Understanding Premises Costs

This article will explain how to prepare yourself for the costs you might have to pay if you are going to take on a business premises.

Mini-Glossary

We get that setting up a new organisation, and using a space, can involve plenty of confusing or technical language. Whilst we have explored concepts in more detail below – there is a mini-glossary at the bottom of the article that explains key terms.

How to prepare

So you’ve found premises that you’d like to operate from.  To start, you should be aware of the costs you may incur.

Businesses are all different, but we’ve prepared a cash flow template listing the main costs that you will need to be aware of here.

Before filling in the cash flow template, be aware there may be costs you might not expect. Has a landlord sent you a lease to review which includes terms you don’t understand? Have you spoken with others who talk about costs you haven’t heard of? Has an agent mentioned “additional management fees”, which can be common if the landlord is taking care of insurance, maintenance etc? These may all be new to you, but the template is designed to help you think through the practicalities of how much a premises may cost.

This is a useful tool to establish whether you can afford the premises that you have found in the long term, and also to calculate any additional funding required to cover initial set up costs.

You might be wondering – “should I rent or buy?”. For most new organisations, renting will be the most sensible option because it allows you to test the strength of your idea and see how you get on. Buying is very expensive and involves much more upfront cost. Buying a premises is a significant decision and we would strongly advise you seek our advice before doing so.

You’re probably thinking – what are all of these costs exactly?

We discuss them in more detail below:

Upfront / one-off costs

• Rent Deposit: Sometimes the landlord might require a tenant to provide a rent deposit. This is a cash deposit, which is usually transferred to a locked account. The landlord is allowed to withdraw money from the rent deposit to cover any costs if the tenant causes any property damage or is late paying rent. If this happens, the landlord can ask the tenant to put money back to the deposit account and top it up. Normally, the tenant gets the deposit back once the lease has expired and they have complied with all obligations in the lease.
• Premium: When a lease is sold there may be a premium payable. Sometimes the landlord will charge a premium. Sometimes a tenant may sell a valuable lease and charge a premium for it to the new tenant. This is called “assignment” – see our How To Guide on “Assignment and Subletting”.
• Stamp Duty Land Tax: if you have done your assessment and think that buying a premises is the best way forward, or if you have to pay a premium on a lease, tax may be payable on the purchase. If so, this will be paid by the person buying the lease. Please seek specialist advice on tax issues.
• Fit Out Costs: The tenant will usually have to bear the fit out costs of preparing the property to fit their specifications and meet their requirements. These can often be very significant. Bars and restaurants in particular will have high fit out costs. Think very carefully about how you budget these, and how you expect to get them back. There may be grants available to you from local authorities, funders, or government for this type of work. Additionally, you can often claim tax reliefs on building work you undertake. You can find out more about government grants for this type of work here.
• Professional fees: It is recommended that you seek professional advice from a surveyor and a solicitor when entering into a commercial lease. Their fees will also need to be budgeted for. VAT will be payable on those fees.
• Landlord consents: Sometimes landlords are allowed to charge fees for their consent to alterations, assignment, and sub-letting. Those will usually be the landlords’ “reasonable” professional fees. What “reasonable” fees are may be debatable, but your professional advisors should be able to give you an idea. Confusingly these are often called ‘licences’ but should not be confused with.
• Planning permissions: If you need to get any planning permissions then these will also require application fees and professional fees. See our How to Find the Right Property guide for more information on planning permission.
• Statutory obligations: including gas, electricity, water/sewerage, asbestos register. Again, these will involve costs of having a tradesman or other specialist carry out these works.
• Lease renewals: If you have a “renewable” lease then there will be costs associated with agreeing a new lease with your landlord. See our How To Guide “The Landlord and Tenant Relationship”.
• Dilapidations: You should take a surveyor’s advice on this issue and also consider making provision for it in your accounts. See our How To Guide “Dilapidations”.
• Other End of Lease Costs: At some point your lease will either end due to the term finishing and it not being renewed, or if you choose to leave it early. You will have, in addition to dilapidations, costs of reinstating alterations, and removing your fixtures, fittings, and other items. You may also have the costs of selling your lease or agreeing a surrender with your landlord if you end the lease early.

