Residential vs commercial property: is what you know transferable?
If you’re thinking of taking on premises for your growing business, you may find yourself thinking “I’ve bought and sold plenty of houses – I’ll be fine” or perhaps “Does buying a commercial property make more sense than renting?” The common assumption in British culture is that when it comes to residential property, although you may rent in early life, you’ll work your way towards buying a house as soon as you’re able.
In my work supporting business owners to find and negotiate the right premises to add value to their business, I often see people bringing their experience of residential property with them. There are actually more arguments in favour of renting commercial property than many people realise. In this blog, I set out to bust three of the biggest myths and shed light on some of the key differences between residential and commercial property.
Myth #1: “Rent is money down the drain”
I often speak to people who believe renting commercial premises is a waste of money and are therefore hell-bent on buying a building, often at great cost. Perception is key here. The truth is: paying rent is akin to paying an employee – you get something in return. The right premises should deliver value to your business as a member of staff would, which is why I often advise clients looking to acquire premises, to start by writing a ‘job description’ for their ideal premises.
I also advise my clients facing a decision to do with their premises, to consider their business plan. It’s easy to take a short-term view and just address the immediate, perceived problem, but what about the long term? What happens if you’ve purchased rather than renting and your business grows rapidly? Conversely, what happens if it shrinks?
If you buy a building and put your business in it, you’re essentially putting all your eggs in one basket. Moving buildings will be a much more arduous, costly and lengthy task as an owner, which could risk holding the business back. Renting a commercial property means it is much more nimble, which is key to business survival (particularly in recent years!)
Myth #2: “My agent will help me get a good deal”
The agent in any property transaction is acting on behalf of the landlord, but never has this been more important than in a commercial property lease negotiation. In fact, comprehensive knowledge is essential to negotiate on equal terms with a landlord. The landlord’s agent may have that comprehensive knowledge but do you? Don’t forget, the landlord and their agent do this sort of thing every day and so they are quite good at it. Ideally, you need experience and understanding equal to theirs, to level the playing field and get the best outcome for your business. They are trying to do the same and so will not tell you anything that might prejudice the outcome for them. Those are the things you need to know.
For example, terms like alienation will appear in a lease document, which you won’t have heard in a residential property transaction. Alienation is an obscure term for passing on your liabilities if you no longer need your business premises. The importance of the alienation clause in a commercial lease comes into play when you might need to sub-let the premises in the future. Defining what alienation looks like for you, before you sign that lease, will allow you to build in the flexibility your business needs. Spoiler alert, the landlord and their agent aren’t going to help you with this.
Myth #3: “The law is on my side”
There are big differences in legislation across commercial and residential property. In residential, there is much more in the way of support of the tenant. Certain legislation protects the tenant when a lease is up, which controls what can and can’t be claimed in terms of damage. Repair obligations are therefore far less for a residential tenant than a commercial tenant. In a commercial lease negotiation, whatever the tenant signs up to in terms of repair is a binding commitment and is agreed ahead of time. The most important action you can take is to know your options and rights ahead of time, just as you would in a residential property transaction. Negotiate the requirements of any repair and decoration clause in the heads of terms, so that what the lease says is fair to both parties. If the building’s initial state does not match what is assumed by the lease, you should consider a Schedule of Condition to document all the details upfront.
Is it time to get a better grasp on the basics?
Hopefully through reading this blog post you will have realised you might have some valuable knowledge already, but perhaps there will also be things you realise you don’t know. There will even be things you don’t know you don’t know, especially when it comes to the nitty gritty technicalities of lease terms.
That’s why I created my suite of online courses to help you develop the knowledge and understanding you need to find and negotiate the right commercial premises on the right terms. With a combination of video content and some simple exercises, you will walk away from these courses with a full understanding of the end-to-end premises selection and/or lease negotiation processes. With the correct knowledge about how the process works and what you are able to influence, you’ll have the confidence to make the right choices to suit your needs and your business.