Climbing the commercial property ladder

First published on WalesBusiness.org

Of the mistakes that it is all too easy to make when starting up a new business, choosing the wrong premises can be among the most costly.

At worst, it can bring the business down before it has got off the ground. 

Nobody in the retail trade can be in much doubt that a shop in the wrong location – or even a shop in the right location, on the wrong terms – can spell doom for the business.

But selection of premises may be equally important if you are running a manufacturing or distribution business, or even a service business run largely from an office.

The old adage states that the three most important things in selection of property are location, location and location. While this is particularly true of the retail trade, it applies to other types of business as well. But even if you get the location right, there are plenty of other pitfalls along the way.

These pitfalls pose a particular threat to the new or young businesses. The problem for most new ventures is that they do not know how they are going to develop, or how rapidly.

You may dream of starting with a workforce of four and building up to four hundred (and a stock market launch) within five years. In fact, if you were a dot.com business launching around the end of the last millennium you might have planned to do it a lot faster than that. And we all know what happened, in the event, to most of them.

This uncertainty makes it particularly difficult to hit on premises that are both right for your immediate needs and also offer you the flexibility that you will need as your business expands.

Take on premises that are too big for your immediate needs and you are saddling the business with unnecessary costs in the early stages. Take on premises that are too small and you may find that your expansion is constrained by lack of space in the existing building and very heavy costs if you try to move somewhere else.

A business looking for new premises, whether it is a start-up or a mature concern, has a number of decisions to make right at the outset. First, it must choose between buying a building or finding premises that it will occupy as a tenant.

Second, if you decide to follow the renting rather than the purchasing route, you face a further serious decision. For how long do you want to commit yourself? Taking a lease of premises is a serious business.

A lease is a binding contract in law. Take a lease for ten years and you cannot simply walk away from it after three years if your premises prove unsuitable or your business fails to develop as you expected.

It may prove very expensive to extricate yourself from your commitment in terms of time as well as money. There could be better solutions.

The usual advice to an established business looking for new premises is: try to visualise the business in five years’ time. How do you expect it to have developed? What do you expect its space needs to be at that point? Then try to find a building that meets (or can be extended to meet) your requirements at least that far ahead.

A new enterprise should be asking itself the same questions. But it is not always so easy to come up with the answers. While selecting the right premises will always be a trade-off between security and flexibility, the new business should err on the side of flexibility.

Some cash up-front will probably be required even if you can cover most of the cost with a mortgage. This gives you security and perhaps an asset that will increase in value, but is not very flexible in one sense. If you need to move you will have the cost and administrative problems of finding a buyer and arranging a sale.

On the other hand, you would have more flexibility extending the building later if the site allows it. You will also be able to alter the building in other ways without needing a landlord’s permission. Businesses that will be installing plant equipment with a long lifespan may need the security afforded by ownership of the building (or at least by a very long lease).

Leases come in all shapes and sizes, whether you negotiate a new one with the landlord or take an assignment of an existing lease. Normally, a business tenant will have security of tenure under the Landlord and Tenant Act, and may require the landlord to grant a new lease when the existing one expires. But not always.

A relatively short (say five-year) lease does not mean the tenant necessarily has to leave at the end of this term and therefore offers flexibility. A long lease (say 25 years) is a long-term commitment.

If your space needs change before the term is up you will have to arrange to assign the lease or to sub-let the building and you probably retain some on-going responsibilities.

With the help of your chartered surveyor and solicitor you need to examine all the terms of any lease extremely carefully before signing. Especially important are the question of security of tenure and the clauses relating to rent reviews, assignment, sub-letting, repair obligations and service charges.

A licence is normally a shorter-term arrangement than a lease, but is not governed by landlord and tenant legislation and does not offer security of tenure. It may be possible to occupy premises under a licence by the month or even by the week.

This often suits start-up businesses. They can limit their financial commitment in case their business plans do not work out. Seasonal shops are often made available under licence.

Starter offices are sometimes provided under licence by regional development agencies and old multi-storey warehouses may be renovated to provide small office suites or even individual rooms. Old industrial buildings may be divided up to house a number of individual manufacturing businesses, occupying the space under licence.

And owners or tenants of virtually any type of building may find it convenient to offer space that is surplus to their own requirements under a licence arrangement.

Whichever option you choose, make sure you really understand what you are getting into before you take the leap. Getting out can prove a lot more expensive than getting in.