As a business owner, where you trade or operate from is one of the most critical decisions you face. Your premises are likely to be your business’s second largest cost after wages and your most important fixed asset.

Your choice of premises will depend on a number of factors, including company size, type, anticipated growth and where your customers are based.

One primary option is to work from home. Alternatively, you may need to find suitable retail, industrial or office space. All have their pros and cons. This guide will help you weigh up the alternatives and make the right choice for your business.

Working from home

Many people start successful businesses from home. There are many advantages: you have no extra overheads in terms of rent or additional mortgage payments, no travel expenses, and it may suit your lifestyle.

If you want to work from home, there are seven main parties to consider.

• Landlords and covenants – Before you begin trading, inform your landlord and check deeds to ensure there is no restriction on working from home, as there is with many council properties, or you may risk eviction.
  
• Building society or other mortgage lender – Inform them you are working from home.
  
• Insurance companies – Inform your domestic insurer that you are working from home or you could invalidate all your domestic cover.
  
• Your local council – To discuss planning permission, licences, health and safety, and business rates.
  
• Your family – Business and family interests could conflict. Will they cope with you being around, but not around them? If you have young children, working at home can be distracting. Will they undermine your professionalism? Friends and family may not discriminate between calling you during business hours and your free time. Explaining that you are not always available even when you are at home could cause frictions.
  
• Other business people – Does your business require you to meet clients or suppliers? If so, you may feel that your home does not convey the right professional image. This can be overcome by arranging to meet people in hotel lounges or renting a room in a local business centre.
  
• You – Have you the discipline to work amidst all the domestic distractions? Unless you have a clearly defined area in which to work, domestic activity may spill over into working time and affect your efficiency. Just as importantly, will you be able to switch off at the end of the day, or will you be tempted to return to work after supper?

Planning issues

Planning permission is not normally needed to run a business from home if the character and use of the building remain essentially residential and the business activity is incidental to residential use. If this is the case you can:

• Use a room as your personal office.
  
• Run a business from home doing anything from hairdressing to dressmaking, music teaching to consultancy.
  
• Use the garage to store goods connected with a business.
  
• Provide accommodation for a childminding service.
  
• Use part of the house for bed and breakfast accommodation.

But all these uses must be kept on a small scale so you do not cause nuisance or inconvenience to your neighbours, especially with visitors’ cars.

On the other hand, you may need to apply for planning permission if:

• Your home is no longer being used substantially as a private residence.
  
• Your business results in a marked increase in traffic or people calling.
  
• The business involves activities unusual in a residential area.
  
• Your business disturbs the neighbours at unreasonable hours, or is particularly noisy or smelly.

It is possible that you may have to pay business rates if you use part of your home for commercial purposes. This will depend on the degree of business use. If the main use of a room is domestic, you are unlikely to have to pay, but if you convert an area to be used solely for work, you will be liable for this tax. For more information, see the Government’s Valuation Office Agency website.

When considering other premises

If you decide that your home is not a suitable business location, you need first to look for alternative premises. Your first consideration when looking for commercial property is cost. If you rent or buy at too high a price, the costs will eat into your profits.

Other questions to consider include:

• Do you need a suite of rooms, a whole building, a self-contained industrial unit or a retail shop?
  
• How many people do you employ? How many do you intend to have in three years? Can they work remotely or must they be in a central location? For office space, allow around 100 sq ft per person.
  
• Where is your ideal location? Much depends on your clients. For example, if you sell clothes to pensioners, a retail outlet by the post office might be ideal. However, if your target market is teenagers and twenty-somethings, a back street location might appear trendier. On the other hand, if you do not rely on passing trade, an industrial estate on the edge of town with parking might suit you better than an expensive city location. This particularly applies to niche businesses where customers will travel to find you.
  
• How far do you have to commute? How accessible and convenient is it for customers? If you employ staff, is there public transport or will they need a car? Is parking available? How easy is it to load and unload equipment, stock and other supplies?

Once you have answers to these questions, your first port of call should be your local Business Link or national equivalent. They will tell you of any subsidised space in your area. They should also be able to help you decide what type of property would suit you best and on what terms.

Issues to check before you commit

There are several checks to make before signing any contract.

• You may need planning permission for a change of use. If so, get it before you sign any documents.
  
• Check with your local authority if development is planned in the area that might affect your business.
  
• If passing trade is important, measure traffic patterns over several days. Never make assumptions or take an agent’s word for it.
  
• Check out the neighbourhood. If there are empty premises in the area, ask yourself why. Are the rent or rates especially high? Is there poor traffic flow or bad parking? Go into existing businesses and talk to them.
  
• Are there restrictions in place? For example, a ban on security grills in a conservation area.
  
• Consider disabled access and facilities both for staff and customers, particularly in the light of the Disability Discrimination Act. Since October 2004, businesses have been required to make reasonable adjustments to overcome physical barriers to disabled access to their premises. Get expert advice if you are in doubt.
  
• Check the VAT position if you’re renting, buying or taking serviced office or factory accommodation. This may not be something that affects your business when you’re starting off but may affect your choice.

Serviced offices

If you cannot predict long-term office requirements, or don’t want the commitment of a lease, one solution may be to hire a serviced office. These provide as much or as little space as you want, often in prime locations. You can increase or decrease space at short notice and can hire them for as long as you wish. Most are smart and well furnished and many offer a range of extra options from the use of PCs, faxes and other office equipment, to reception staff and full secretarial services. They are expensive, but you are paying for convenience and flexibility and possibly saving your need for a receptionist.

Note that few serviced offices carry with them the responsibility for upkeep – in effect you are paying for this as you go along.

