Finding premises

For both Gary and Bob, the problem of finding the right location for their business. Commercial property tends to do better than residential property at times of a slowdown in the overall market. Commercial prices tend to be higher and more stable than their residential counterparts. If there’s one thing that commercial estate agents know about businesses it’s the old adage location, location, location. This of course is true. Your location whether it is a high street, a shopping centre or an office block will determine your business activity. But location can also define your image, bring in other business and other contacts.

We recommended that both of the partners sat down with a professional surveyor such as The vinden Partnership to discuss their property budgets, ideas, constraints and draw up an action plan.

So what does that actually mean? Where should you position your business? For example, should you head straight for the high street and aim to directly attract customers as they walk past? Should you locate on the edge of town or just off the main shopping avenue because there are better parking facilities? Or should you head out of town altogether and follow the larger stores into a retail park but pay more rent?

Considerations

There are two main principles to bear in mind. What sort of business you are and what sort of customers you are going to be targeting (see checklist).

Then comes the most important factor – market research and the four main areas you should consider. These are population, accessibility, competition and costs. These will determine where you locate.

For example, if you run a sandwich bar or café - are the customers in the high street the ones that will buy take away snacks? Can they afford your prices? What is the footfall or number of passers by that walk in or past your shop? How visible is your store next to your competitors and how easy is it to access your store?

What do you actually need?

Three factors dominate the priorities of small businesses looking for premises: cost, cost and cost. Nobody ever has enough money, so there is an overwhelming temptation to go for the cheapest property. It is a mistake that can take decades to rectify – and even bring a promising business to its knees.

Ironically, some firms swing too far in the other direction, committing themselves to a heavy initial outlay because they believe image is vital – and image does not come cheap.

Finding the right premises is the real secret. That can, and will, vary enormously according to the type of business. But there are some general rules that apply to any operation.

Location

Shops need passing trade but high street premises are expensive. Do you need passing trade or will customers come looking for you? Rents fall quickly within yards of main roads. Offices are even more flexible, particularly if most business is done on the telephone.

Manufacturing and storage relies heavily on access. Think about how vans and lorries will deliver and collect goods. Nearby parking can be important. As traffic restrictions tighten, public transport can be even more so.

Size

This is a crucial decision. Health and safety laws provide basic guidance on how much space is needed per office desk or manufacturing process. But allow for growth. The whole point of business is to expand, so try to be flexible. This will cost more, however, today's out goings must be balanced against the prospects of tomorrow's earnings.

Growth

Can a building be physically altered internally, such as knocking down walls, extending outwards or upwards? Is there spare land next door for expansion.

Landlords obviously hold the whip hand and it can be important to make agreements from the outset about what will be allowed and how much extra will be charged on top of the cost of rebuilding or alteration.

But planning rules must also be considered. Local authorities are not always open to discussion about the future of premises. They may have rigid rules about increasing density of development. The buildings may be in a conservation area or near housing, in which case it will be much more difficult to consider changes.

Even where no physical changes are required, it is crucial to consider restrictions on potential alterations in how premises may be used. Lease conditions and planning rules are usually quite specific about what goes on within a building. You cannot even change a shop to an office, or vice versa, without permission from the local authority and landlord. In fact, changes from one type of shop to another can sometimes fall foul of planning restrictions.

Getting help

The cost, time and plethora of potential problems makes the whole business of buying, leasing and selling property a minefield. At best, it can absorb huge amounts of management time. At worst, it can lead to bankruptcy.

Take specialist advice. Everyone dislikes agents but do not mix up chartered surveyors and valuers with this ubiquitous breed of high street hawks. Just as lawyers know the law, surveyors know bricks and mortar.

There are different types:

One group are effectively agents and know all about availability, rents and prices. It may be worth employing one to find the right space rather than traipsing around those selling or leasing.

Building surveyors specialise in the nitty-gritty of construction. They can organise a new-build or inspect existing buildings for potential faults.

Another skill lies in analysing the average 40-page lease a landlord will expect. Or they can take over negotiations on rent reviews, rating appeals and planning applications.

Use an expert with letters after their name. Several professional organisations award these, such as the Royal Institution of Chartered Surveyors (RICS) and the Incorporated Society of Valuers and Auctioneers (ISVA). Ask in advance how much it will all cost. After taking a deep breath, consider how quickly such fees will be saved in making the right choice or winning a cut in the asking rent.

Other factors to consider

Use of premises

Most leases overflow with restrictions on how buildings can be used. This is partly to protect the landlord's investment by, for instance, preventing dangerous or noisy activities. There may also be covenants from the original ground landlord on types of business activity as well as local planning restrictions. Sub-letting is commonly denied without the permission of the landlord. If a lease contains too many of these caveats, it can restrict ability to pass on the lease to another tenant when you want to move on.

Redecoration and repair

Designating when, how, and how often, this should take place, and who should do it. This can be a crucial factor for older premises, where hefty costs may be involved, and many modern leases load most of these onto tenants. Landlords usually demand power to carry out the work at your expense if it is not done on time and to a required standard. Tenants also face what are called dilapidations schedules at the end of their lease term, where the landlord can demand payment where premises have not been kept in good condition.

Alterations

Structural changes and extensions are usually restricted. Internal changes require negotiation and may need clearing when the lease ends.

Length of commitment

A tradition has grown up in the UK for long leases. At one time these ran for as long as a century but the term has gradually been eroded to between ten and 15 years. These generally apply to new buildings or those in high-demand city centres, however. Much shorter terms can be found – or negotiated – nowadays as landlords adjust to conditions where tenants are unwilling to commit themselves for such long periods.

Three to five years is generally considered a good compromise between a landlord seeking security of investment and small business unsure of their future. For financial reasons, a landlord may prefer to maintain the lease length at ten years but allow a break clause. This effectively means the tenant can leave after, say, three or five years. On the other hand, it also means that the landlord can demand this break even when a tenant does not want to move, causing expense and disruption.

Security of tenure

Many businesses may prefer to feel secure with longer leases. They are normally assured of this by the 1954 Landlord and Tenant Act, which gives them the right to a new lease when the existing one expires. But sometimes these restrictions do not apply. Serviced premises are one example; a sub-lease or older buildings in temporary use pending redevelopment are others.

Others may seek the freedom to get out of their commitment. Watch out for restrictions on sub-letting or assigning a lease. These are common, as landlords usually like to keep control on who is using their buildings. Be aware that this may involve you paying someone a premium to take on the responsibility for a lease.

One crucial factor when taking on an assignment is whether that lease is subject to an archaic rule called privity of contract. Until the law was changed in 1996, a tenant remained responsible for rent and other charges even after assignment.