feet (Sq. Ft). 

A typical double garage is approximately 11.9 Sq. M or 128 Sq Ft. 
A typical football pitch is approximately 7,140 Sq. M or 76,900 Sq Ft!

Where should I locate my business? 

There are lots of things to consider: Local amenities (cafes and shops for employees), parking facilities (and restrictions), delivery facilities (and restrictions), congestion charges, proximity to customers / clients / staff, kerb appeal, broadband coverage, mobile coverage, transport links (airports, trains, buses and roads). 

You should thoroughly research a location, particularly if you are considering somewhere new. Familiarise yourself with similar businesses, where are they located and why?

If you are looking for a retail or leisure use, you may want a high street location with good footfall.

If you are a trade, you may seek a main road position with good access and profile. 

If you are logistics, you may require good transport links. Is that 1 mile from the motorway as the crow flies or as the HGV drives?! A HGV route planner can help with this.

If you are searching for office space, you will need a location that staff can easily commute to and attracts employees.

Step 2Commercial property costs

There are a number of different costs you are likely to incur when renting commercial property. Explanations to some of the costs are detailed below. It is important you understand what you may be liable for prior to taking on a commercial lease.

Professional fees

We recommend you take independent third-party advice prior to agreeing heads of terms. Using a agent or surveyor such as Omeeto to advise on terms and a solicitor to advise on a lease agreement is recommended, especially if you're taking on a Full Repairing and Insuring or a longer term lease.  

Whilst this may feel like an added initial expense, the cost of their advice could be paid back many times over in duration of the lease. 

VAT on commercial property 

Commercial property costs are usually quoted exclusive of VAT and a property may or may not be registered for VAT. If a property is registered for VAT, VAT will be payable on top of prices quoted. You can only claim the VAT back if your company is VAT registered.

Commercial rent rent payments

Unless stated otherwise, the rent quoted is usually exclusive of all other costs.  
Commercial rent is normally paid quarterly in advance, the rental dates are: March 25th, June 24th, September 20th and December 25th. Landlords are however increasingly accepting rent payments on a monthly basis. Any service charge or insurance will usually be billed along with the rent.

Rent payments are due whether or not you receive an invoice, and it's your responsibility to ensure rent is paid by the due date. Additional charges for late payment can be incurred or the Landlord might take enforcement action. 

Rental Deposit

Do not be offended if the Landlord asks for a deposit, this is standard practice and may be preferable to providing a personal guarantee. Rental deposits are separate and paid in addition to the initial rent. 

If a rental deposit is requested, we would recommend you seek a rent deposit deed. Rental deposits are usually held in a separate account which the Landlord may draw from, if you do not fulfill your obligations.  

Business Rates and calculating rates payable 

Business rates are a tax on non-domestic property. Rates are calculated by The Valuation Office Agency (VOA) and are usually revised every 5 years. The most recent revaluation came into effect in England and Wales on 1 April 2017, based on rateable values from 1 April 2015.

The Rateable Value (RV) is not what you pay.  To calculate rates payable (your business rates bill) you need to multiply the RV by the multiplier for the current tax year. Check the current multiplier on the VOA website

The Rates payable are approximately half the RV. There are various schemes and incentives available for some small business’, charities and retailers etc.  Details can be found on the Business Rates Relief section of the VOA website.

You might also want to look out for incentives and initiatives in the region, such as Business Improvement Districts (BIDs), Enterprise Zones and Local Enterprise Partnerships (LEPs).

Utilities

Unless stated otherwise you will usually be responsible for all the running costs associated with the building.  The running costs will be down to your usage, so it is difficult for the Landlord or the letting agent to provide a budget.

We recommend you check the Energy Performance Certificate (EPC) showing you how energy efficient the commercial property is.

Decoration, Repairs and Ongoing Maintenance

Make sure you understand your obligations under the lease, you should set aside a monthly budget for the ongoing property costs you may be responsible for. 

Service Charges

Service charges tend to include the management, maintenance and repair of common or shared parts of the commercial property and or estate. If Service Charge is payable, we recommend understanding what is included and getting a budget for the costs. Some Landlords may agree to fix or cap the service charge as part of the negotiation prior to the lease being signed. 

Building Insurance

The Landlord will typically insure the building and recharge the Tenant the premium. 

