Buying a freehold is often seen as making an investment in property. You can benefit from the rise in the value of the property - but you are also at risk if its value falls and you want to sell.
In cashflow terms, buying a freehold has a high initial cost. Over the long term, however, owning the freehold can be more cost-effective than leasing premises. Owning the freehold can also give you greater flexibility in how you adapt and use the premises (see 2). However, if you expect to want to relocate or acquire different premises, a flexible lease may be a better solution.
Regardless of whether you own the freehold or lease the premises, there are restrictions. If you want to change the type of business the premises are used for, you may need to apply for planning permission. If you want to make any significant alteration to the premises, you will probably need building regulations approval.
If you lease the premises, the lease may contain extra restrictions. For example, the lease may prohibit you from applying for a change of use, or require the landlord's consent to any alterations. Even if you own the freehold, there may be other restrictions. For example, the terms of planning consents might restrict trading hours to protect local residents. Restrictions are more likely if the building is listed, or located in a conservation area. It is essential to check any restrictions before you purchase premises.
Costs typically include:
VAT may be payable (see 6).
Some costs are relatively straightforward to check. For example, you can find out what the rateable value of the premises are, and ask for quotes for building insurance. Ask to see the previous owner's bills for utilities. Estimate whether your own bills are likely to be higher or lower. Check whether there is any service charge and if so how it is calculated. The most variable costs are usually for maintenance and repair. Your survey (see 12) should provide guidance on this. See also the section on Business rates on Tax Donut.
Stamp duty land tax (SDLT) on freehold and leasehold purchases ranges from 0% (for purchases below £150,000) up to 4% (for over £500,000). If the transaction involves the purchase of a new leasehold, an additional payment of SDLT may be payable depending on the value of the lease premium or purchase price and the rental value of the property (which are calculated separately and are then added together). If the 'net present value' of the rental payments over the life of the lease is over £150,000, there is an additional SDLT payment of 1% of that value. Land registry fees range from £50 up to £920, depending on the value of the property.
See the section on Stamp duty on Tax Donut.
Depending on the vendor's VAT position, you may have to pay VAT on the purchase price (and on any rental payments under a lease). Check the details in advance with your advisers. With suitable planning, you can usually reclaim any VAT you have to pay.
Before making an offer, take advice on the most tax-efficient way to acquire the premises. Depending on the circumstances, it may be appropriate to buy premises using your pension scheme, or through a separate company. It's normally a good idea to make a written offer to show that you are serious.
Make it clear what the conditions are. Typically, the offer might be conditional on a satisfactory survey and property searches, contract conditions and so on. You may also have conditions specific to your circumstances: for example, you might only want the premises if you can get planning permission for a change of use. Your adviser can draft a conditional offer for you.
As with any negotiation, pitch your opening offer low enough to give you room to manoeuvre. Decide what price you are prepared to go to, and any other key conditions which affect the value of the premises to you. Find out as much as possible about the vendor's negotiating position. For example, whether the vendor is in a hurry to sell, and whether there have been any other offers.
Look for evidence supporting the case for a lower price. For example, there may be similar premises in the area being offered for less. Use any faults shown up in the survey as negotiating points. Highlight any weaknesses the premises have. Unless you are a skilled negotiator, it's usually a good idea to negotiate through your advisers.
You can negotiate a lockout agreement. This prevents the vendor from negotiating with anyone else as long as you exchange contracts before a set date.
A property search includes a search of the local land charges register for information about the premises. This records legal and financial restrictions related to the premises and any notices or charges. For example, the search will show what planning permission the premises have, and whether there are any public rights of way on the property. The local authority will also provide additional information covering, for example, any local planning applications. The search will also usually include a search with the water company to check that the premises are connected to the sewerage system.
The environmental consequences of building on, for example, contaminated land, have become more of an issue in recent years. It is now standard practice to carry out a separate environmental search to identify likely risks. In addition, your solicitor will check every detail of the contract. For example, the contract will need to specify exactly what is included in the sale, the terms of any lease, and so on.
