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To buy or to lease as the economy continues to recover?

Posted: 6th May 2015   In: Commercial Property

During the recession, many firms shelved plans to move to better and larger premises. Indeed, some businesses looked to downsize rather than expand.

However, as the economy gradually recovers and confidence slowly returns, some firms may be considering whether the time has now come to make a long-delayed move.

The demand for property has recovered over the last few years and although the rock bottom prices being offered during the recession may no longer be available, there are still good deals to be had.

One of the first things for businesses to consider is whether it would be better for them to buy or to lease.

The great advantage of leasehold is the flexibility it offers. A firm that sees itself expanding will not want to buy a property that it’s likely to outgrow within a few years. By leasing instead it can leave itself free to up sticks and move a few years down the line, or simply expand within the landlord’s existing premises by taking on new units if they are available.

You can negotiate a short lease of say, three to five years, if you think you are likely to want to move to somewhere larger in future. Or if you want longer term stability but are unsure how well your business might perform then you could take out a longer lease with a three-year break clause. This would enable you to walk away if things don’t work out as you hope and the business fails. That might prove an attractive option in these uncertain times.

There are potential pitfalls however. If you don’t exercise the break clause then you will be tied in for the remainder of the lease.

Leaseholders may also be able to negotiate a rent free period to help cover the cost of fitting out the premises. The landlord may also be prepared to contribute to the cost, especially on a longer term lease.

The advantages of buying are in part the opposite of leasing and will often be the better option for more settled businesses where future growth and development are more predictable.

If you feel you are likely to want to remain in a property on a long term basis then buying may well work out to be more cost effective. Most landlords work on the general rule of charging an annual rent that is 10% of the value of the property.

If you think you are likely to stay in your premises then buying might be a better option because the amount you pay on a lease could be enough to buy the property outright within ten years.

The problem may be finance because although banks have money to lend, they are still very careful about where they place it.

Buyers still come under great scrutiny by lenders who don’t want to risk their money with someone who might soon go out of business. Your existing bank with whom you already have a rapport might be the most likely to help. Other lenders may even be suspicious of someone who hasn’t gone with their existing bank and wonder whether there is a problem with your ability to service the loan.

Given the uncertainties in the market, it’s likely that we may see more leasing but for those who feel they would be better off buying, there are good deals to be had if you can raise the finance.

Please contact Santokh Singh if you would like legal advice about buying or leasing premises.

 

 

 

 

 

 

 

 

Posted by: Santokh Singh
Commercial Property
Luton Office