We recommend obtaining the budget for the current years Building Insurance Premium prior to the lease being signed. Buildings Insurance is separate and does not cover contents! You will need your own contents insurance.

Step 3Negotiate a commercial lease 

Remember commercial property legislation is different to residential. If you are renting commercial space, you are entering into a commercial negotiation. We recommend commercial tenancy negotiations are done with the help of third party advisors such as an commercial property agent and a solicitor. 

Key points to consider are; 

Lease Term

The longer the term you are prepared to commit to, the more attractive your proposal is likely to be for a landlord. 

The term certain is only up to the first break point so a 10 year lease with a break at year 2 shall be viewed as a 2 year commitment.

Break Clause

You are not able to quit a lease unless a break clause has been agreed. Break Clauses will only be valid if the pre-agreed conditions are met. It is common for a Landlord to seek a minimum of 6 months prior written notice to a break and for all payments due under the lease to be up to date. Remember if you do not compley exactly with the break terms it may invalidate your break, even if you served the correct notice. 

Rent

The rent should be market-led, how much are similar properties priced? 

Rent is often calculated per Sq Ft. So, renting a 1,000 Sq. Ft property at £20,000 per annum is £20 per Sq Ft.  

Rent incentives might be negotiated but remember it is all relative. The landlord holds the property as an investment. If the deal works, it works! But if a tenant seeks rent free, a reduced rent, a short lease and landlord capital expenditure etc there may be no incentive for the landlord to do the deal. Be realistic with your requests and expectations.

Rent Reviews

A lease may include rent reviews, typically every three or five years, which can alter the amount you pay over time. Rent increases are usually market led but can be index linked. It is important you agree to a review mechanism that you understand. 

If you do not like the uncertainty of not knowing future rent increases, a landlord might be amenable to stepped rents – this is where the rent increases are pre-agreed and fixed.

Repair

You should check the overall condition of the commercial property for rent prior to agreeing terms. It is also advisable to seek up to date certification.  Look out for repairs you might become liable for on signing or during the lease. It may be worth carrying out a building survey to ensure you are aware of any problems with the building before you commit to the property.

A landlord may be willing to remedy some defects or offer rent incentives in lieu of works as part of the deal.  Or they might agree to a schedule of condition. This is subject to rent (above).

Alterations

If you wish to make some alterations to the commercial property, you may need to get consent from your Landlord first. It is always worth getting an agreement in principle to proposed works prior to entering into a lease negotiation. 

Some works may require Building Regulatons and Planning permission. 

Use

It is important the use permitted under the lease covers your current and future business requirements and does not restrict your ability to assign or sublet the property in the future.

1954 Act Protection

1954 Act protection (also known as “Security of Tenure”) gives a tenant a legal right to renew  their lease on expiry, on the same terms as the old lease but at the current market rent. The landlord still has rights to take back possession of the property on certain grounds, for instance if the tenant has committed certain breaches of the lease. 

It is quite common for landlords to require that rights for Security of Tenure are excluded from the lease because they wish to retain control over the occupation of their property. To exclude a property a Statutory Declaration must be signed by the tenant. 

Once you have agreed terms they would usually be recorded in a document called Heads Of Terms. This is then sent to the solicitors to draft a lease. 

Step 4Complete the lease

You will complete the lease once the money to do the deal is in place and all parties are satisfied with the state of the commercial property for rent as well as the contract. The deal will be legally-binding once the lease is completed.

At Omeeto, we have tried to streamline the letting process so some of our clients offer standard tenancy agreements. This means you can complete the letting process sooner because the main clauses within the standard tenancy agreements are non-negotiable. 

It is essential you understand them so please remember RTFL…  Read The FULL Lease and take third party advice. 

If you are unsure, do not be afraid to ask. Typical questions might include;

  • What is the rent? Are there any incentives such as rent free or a stepped rent?
  •  How and when is the rent reviewed?
  • What other costs am i responsible for (such as service and maintenance charges).
  • When and how are invoices paid?
  • What term can i have (lease length)?
  • Can i have a break clause, if so, what are the conditions?
  • Am I able to assign or sublet the property (Alienation)?
  • What are my responsibilities, who is responsible for property repairs?
  • How much is the service charge and what services are included?
  • Can the lease be renewed (1954 act protection)?  

For further information please The Royal Institution of Chartered Surveyors (RICS) has provided a Code for Leasing Business Premises.

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