After exchange of contracts (see 16), your solicitor will check with the land registry to ensure that the vendor has the right to sell you the premises. This includes checking any registered charges such as mortgages on the property. In practice, your solicitor will also usually be responsible for liaising with the vendor's solicitor, negotiating, and handling completion of the purchase.
You need a full structural survey. This should include:
The survey will also include a valuation which can be a useful negotiating tool. Discuss your requirements with the surveyor, and agree in writing what the survey will cover. In some cases, the surveyor may also recommend a specialist survey for example, if the premises include lifts or air conditioning. If you will be mortgaging the premises, check that the survey will be acceptable to your bank. Do not rely on a survey or valuation carried out for the bank. As you are not the surveyor's client, you will not usually have any claim against the surveyor if the survey fails to uncover faults.
Owners selling a commercial property (or letting it), or developing new property, must provide an Energy Performance Certificate (EPC), giving a rating of the energy efficiency and carbon emissions of the building. EPCs are produced using standard methods, with standard assumptions about energy usage, so that the energy efficiency of one building can easily be compared with another similar building. The aim is to help you consider energy efficiency and fuel costs as part of your investment.
Before you get as far as making an offer, you should check for obvious problems. For example, a visual inspection may reveal excessive damp, cracks and so on. You may not want to take on premises in that sort of condition. You will need to think about how you will use the premises. For example, you should draw up a plan of how you would arrange them. Even if the premises are in perfect structural condition, they may not suit your requirements.
Likewise, you may need to investigate whether there is adequate parking and access for deliveries. You should also make your own informal investigation into the sorts of problems which will not necessarily show up in legal searches and surveys. For example, traffic noise or awkward neighbours. Visit the premises and the area at different times. Ask other local businesses what problems they are aware of.
The purchase contract will include both the premises and the equipment. Stamp duty land tax is only payable on the value of the premises (see 5). You will need to check that the vendor owns any equipment being sold, and that there are no leases or hire purchase contracts. You will also want to check whether there are any warranties or guarantees and whether they can be transferred to you.
The transaction can be structured either as the purchase of a business, or as the purchase of assets (including the premises). The choice will affect the costs, potential tax implications and your potential legal liabilities. For example, if you purchase a business, you may also take on the business' liabilities. On the other hand, purchasing the share capital of a business which owns the premises you want could attract a lower stamp duty charge than purchasing the premises directly. Take advice on the best way to handle the purchase to suit your requirements.
When you exchange contracts, you commit yourself to the purchase and to the agreed terms. You will also normally pay a deposit, typically 10% of the purchase price. At the completion date, you pay the balance of the price (and stamp duty and other fees), and take ownership of the premises.
You could be held liable for any losses suffered by the vendor. These will include the vendor's legal costs and so on. But they could also include any subsequent fall in the value of the premises, and the costs the vendor has finding a new purchaser. Use your solicitor to negotiate an agreement if you want to pull out of the purchase. Make sure that your liabilities are clearly agreed and limited.
You are entitled to take action for any losses you have suffered. For example, these can include your legal costs; the costs of finding new premises; any increased price you have to pay for new premises; and any losses caused by disruption to your business. If the specific premises are particularly important to you, you may be able to force the vendor to complete the sale.The best option is usually to get your solicitor to negotiate a compensation payment from the vendor. Your solicitor will also advise you as to your prospects of forcing the vendor to complete.
The lender's rights are stated in the mortgage document. Usually, you have various obligations, such as keeping the premises insured and in good condition. You are also prevented from some actions - such as leasing the premises to someone else - without the lender's permission.
If you plan to let the premises, it is a good idea to check from the outset that this will be allowed. Of course, you are also required to pay interest and make repayments of the mortgage as agreed. If you fail to make payments, or otherwise breach the terms of the agreement, the lender can appoint a receiver to take control of the premises. They can then sell the premises (and use the proceeds towards paying off your debt).