Annual costs

• Business rates: Business rates are taxes paid on commercial premises. They are usually paid by the tenant of leasehold premises and the lease will set out that the tenant has to pay them. Local authorities issue the business rates bills each year, between February and March. Business rates are based on the annual market rent value. This valuation is carried out by the Valuation Office Agency (VOA), using other rents in the local area to calculate an average. These values are usually examined every five years and take into account the size of the property and its usage. For example, factories and shop floors are likely to have a higher rateable value than stock rooms. Some properties are eligible for discounts on their business rates (called “business rates relief”). Relief is available for small businesses, charitis, for certain types of buildings, and as a result of Covid-19. You can find out more about rate relief here.
• Service charges: These charges are about the maintenance of the building in general – for example, maintenance of central heating, lifts, porters, security, lighting, disposal of rubbish, gardening or cleaning of common areas. If you are renting part of a landlord’s building such as an office space, you will typically be charged for a proportion of these services. A tenant may also be charged for service costs such as parking or access roads and may have to pay these costs even if they are the only tenant.
• Licences: Such as premises licences. The most common licences, which are granted by the local authority, are for the sale or supply or alcohol and other late-night refreshments, and those that permit certain types of entertainment. There are likely to be application fees and professional costs involved in applying for any licences.

On-going costs

• Utilities: The will have to pay the usual gas, water, and electricity bills for utilities that they use, unless otherwise agreed with their landlord.
• Rent in advance: The tenant will have to pay the rent either monthly or quarterly in advance. It is usually payable whether the landlord demands it (i.e. sends an invoice) or not. It can be tempting, if a landlord hasn’t asked for rent, or, if the tenant thinks the landlord isn’t doing something they should, not to pay it! It is very risky to take this approach as a landlord’s failure does not give a tenant the right to withhold rent. Interest and other penalty charges are usually payable to the landlord if rent is paid late, or worse, a landlord can pursue a tenant through the courts for failing to pay. If the tenant believes they shouldn’t pay rent, they should seek legal advice. It is usually the case that rent still needs to be paid whilst a separate complaint can be made to a landlord.
• VAT on Rent: VAT may be payable on rent. The tenant should keep VAT records in good order if they are able to reclaim this VAT.
• Rent Reviews: be aware that your lease is likely to have a rent review at some point. You will need to try and budget for future increases in the rent. If the rent does go up, your business rates are also likely to increase in line with this. Please see our How to Guide “Lease length, break clauses and rent reviews”.
• Buildings insurance: Either the landlord or the tenant must insure the property under the business lease. In a case when the tenant is asked to insure the property, you must check whether the lease has any particular requirements regarding the level of cover, the risk covered and the name of the insured parties. Where the landlord insures the property, the tenant usually has to pay a proportion of the premium payable for the insurance.
• Other insurance: The tenant will usually need to take out insurance. Some of the common policies which are needed include public liability; accidental damage; business interruption; plate glass, contents, and so forth.
• Repair costs: Under a commercial lease, tenants usually have to carry out repair works. Sometimes, the lease will also impose repairing obligations on the landlord. The tenant is required to keep the property in repair, even if it was not in a good state of repair at the date of the lease.

There are lots of technical elements to consider when looking at finance (just look at the list above!). The key is to think about is why you need the premises and what operational difference it is going to make to how your organisation will work.

For example:

• Is the location practical for you, any staff, or partners you work with?
• Are there good transport links, parking?
• Is the location accessible for loading/unloading goods?
• What other businesses reside in the area?
• Will Broadband, telephone lines be an issue?
• How is the building heated?
• What additional costs will you need to incur to make the space fit for purpose?

Once you are happy that the premises meets your needs, the next step will be to ensure it is affordable.

You will need to think about both the up front costs, fit out costs etc, as well as the additional monthly costs set out above of operating from the premises and ensure that you have sufficient funds available to meet these.

Ask yourself what impact these additional costs will have on your net monthly income?

Remember

• Before signing a commercial lease, business owners should consider the financial commitment they are making themselves liable for.
• The lease will usually outline whether a particular cost will be paid by the tenant or the landlord.
• You should always take professional advice from a surveyor and a lawyer before signing a lease.

Some of the costs we have set out can be negotiated with the landlord (e.g. deposit amount or rent reviews) but some will typically never be negotiated (e.g. what insurances are required). See our Negotiating a Commercial Lease guide for more advice on this.

We would recommend seeking financial advice or speaking to an accountant before signing any final lease agreements to ensure you have considered all relevant business costs and the costs of any additional funding requirements.

Are you reading this page as part of our Guide for Opening, Running and Growing a Cultural or Community Space? Have a look at Developing a Fundraising Strategy next.

Mini-glossary

• Premises: Any space you will use as part of your organisation. It might include an office, a shared space, a gallery, a workshop, or an entire building.
• Landlord: Often the owner of a building, premises, or land and the person who rent is paid to.
• Tenant: Those who rent a premises and have use of a space or building, under a lease or tenancy agreement.
• Premise Licence: A permanent licence, granted for a specific location and authorising the licence-holder to carry out various licensable activities. It might be for sale or supply of alcohol, or providing certain forms of entertainment.