Commercial Property Guide
Commercial Property: Buying, Leasing & Development
A plain English guide to buying and selling commercial premises, commercial leases, development, refinancing and pension property purchases.
Buying and Selling Commercial Property
Commercial property transactions are more complex than residential conveyancing. There is no standard contract and the terms are negotiated between the parties. The process typically takes 6–12 weeks for straightforward transactions, but can take longer for complex developments or where planning issues arise.
Key stages in a commercial property purchase include: heads of terms (a non-binding summary of the agreed deal); due diligence (searches, surveys, title investigation); drafting and negotiating the contract; exchange of contracts (legally binding); and completion (transfer of ownership and payment of the purchase price).
VAT is a significant consideration in commercial property transactions. Commercial properties can be elected to be subject to VAT, meaning the buyer pays 20% VAT on top of the purchase price. This can be avoided if the transaction qualifies as a Transfer of a Going Concern (TOGC), but strict conditions must be met.
Commercial Leases
A commercial lease is one of the most significant financial commitments a business can make. Unlike residential tenancies, commercial leases are largely unregulated and the terms are negotiated between the parties. This means the landlord's first draft will almost always favour the landlord — and it is essential to have a solicitor review and negotiate the terms before you sign.
Key issues to consider when taking a commercial lease include:
- Rent and rent reviews — how often can the rent be reviewed, and on what basis (open market, RPI, fixed uplift)?
- Lease length and break clauses — how long is the commitment, and can you exit early?
- Repair obligations — are you taking on a full repairing and insuring lease? What is the condition of the property now?
- Permitted use — does the permitted use clause allow you to operate your business as planned?
- Alienation — can you assign the lease or sublet if your circumstances change?
- Security of tenure — is the lease inside or outside the Landlord and Tenant Act 1954?
Commercial Development
Commercial development involves a range of legal issues beyond the property transaction itself, including planning permission, construction contracts, funding arrangements, and pre-let agreements with tenants. A solicitor experienced in commercial development can coordinate all of these elements and ensure the project proceeds smoothly.
Development finance is typically provided on a short-term basis and must be repaid on completion of the development. The lender will require a first legal charge over the property and will appoint a monitoring surveyor to oversee the build. Refinancing onto a longer-term commercial mortgage on completion is common.
Frequently Asked Questions
What is the difference between a freehold and leasehold commercial property?
A freehold commercial property means you own the building and the land it stands on outright. A leasehold means you have the right to occupy the property for a fixed term under a lease agreement with the freeholder (landlord). Most commercial properties are held on long leases of 10–25 years, though shorter leases are common for retail and office premises.
What searches are required when buying commercial property?
Standard searches include: local authority search (planning permissions, enforcement notices, road schemes); drainage and water search; environmental search (contamination, flood risk); and a chancel repair search. Additional searches may be required depending on the location and use of the property, such as a coal mining search or a tin mining search in certain areas.
What is a commercial lease and what are the key terms?
A commercial lease is a legally binding agreement between a landlord and a business tenant. Key terms include: the rent and rent review provisions; the lease length and break clauses; the permitted use; repair and maintenance obligations (full repairing and insuring leases are common); alienation provisions (whether you can sublet or assign); and service charge provisions for multi-let buildings.
What is a full repairing and insuring (FRI) lease?
An FRI lease places the full cost of repairing and insuring the property on the tenant, regardless of the condition of the property at the start of the lease. This can be a significant financial liability. A schedule of condition, agreed at the start of the lease, limits your repair obligations to the condition of the property when you took it on.
What is a break clause in a commercial lease?
A break clause gives either the landlord, the tenant, or both the right to end the lease early at a specified date or dates. Break clauses are often subject to strict conditions — for example, that all rent is paid up to date and the property is returned in good repair. Failure to comply with these conditions can invalidate the break notice.
Do I have security of tenure as a commercial tenant?
Under the Landlord and Tenant Act 1954, commercial tenants have statutory security of tenure — the right to renew their lease at the end of the term on similar terms. However, many commercial leases are granted "outside the Act" (contracted out), meaning the tenant has no right to renew. Always check whether your lease is inside or outside the Act.
What is stamp duty land tax (SDLT) on commercial property?
SDLT on commercial property purchases is charged at 0% on the first £150,000, 2% on the next £100,000, and 5% on the remainder. For commercial leases, SDLT is charged on the net present value of the rent over the lease term. SDLT returns must be filed and any tax paid within 14 days of completion.
Can I buy commercial property through a pension (SIPP or SSAS)?
Yes. Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs) can hold commercial property as an investment. The property must be used for business purposes and cannot be used by the pension member personally. The purchase process is similar to a standard commercial property transaction but involves additional requirements from the pension trustees.
What planning permission do I need for commercial development?
Planning permission is required for most new commercial developments and for changes of use between different use classes. Permitted development rights allow some changes without full planning permission — for example, converting offices (Class E) to residential use in certain circumstances. A solicitor can advise on the planning position and any conditions attached to existing permissions.
What is due diligence when buying a commercial property?
Due diligence involves investigating the legal, physical and financial aspects of the property before exchange of contracts. This includes reviewing the title, existing leases, planning history, environmental reports, building surveys, and any outstanding disputes or enforcement notices. Thorough due diligence protects you from unexpected liabilities after purchase.
Speak to a Commercial Property Solicitor
PDA Law advises businesses, investors and developers on commercial property transactions across England and Wales. Contact us for a free initial discussion about your commercial property matter.