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Weighing the pros and cons of leasing vs buying commercial property

Making the right decision between leasing and buying a commercial property is a significant step for any business. This choice can have long-term financial and operational implications.

By understanding the advantages and disadvantages of both options, business owners can make informed decisions that align with their strategic goals and financial situation.

Advantages of leasing commercial property

Flexibility for changing needs: Ideal for businesses in growth or transition phases, offering the ability to upscale or downscale as needed.
Reduced upfront costs: Lower initial financial burden compared to purchasing, helping to maintain liquidity for other business operations.
Shorter commitment: Leasing typically involves shorter-term commitments, providing opportunities to relocate or adjust business strategies more readily.

Disadvantages of leasing commercial property

No equity accumulation: Rent payments do not contribute towards property ownership, offering no financial return in terms of asset accumulation.
Vulnerability to market changes: Risk of rent increases, especially in high-demand areas, which can impact long-term financial planning.
Use and customisation limitations: Restrictions may be placed on how the property can be used or altered, potentially hindering branding or operational modifications.
Uncertainty post-lease: At the end of the lease, businesses may face relocation if the lease isn’t renewed, leading to potential business disruption.
Maintenance and repairs: When leasing a commercial property, most tenants typically sign a full repairing and insuring lease (FRI), meaning that tenants are responsible for all repairs, even for pre-existing issues. This can significantly affect leasing costs and could potentially lead to unexpected expenses for tenants. It is highly recommended that tenants should seek legal advice when signing a lease agreement as to whether it is appropriate for their situation.

Advantages of buying commercial property

Equity building: Purchasing allows for equity accumulation, which can be a significant financial asset in the long run.
Long-term stability: No risk of eviction or rent increases, providing a consistent operational base.
Complete control: Ownership allows for extensive customisation and alterations to suit business needs.
Potential income source: The property can be leased to others, providing an additional income stream.
Appreciation benefits: Potential for property value appreciation over time, contributing to business assets.

Disadvantages of buying:

Higher initial investment: Substantial upfront costs including down payment, closing costs and potential renovation expenses.
Property taxes: Owners are responsible for property taxes. Stamp Duty Land Tax is typically applied, varying on the purchase price. Buyers will also need to consider business rates which are dependent upon the property’s rateable value. Typically, Value Added Tax (VAT) is not paid on the sale of a commercial property, unless it is a new build. However, it is important to note that some sellers or landlords may choose to charge the 20 per cent VAT charge on the property.
Reduced liquidity: Capital is tied up in the property, potentially limiting flexibility in other business investments.
Market risk exposure: Property values can fluctuate, exposing the owner to market risks and potential losses.

Seeking legal advice

When entering into a commercial property transaction, either as a lease or a purchase, it is crucial to seek legal advice:

Understanding contractual obligations: Commercial leases and purchase agreements contain complex legal terms and conditions. A solicitor can help interpret these terms, ensuring that you understand your rights and obligations.
Negotiation support: An experienced solicitor can negotiate on your behalf. In leasing, this might include favourable lease terms, such as rent amounts, lease duration, and termination clauses. In buying, negotiations might focus on the purchase price, contingencies and closing terms.
Risk mitigation: Solicitors can identify and advise on potential risks associated with the property or the transaction. This includes advising on liability issues, potential disputes and how to mitigate these risks.
Handling paperwork and formalities: Property transactions involve substantial paperwork. Legal professionals ensure that all necessary documents are accurately prepared and filed, complying with relevant laws and regulations.

Seeking legal advice is vital in navigating the complexities of commercial property transactions. It ensures that your business interests are protected, legal risks are minimised and ensures you are well-informed about the implications of your decisions.

Both leasing and buying commercial properties have their benefits and drawbacks. The right choice depends on the business’s current needs, future plans and financial capabilities.

Do you need advice regarding a commercial property transaction? Get in touch with our team today.

Carl Jones

Director - Head of Commercial Department

I qualified as a Solicitor having completed my training with Mander Hadley in 1992 and am a member of the Law Society Property Section and The Warwickshire Law Society.