Buying a Leasehold Business: Is it a Good Idea?

In short:

• A leasehold business is any company that doesn’t own its own premises.
• Buying a leasehold business is usually cheaper than acquiring one with its own property.
• Landlords simply transfer the lease over to the new owner.

 

When buying a leasehold business, investors often contact us with concerns and questions about the process. The truth is, however, that the vast majority of UK businesses operate out of a rented premises, so it’s far less commonplace to find a freehold business for sale.

In fact, in a survey conducted by UK solicitors, Dutton Gregory, they found that 94.9% of organisations rent their main commercial premises. While this doesn’t necessarily mean that the land their premises sit on is leasehold, it does show that you should probably expect to have to pay a landlord in one way or another as part of your business expenses.

Below, we’ve compiled some of the most common questions that our clients ask us about leasehold businesses.

 

What is a leasehold business?

In general, a leasehold business is any business that does not own the premises it operates from.

In residential terms, buying a leasehold property would involve the purchase of a house that can have up to a 999-year lease on the land it sits on.

When it comes to business acquisitions, however, it simply refers to the rental of the company premises. Landlords will often try to tie commercial tenants down to longer-term contracts, however. These can be over five years, ten years, or even longer.

 

Do you pay rent on a leasehold business?

Yes. The business owner will be expected to pay rent for the period agreed on the lease. Founder of Barker Property Consultants, Jonathan Barker, explains that “rent is typically paid monthly or quarterly in advance, but can occasionally be structured into different increments or even paid monthly in arrears depending on the contract”.

Additionally, some business owners may be liable for service charges, ground rent, and other fees.

 

Is it worth buying a leasehold business?

Absolutely! In fact, buying a leasehold business is usually a much more affordable way of making an acquisition compared to buying freehold.

Business Acquisition Expert, Nicholas Troth explains that “as well as a bigger purchase price, buying a business with its own premises also calls for a great deal more legal work and due diligence. Of course, while acquiring a property along with a business provides more value, it can also be a money drain should the premises be in a state of poor repair.

“At least with a rented commercial property, you can generally call upon the landlord for any essential works that need completing. Businesses that are just starting out or going through a lean patch can ill afford to pay out for a new roof or broken windows, for example.”

 

Benefits of buying a leasehold business

Cost

As mentioned above, without the addition of property in an acquisition deal, businesses tend to be cheaper to acquire.

 

A simpler deal to complete

Business acquisitions are a complex beast at the best of times. Throw in some commercial premises and you only add an extra layer of issues to overcome. As such, acquisition of a leasehold company can sometimes be quicker and (relatively) easier to complete.

 

Large repairs paid for

As somebody else will own the premises your business operates out of, they will usually be responsible for its upkeep.

This isn’t always the case, however, and it pays to double check any documentation to determine who is liable for any repairs to the property before signing off.

 

Disadvantages of buying a leasehold business

A degree of uncertainty

Without legal provisions in place, a landlord can choose to evict you or sell the premises whenever they like. Such actions could seriously interrupt your business operations.

Commercial property expert, Jonathan Barker suggests that anybody worried about this possibility can check that they have the appropriate protections in their lease. “Sudden evictions are few and far between thanks to the Landlord and Tenant Act 1954 which protects tenants from unreasonable evictions” he says.

“If your lease is covered by this, then there should be little to worry about in this regard”.

 

Restrictions

You may have plans for some exciting new signage or a more open-plan layout inside, but these can be blocked if the landlord doesn’t agree with your vision.

Some landlords can even restrict small changes such as the colour of the paint used on the walls. In such instances, owning the property is the only way to have full creative control over your business.

Although this is a risk, however, it’s thankfully far from the norm. Barker explains that “the vast majority of landlords will allow, and even expect business owners to customise the premises to suit their needs. This can be simple things such as branding and decorating, or even non-structural alterations.

“Many are even able to make structural changes, but these are subject to the landlord’s consent. The landlord may stipulate that if such works are taken out, that the premises be returned to its original state at the end of the lease”.

 

Fewer assets to fall back on

Should your business ever struggle, the sale of assets to either keep it afloat or pay off creditors can act as a safety net of sorts.

Some of the most valuable assets that businesses usually hold are equipment, vehicles, and stock. Far beyond these, though, the most valuable asset that a company can own is usually property.

 

 

How do you value a leasehold business?

It’s difficult to give one definitive answer to this, as there are multiple methods of valuing any business. We’ve devoted whole articles to this subject before, but the best advice is to have a professional third-party value it for you.

In general, the main factors that should be considered when valuing a leasehold business are the same as any other, apart from in the terms of the lease. Consideration should be given to the length of time allowed, price of rent, and any clauses that could be deemed a benefit or disadvantage.

Location can be a huge selling factor for a business, so if a deal includes a prime retail or dining spot, you can expect to pay a premium for it.

 

Can I sell my leasehold business?

There are few things that last forever. That’s why it’s always worth checking how liquid any potential purchase is.

A leasehold business can be sold like any other, but there may be restrictions in the form of landlord consent. Some commercial leases need the permission of the landlord before being transferred over to another business. It’s uncommon for landlords to refuse though, and legally, they have to have a reasonable motive to do so.

If the landlord’s consent is given, it may be accompanied with some conditions. These should be clearly outlined in a ‘licence to assign’. This is a document that lists each party’s intentions and obligations going forward.

 

What happens to a lease when a company is sold?

Assuming that the buyer is happy with the terms of the lease, when a leasehold business is sold, the lease simply transfers over to the buyer.

Typically, the new owner will pick up the lease where the seller left off. The responsibility of remaining time left on the lease and fulfilling the original obligations is passed on to the new owner.

 

What is a lease assignment?

The legal process that transfers the lease from the old business owner to the new owner is known as a lease assignment.

This process involves a number of steps. Firstly, the landlord will determine whether or not they accept the new owner as a tenant by performing due diligence checks such as asking for references, trading accounts, or even credit checks. This will usually be handled by a legal representative working on behalf of the landlord.

Once happy to proceed, formal consent of the landlord is demonstrated by a ‘licence to assign’.

Beyond this, the landlord can potentially ask for rent deposits or personal guarantees. There may also be added stipulations in the authorised guarantee agreement.

 

What is an authorised guarantee agreement?

An authorised guarantee agreement (or AGA) acts as a legal document that promises the landlord that the new tenant will adhere to the stipulations of the lease. These covenants may refer to payment, repairs or potential misuse, and provide a level of protection for the landlord.

 

Who pays for my landlord’s legal costs?

Generally, the outgoing tenant will pay for the legal costs involved in vetting a potential new tenant. While this may seem unfair at first, remember that the landlord would not need to do this if it wasn’t for the existing tenant selling up mid-lease.

 

Acquisition specialists can make the whole process easier

There are myriad issues to consider when buying a business, and it’s highly recommended that you use a business consultancy that provides help with acquisitions to navigate you safely through the process. Mistakes in the buying stage can potentially cost you dearly in the long term, so hiring a specialist to take care of things for you can allow you to relax while everything is done properly.

Forbes Burton can guide you throughout the entire acquisition process. Call one of our friendly advisers on 0800 975 0380 or email advice@forbesburton.com to ensure your acquisition completes with the minimum of fuss.