Commercial property transactions can be very complicated and may present frustrations unforeseen at the outset
The Attwaters Jameson Hill Commercial Property team has put together this brief guide to answer some of the questions commonly asked by our clients:
“On top of the purchase price or rental of a commercial property, what other costs are there?”
Apart from your solicitor’s fees and VAT, there will be some additional expenses just as there are when buying a home. There will usually be fees for making enquiries/searches of the local authority, companies house etc. There may registration fees (if a company is entering into a mortgage or if the property is freehold or held on a Lease over 21 years). There may be VAT and Stamp Duty to be paid. Stamp Duty is payable on the purchase of a freehold property at the same rates as domestic property: it is also payable upon premiums paid under Leases and on any rent.
“How is Stamp Duty calculated on rent?”
It is based on the average annual rent taken over the length of the term. If future rent cannot be ascertained at the outset (for example, where the rent is to be reviewed in line with the prevailing open market), then such increases are ignored for this purpose. Unless the Landlord has promised not to waive the exemption from VAT at a future date, VAT is added to the average annual rent and Stamp Duty is calculated according to the annual rent payable and the length of the lease.
“Is VAT payable on the purchase price and/or rent of the property?”
Regarding the purchase price, generally this will depend upon whether the seller has elected to waive the exemption from Value Added Tax. If so, VAT will be payable in addition to the purchase price although the buyer may be able to reclaim this sum if VAT registered.
Regarding the rent, this will depend upon whether the Landlord has elected to waive the exemption from Value Added Tax. If so, VAT will be payable in addition to the rent although the Tenant may be able to reclaim this sum if VAT registered.
“Will we be forced to move our business premises at the end of a short lease period?”
It depends upon the terms agreed with the Landlord. As a matter of course, a business Lease automatically continues after the expiry of the contractual period until it is brought to an end by either party serving a notice in a prescribed form. The Tenant has a statutory right to ask for a new Lease and there are only very limited grounds upon which a Landlord can regain possession of the premises.
With short Leases it is becoming more common for Tenants to agree to waive their right to an automatic extension – but we recommend seeking advice before doing so.
“My Lease states that the Tenant is to repair the premises – does this include items which may have needed repair at the date of the Lease?”
Liability for repairing the premises depends on the wording of the Lease. For example, an obligation to “keep the premises in repair” means the premises must be first put into repair (taking into account the age, character and locality of the premises) and then kept in repair. This could involve the Tenant in repairing damage which occurred prior to the start of the lease. A Tenant wishing to avoid this should seek legal advice as to the wording of the Lease and may be advised to have a ‘Schedule of Condition’ prepared or even photographs taken to record the condition of the property on the day the Lease was granted.
“As a Landlord, can I stop the Tenant selling the lease?”
Unless you specifically restrict a Tenant, the answer is ‘No’. Invariably a Lease will include a restriction and the words of the lease are strictly interpreted. Usually any dealings with part of the premises (as opposed to the whole) are prohibited. Often, sub-letting will only be allowed in restrictive circumstances (a Landlord must ensure that if the head-Lease comes to an end, a sub-Tenant’s occupation will not be detrimental to the Landlord’s interest). A Lease will often prescribe the circumstances in which the Landlord may refuse consent (for example, if the new Tenant is not of equal financial standing).
“As a Tenant, what payments will I have to make (on top of rent)?”
The Lease must be read carefully to check what financial commitments are involved. Usually the Tenant is obliged to pay towards the insurance of the building and if the premises form part of a larger building, the Tenant will most likely have to contribute towards the maintenance and running of that building. This latter cost is often collected by way of ‘service charge’ and should be thoroughly investigated before a Tenant signs a Lease as such a variable cost could drastically affect the profitability of a business.
We must stress that this is only intended as a thumbnail guide, rather than the comprehensive, tailored legal advice that our Commercial Property team supplies as a matter of course to our clients.