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Hidden Costs on taking Commercial Leases

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Many small businesses and entrepreneurs may not be familiar with the costs involved with leasing commercial premises. If you are interested in growing your business, before agreeing terms for a new lease you should be aware of some of the hidden costs which the landlord’s agent may not necessarily inform you of or which may not be shown in the terms agreed. Your solicitor will inform you of these costs at the outset, but by then you will have spent time and effort agreeing lease terms with the landlord’s agent. It is better to be aware of these before that stage is reached.

One such cost which is not usually discussed at an initial stage is stamp duty land tax (SDLT). Just like with purchasing a house, taking or ‘purchasing’ a lease can make you liable to pay SDLT to HM Revenue and Customs (HMRC). The threshold over which stamp duty liability begins for commercial property is £150,000. Whether or not a lease is liable for SDLT, and for how much, can be roughly determined by multiplying the term of the lease by the annual rent (including any VAT payable on the rent, see below). For example, a lease for 5 years at a rent of £21,000 per year would total £105,000 in total rent, falling below the threshold. A lease of 7 years for £35,000 would result in £245,000 total rent, above the threshold. A SDLT liability of £640.00 would then be payable. You should speak to a solicitor early on to establish your potential liability.

Initial lease terms may not clearly say whether VAT is charged on the rent and any service charge you may be paying. Not all landlords can charge VAT, only those which have ‘opted to tax’ the land by having notified HMRC. Lease terms usually indicate this by stating that rent or service charge is ‘exclusive’ or ‘exclusive of VAT’. You will be able to recover any VAT payable, but only if your business is VAT registered. If you are given terms for a lease where this is not mentioned, you should ask the landlord’s agent early on to clarify.

Registering your lease at the Land Registry is another “hidden” cost. Leases must be registered where they run for at least seven years, or where the lease term is due to start in over three months’ time. When the yearly rent (including any VAT) is below £80,000 per year, a sum of £40.00 will be payable. However, the fee payable increases sharply when the rent climbs above this level.

You may be looking to carry out fit-out works to make the premises suitable for you. Consent is usually required for such works and the costs payable can become expensive if the landlord does not own the premises itself, but leases it in turn from a superior landlord who may have to approve works. They would likely require you to pay the cost of their solicitors drawing up a “licence for alterations’’ and any surveyors costs if there are concerns about the building’s structure. A superior landlord will also usually require a ‘licence to underlet’, authorising your lease. Their legal fees for this would be covered by you and can range from £500 plus VAT to more than twice that amount.

Any works may require planning approval and this is more likely to be needed where premises are for example, in a conservation area. Issues like this can be looked at and advised on by your solicitors carrying out searches. We would always recommend ordering searches if you are taking a lease of five years or over. A full pack of searches, including a local search and environmental search (investigating risks of contaminated land and flooding among others) can cost up to £600 depending on the local authority involved and any extra searches which are advisable to order, such as mining searches.

When letting a property, you will be taking on full repairing liability and we would therefore advise that you carry out a survey to identity any issues with the state of repair of the premises and any building they may be situated in. The cost would usually range from £750 – £1,500, with more expensive surveys being recommended for premises within older buildings or those of an unusual design.

As you can see above, there may be a sizable cost involved in taking a commercial lease which you may not necessarily be familiar with at the start of the process. Asking the right questions early on could save you time and money before committing to taking a lease.

At Clarke & Son our team of skilled lawyers is highly experienced in reviewing and advising tenants on initial lease terms and recommending the best way forward. Get in touch with us on 01256 320555 or mail@clarkeandson.co.uk to see how we can assist you.

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