Buying property

Buying premises is not much different to buying a house. It is a long-term investment, and you will need a survey, a solicitor, and probably a mortgage – can your business sustain the expense?

The benefits are that you can decide what to do with the building, you are not dependent on someone else maintaining it and you have, hopefully, an increasing asset. Make sure you have necessary permissions in place before you exchange contracts.

The downside is that you are tied if you find that circumstances change. You may find that when you wish to sell, property prices have fallen and you may not get back your investment.

Leasing

There is a wide range of property available to rent. For most small businesses, renting provides enough flexibility with sufficient security.

If you decide to rent space, there are two basic types of agreement – a lease or a license. A lease is a contract to rent space for a period. A license may offer much less security, but generally much shorter terms – by the week, by the month, or by the year can be arranged.

The main difference from the occupier’s point of view is that the landlord can get you out of the property for any reason whatsoever at the end of the license period. When a lease agreement ends, however, the landlord’s reasons must comply with the Landlord and Tenant Act.

Anyone entering into a lease agreement should do so carefully, taking advice and doing as much research as possible beforehand. The first mistake that many people make is not asking enough questions. The law expects both parties to understand all the terms of the lease – it is no use waiting until after all this is signed to ask for explanations of certain clauses.

Taking a lease is a property transaction that carries with it rights and responsibilities – don’t forget that you are committing yourself to a long-term cost that you may not be able to avoid even if the business is not successful.

Check the details

You can do a lot before you even approach the landlord. If you see a property that might be suitable, find out what you can from the people next door. What are the conditions like? What is the landlord like? The reply could save you a lot of wasted time and effort since most landlords are good, but there is a minority who are not.

Make sure that the person you are renting from actually owns the property.

A commercial lease is a complicated document and some run to more than 150 pages. Get this checked by a solicitor, but remember everything is open to negotiation.

Pay special attention to certain clauses. For example, leases often contain restrictive convenants – in other words, restrictions on how you may use the premises. If this is too specific, don’t accept it.

Repairs and reinstatement

Repairs are another issue to be wary of. There are a number of definitions. For example:

• A full repairing lease means that you are usually responsible for keeping the inside and outside of the property in good repair and condition, including structural defects as well as decoration. This particularly impacts towards the end of leases. In some cases, you could be responsible for putting right any problems, even if they date from before you moved in. Get a survey, take photos and consult a property lawyer before signing.
  
• An internal repairing lease makes you responsible for the internal aspects of the property.

If repairs are required, you can always ask that these be undertaken by the landlord as a condition of you taking on the lease. Many leases require that on termination, you reinstate the property to the state at which you moved in – bear this in mind before you contemplate alterations.

Other aspects of leases

You want maximum security within minimum liability. If the property you want is offered on a 15-year lease, ask for break clauses at rent review times. This will allow you, at regular intervals, the flexibility to end the agreement.

Leases are usually specific for a term of years, with rent reviews generally carried out every three to five years. Rent reviews are usually based on the open market rent of the property at the time of the review.

The rent quoted is almost always exclusive of rates, insurance and other outgoings, which can add significantly to your overheads. Insurance may be included, with the landlord insuring the property and then collecting the premiums from you with the rent. Otherwise, make sure the building is fully insured.

Most overheads of any business are fixed, but rent is one cost that can be negotiated. Some landlords will offer a rent-free period, which can be a big help to a business starting up. Even if it isn’t included as part of the property details, it is always worth asking for it. If you are successful, remember that this will not include insurance, or rates. And watch out for specific date-tied rent-free periods. The period offered could be over before you take up occupation!

Landlords can include whatever terms they like into a lease. Whether you decide to accept them depends on how badly you want the property. At its most basic, a lease is a contract to which you comply. All you have to do is pay the rent.

There are other issues to watch out for:

• Unless the landlord has the legal right to possession of the property when the lease expires, most tenants are entitled to a new lease at a market rent. Before the lease expires, consult your solicitor.
  
• Contracting out of the Landlord and Tenants Act – this will leave you potentially unable to review the lease once it terminates.
  
• Be wary of accepting a repairing clause that stipulates the quality of materials to be used in redecoration or maintenance of the property.
  
• If the landlord wants to include a service charge, be sure that is it for a fair and reasonable amount in relation to the services provided.
  
• Non-assignment clause. This means that you won’t be able to pass the lease on to a third party and effectively locks you into the agreement.
  
• Rent reviews are undertaken independently of how well or how poorly your business is doing. You have the right to challenge an increase in rent if you feel it is unreasonable. If you cannot reach an agreement with the landlord, you may have to involve a mediator or professional adviser.
  
• Legal costs. New tenants may be asked to pay the landlord’s legal expenses – this is a tradition rather than a legal requirement. This can be expensive so try to negotiate for the landlord to pay their own legal expenses.
  
• Check if your landlord is VAT registered as this may prove an unexpected expense when you set up on your own.

Transferring a lease

With a ten-year lease, you may find that you grow faster than expected and need to move after five years. In some cases, you may be able to sell on the unexpired lease to another business. Though this may appear to get you off the hook, be very careful in that, should the sub-tenant default, you could still be liable for all their rent and repairs. Conversely, if you take over a lease, make sure you are not taking on any hidden or previous obligations.

Further information

• Valuation Office Agency

  W: www.voa.gov.uk

• Royal Institution of Chartered Surveyors

It can provide valuation guidance to small businesses on all aspects of property including leasing, planning permission and business rates. For a free CD-ROM on the subject, visit their business website.

W: www.propertyinbusiness.co.uk
T: 0870 333 1600.

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