Tony Houghton considers some of the current issues facing business owners wanting to acquire UK commercial space and draws on the experience of Rob Martin (who runs London-based RMA DESIGN), one of his long-term clients.
Even though it is now the site of a ventilation shaft for Crossrail, number 9 Fareham Street, in the heart of London’s West End will always trigger fond memories for designer Rob Martin: not only was it where he took on his first commercial lease in 1993 — for his design consultancy RMA Associates — but it was also where he first met his future wife, Eileen (who was one of RMA’s original employees). Like many fledgling business owners,
Rob realised that the future success of RMA Associates would depend on having their own central London offices where his team would be based and where he would meet his clients. The days of hot-desking and shared office space were over. Once Rob had identified suitable offices on Fareham Street — just south of Oxford Street and a short walk from Tottenham Court Road tube station — he was faced with a number of factors that needed to be considered before he signed the lease.
When he first set-up the company he was still a sole trader, so Rob had little choice but to take the lease in his own name. From a legal perspective it is always preferable to take on the lease in the name of a limited liability company (although in a start-up situation the landlord is still likely to want a guarantor and/or a rent deposit). In Rob’s case the landlord required a deposit of 6 months’ rent for the full term, which was paid into a designated rent deposit account with interest accruing.
His deposit included an element to cover VAT in the event of Rob defaulting, but the VAT element could only be claimed back in the event of rent arrears. This was something that Rob was in a position to accept, but where the rent is high, a 20% non-reclaimable VAT element can have cashflow consequences for new tenants. Rob’s new premises were run down and in need of improvement and so we were able to negotiate a rent-free period at the start of the 10-year lease (including a tenant-only, not mutual, termination break at the end of year 5), to give Rob the flexibility to move on as the business grew — as he then anticipated.
We ensured that in the event of Rob wanting to terminate his lease, he would only have to give six months’ prior written notice – there was no penalty to pay and service of the notice was geared only into giving vacant possession and paying the rent up to the date of termination and not to RMA being liable to pay all the other expenses and/or observing the tenant’s covenants under the lease. As with many short-term leases the landlord insisted that the contract would not be covered by the terms of the Landlord and Tenant Act (there would be no automatic right of renewal at the end of the 10-year term), which Rob accepted because he anticipated that by year 10 his company would need larger premises.
Before taking on any lease it’s always best to insist that the heating, electrical and all other services are independently assessed, which would limit the tenant’s obligations by reference to a photographic schedule of condition and a detailed report prepared by Chartered Surveyors. Before finally agreeing to his lease transaction Rob asked me to check through his heads of terms and I would also advise that any other client has every aspect of the Heads of Terms checked by a solicitor. This way any onerous provisions can be deleted at an early stage, which is much easier before the lease has been issued.
After completing our enquiries, Rob signed the lease and moved in to premises that provided the stability needed to grow his business. Since I first helped Rob back in 1993 with his first commercial lease how has his company fared and was his optimism well-placed? In 2007 I received a call from Rob who explained that it had always been his ambition to own his own freehold office building and that he’d found one to buy. As with any property purchase where a substantial sum is being spent it is essential to carry out the same due diligence as you would when buying a residential property, which is exactly what we did.
Again, we undertook searches and enquiries – full local, drainage, environmental, ground survey and other relevant searches were required (these days it is possible to carry out a planning search, which shows any planning applications that have been granted but not yet implemented or any forthcoming capital projects, like Crossrail, that could be disruptive to business). A full structural survey was carried out as well as a bank valuation and checks were made to validate the authorised use for planning and building regulation purposes. At exchange of contracts Rob had to find 10% of the purchase price by way of a deposit and on completion (where the vendor has opted to tax for VAT purposes) had to pay the remaining 90% and also the VAT at the current rate. Following completion Stamp Duty and Land Registry fees were payable (note that Stamp Duty is levied on the purchase price and any VAT payable — a tax on a tax can prove to be problematic if not taken into account at an early stage).
At the end of the process Rob acquired a commercial building, which he still owns to this day. Although property can go up and down in value, many business owners have benefited from buying commercial property. Not only can it provide an asset for the owner’s business, but can provide longer-term security for the owner and their family.
In the event of retirement or sale of a business, the property can be used to create an income for the owner by way of letting to a tenant or it can be used as an asset to raise money either through mainstream or peer-to-peer lending, or equity crowdfunding or when looking at ways to exploit the new pension freedoms. Rob commented: “While trying to do all the things that come with starting and running a small, growing business in a fast-moving industry like marketing and communications it can sometimes be difficult to consider the ‘long-game’. I always employed talented people to help me meet immediate client needs – and let them get on with it (with some oversight of course).
“So, when it came to these ‘long-game’ issues – decisions on pensions, investments, property — and all matters legal — I simply briefed in the specialist people I knew and trusted to do their bit, to give me the advice and benefit of their experience (whether I wanted to hear it or not) – and encourage them get on with it. I might be a decent designer – but would have made a terrible legal eagle. “Thankfully, Tony Houghton was already advising me on other legal matters that a small company often needs to work through – and stepped in to help make my ambition of owning my own business property a reality.”
THE AUGUST ISSUE OF TALK BUSINESS MAGAZINE PUBLISHED AN ARTICLE BY TONY HOUGHTON ON THE SAME SUBJECT
ENTITLED: “A BEGINNER’S GUIDE TO BUYING COMMERCIAL PROPERTY” READ ARTICLE ONLINE: CLICK HERE