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Leasing or buying premises

Leasing or buying premises

If it’s your first premises or you are relocating, the first step is to think about buying vs leasing.

Buying offers more stability. Leasing is more flexible.

Deciding which option is best for you is about understanding where your business is headed. Here are some tips to help.

Consider your options

If you’re just starting out or are self-employed, you may want to explore other workplace options, eg shared working spaces or working from home.

If your business is established, you may consider buying or leasing premises — and the different opportunities and stumbling blocks of each. In either case, discuss how to get the best terms. Know what you’re agreeing to before signing any contracts.

Buying your premises

Most small businesses don’t own their premises outright. However, there are certain situations when you might consider purchasing your workspace.

Buying may suit businesses that:

  • are stable
  • are well established
  • have capital to invest
  • are owned by people who want to build personal wealth — property is an asset that should appreciate. 

Pros and cons

Upsides include:

  • You have a valuable asset.
  • You’re protected from rent hikes.
  • You’re protected from a lease ending.
  • You avoid landlord issues.

Downsides include:

  • It limits your opportunities to grow, shrink or adapt quickly to changing circumstances.
  • Depending on where you are located, there may not be many premises available to buy.
  • You're responsible for maintaining the premises.
  • You’re responsible for paying all relevant expenses, compliance and insurance costs, plus taxes on your premises.
  • Depending on what sort of mortgage you get, you may be subject to interest rate rises.
  • The value of the property may fall.

Get advice

Buying commercial property can be complicated. You should consult with a property advisor, lawyer or commercial real estate agent if you are thinking about purchasing property — especially if you don’t have in-depth experience in this area.

Leasing your premises

Most small businesses lease their building or workspace.

Leasing suits businesses that are:

  • moving into their first premises
  • in the start-up phase 
  • focused on building and growing
  • don’t know where they will be in next few years
  • have little capital or would rather invest in other parts of their business.

Pros and cons

Upsides include:

  • It’s easier and quicker to move to new premises if you need to.
  • You have different levels of flexibility depending on where you lease, eg shared workspaces offer lots of different options.
  • There’s less risk involved.
  • You don’t need to invest a lot of capital upfront.
  • You often have more premises options to choose from.
  • Your landlord handles day-to-day repairs and maintenance.
  • Your landlord is responsible for any compliance and regulatory issues.

Downsides can include:

  • Being forced to move if the owner wants to sell or your lease is not renewed.
  • Issues with your landlord, eg problems with an exiting a lease, or maintenance.
  • Rent rises.

Many of these cons can be limited by negotiating a favourable lease.

If you are a start-up or a high-growth business, choose premises that offer the most flexibility.

If you are a start-up or a high-growth business, choose premises that offer the most flexibility.

This could mean short-term leases in a shared or co-working space.

Property professionals

To protect yourself from issues, it’s important to seek help from professionals who specialise in commercial property — particularly if you haven’t leased or bought a work premises before.

Local commercial real estate agents will:

  • help you find suitable options
  • assist you through the leasing or buying process
  • give you advice across a wide range of areas. 

Their fees are usually paid by the landlord or current owners of the property.

Commercial property lawyers will advise you on the details of lease terms and conditions or sales agreement. It’s their job to make sure you get the best deal for your needs.

You may also get help from:

  • structural engineers
  • building services engineers
  • fit-out or space planning consultants.

Finding premises to lease

Before you start looking, do some business planning to define your needs and specifications.

Questions to ask:

  • How long a lease do I want? Should I look for a premises that offers lease renewals?
  • Does the market favour leasing? What other deals are businesses like mine getting?
  • What’s my budget?
  • How much space do I need? 
  • What do I need from my workspace?
  • How important is location?
  • What are my short-term growth goals?
  • What are my long-term growth goals?

It’s good to find six to 10 possible options and narrow them down from there. You will get a decent understanding of the market and what’s available.

Be wary of any landlord who won’t provide a structural or asbestos report.

Be wary of any landlord who won’t provide a structural or asbestos report.

You have a responsibility to provide a safe workplace for your staff and visitors.

Lease documents

Here are things to consider before you sign a lease agreement. Remember, a deed of lease is a document that sets out both a landlord and a tenant’s rights and obligations. They can be long and packed with legal jargon. It’s important to get professional help if you don’t have in-depth experience with commercial leases. Nothing is set in stone — negotiating good terms is worth the upfront work.

End dates and flexibility

Some common lease terms you may negotiate with the landlord include:

  • The ability to expand or shrink the premises.
  • Being able to lease more space in the building under the same terms, often called a first right of refusal.
  • Sub-leasing — or assigning — part or all of the space to another business.
  • How the property should be left at the end of the lease term, often called make good provisions.
Do ask about incentives.

Do ask about incentives.

This may mean asking the landlord for a rent-free period, more favourable terms and conditions or assistance with fit-out costs.

Fit-outs and maintenance

Be sure the lease is clear on what maintenance and repairs the landlord and the tenant will be responsible for. You will also want to check who needs to pay for any fit-outs, renovations or changes made to the premises. Often landlords will agree to pay for some of the fit-out as a signup bonus or incentive. The longer you sign your lease for, the more they are likely to commit to an incentive.

Bonds and security

Most landlords will want security. Commonly, this comes in the form of a bank bond or personal guarantee.

Bank bonds are a financial agreement a tenant has with their bank. Like an overdraft, it provides security to the landlord should you default on payments. To get a bank bond, you pay a fee to the bank for its risk — it’s not a cash payment held by the bank.

A personal guarantee is an agreement that the guarantor, usually the business owner, will be personally responsible for any debt the business cannot pay.

The higher the risk, the more security a landlord may require. This means landlords may ask for more security if you are leasing for the first time or don’t have a strong leasing history.

If the building is damaged

Make sure the lease is clear on what happens if the building is damaged or destroyed — or if access is limited due to a disaster, eg earthquake or fire.

Ask for a structural report. Get an expert to review it. If a building falls below a certain percentage, the lease may state the landlord needs to carry out strengthening work by a certain date.

Leases contain clauses that cover these scenarios. It’s best to consider and negotiate these terms prior to signing a lease agreement.

Other terms

You might also want to discuss:

  • renewal options
  • what the likely expenses — or outgoings — are, and who is responsible for paying for what
  • parking rights
  • signage rights
  • specific tenant use clauses
  • any specific zoning regulations.

Common mistakes

Common mistakes
  • Not using an agent or commercial lawyer — they have market knowledge on what’s available and can help you untangle complex lease agreements and deeds.
  • Not checking upfront about how earthquake-safe the building is — if it’s not and there’s an earthquake, you may have to look for new premises.
  • Not checking up the landlord’s history. If you can, speak to previous tenants or other tenants in the building.
  • Committing before you’re ready — think about a serviced office if you’re not sure whether you’re ready to take on your own lease.
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