Buying a commercial unit: what you need to know
Freehold or leasehold?
Most commercial premises are leasehold rather than freehold. If leasehold, you need to understand the length of the unexpired term, the ground rent and service charge, provisions on repairs and alterations, and how readily you could transfer or sub-let the premises if your plans change. A short residue or onerous covenants can significantly affect both value and saleability.
How will you own it?
The next decision concerns the buying entity. You can purchase personally, through your trading company, or through a separate property-holding company. Each option carries different tax and risk implications. This is a conversation to have with your accountant alongside your solicitor, as the earliest opportunity.
Tax on the purchase
Stamp Duty Land Tax may be payable on the premium or the rent.
VAT must also be considered. By default, commercial property is exempt from VAT, but a seller may have “opted to tax”. If so, VAT is added to the purchase price/rent, and SDLT on the VAT-inclusive figure. In some cases, the buyer can opt to tax and recover the VAT, but the rules are technical. Your solicitor and accountant should consider this together.
Planning and permitted use
The property’s planning consent must permit the use you intend. Use Class E covers a broad range of commercial uses, including shops, offices, restaurants, cafés and most light industrial activity. Changes within Class E generally do not require planning permission. Other categories, such as hot food takeaways, drinking establishments, hotels, or general industrial use, fall outside Class E and may require a change of use.
Legal due diligence
Once the heads of terms are agreed, your solicitor will carry out legal due diligence. This typically involves reviewing the title, raising enquiries of the seller, and commissioning a suite of searches. The aim is to identify anything that could affect your use, value or enjoyment of the property: restrictive covenants limiting how the unit can be used, rights of way crossing the site, boundary uncertainties, planning enforcement history, environmental contamination, and any rights or obligations that pass with the title.
Ongoing costs
Buildings insurance and business rates will be payable. If the property is leasehold, budget for service charges on top. Repair and maintenance obligations, particularly under a full repairing and insuring (FRI) lease, can be more onerous than they appear on the surface. A building survey undertaken at the outset by a chartered surveyor will identify defects, repair liabilities and likely maintenance costs.
A commercial purchase benefits from early professional input. A solicitor, surveyor and accountant together can identify the right structure, manage the risks, and keep the transaction on track. If you are considering buying a commercial unit, get in touch with your solicitor before signing heads of terms or paying a deposit. The earlier they are involved, the more value they can add and ultimately, the more cost effective it can be.
Latest insights and news
