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Commercial property leases and mortgages

We explore commercial property leases and mortgages, including which is best for tradesmen and local businesses plus how they differ from residential tenancies and mortgages.

Rent – commercial property leases

For most tradesmen and women or small, local businesses, renting is the most affordable way to have a shop, showroom or office. It’s more flexible than buying and legally, you’re usually well protected.

Commercial property leases tend to be longer than residential tenancies – typically several years for a business lease compared with one year for a residential agreement.

Another key difference between a residential property tenancy and a commercial property lease is the responsibility for property repairs and maintenance. Ordinarily, this is the landlord’s responsibility for residential tenancies. The responsibility for maintenance of commercial properties, however, is with the business.

Bear in mind that a landlord may want to increase the rent when it is reviewed. You should factor this in when thinking about your maximum budget.

Always get a commercial property solicitor to review your business property lease and help with negotiation of terms before signing it.

Buy – commercial property mortgages

Tradesmen and small local business could benefit from buying a property if, for example, they want to have complete control over the layout of the interior. But, buying a commercial property is costly and can be stressful.

Lending on commercial premises is perceived as more risky than lending for residential properties. Unsurprisingly, the result is that commercial property mortgages tend to have shorter terms (typically up to 15 years) compared with residential mortgages which may allow as many as 30 years for repayment.

The loan-to-value (LTV) rate on commercial property mortgages is usually significantly lower than for residential properties. A lender will usually want to see some equity being paid down by the borrower at the point of purchase. For a commercial property mortgage, the borrower can expect 65 to 70 per cent LTV (compared with 90 to 95 per cent LTV for residential properties).

The risk profile of the business that wishes to borrow will determine the fee structure for set-up of the loan as well as interest rates. Unlike residential mortgage applications, there usually aren’t standard ‘three times income’ type rules. The lender takes into account a wide range of factors about the business and business owner and often makes a bespoke offer based on their analysis.

It’s normal practice for a lender to ask for lots of financial information about the business, and to check the background of the firm and its owners, before agreeing to lend.

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