Leasehold Commercial Property: The Pitfalls

I have seen it happen so many times. An entrepreneur in the hospitality space has an idea for a new concept. People like it. A business plan is produced. The numbers look good and funding is achieved.

It is champagne all round – job done. But it is not…

Often the biggest hurdle is not these initial stages but successfully acquiring suitable premises. In a rush to open the new business, here are some common mistakes and what can be done to avoid them. 

When is a low rent not a low rent?

Sometimes what is a low rent can change significantly if the lease contains a rent review clause where the rent is shortly due, or even overdue, for assessment. Such clauses tend to specify that the rent will only be reviewed upwards and, whilst the new level can be negotiated between the landlord’s and tenant’s respective surveyors, the hike in rent can be considerable. Any increase is likely to be exacerbated if the area has become gentrified in recent years with rents of comparable properties increasing. Ironically, whilst it is businesses which can improve an area through investment and hard work, they can end up paying for the privilege via increased rents!

If a rent review is looming, the rent review provisions in the lease should be checked and advice sought from a surveyor on comparable rents in the area and the prospect of a significant increase in the rent.

Surely the length of the lease does not matter on a commercial unit? 

A common misconception is that all commercial leases are automatically renewed at the end of the term by virtue of the Landlord and Tenant Act 1954. However, a lease can opt out of this Act. When this is the case, the sale particulars should say words such as, ‘outside of the Act’. Any properties with leases outside of the Act should be treated with caution. It might be that you are happy for your new vegan, raw Korean BBQ restaurant to risk being a pop-up. However, do not fall into the trap of thinking that, just because you spend time and money creating a beautiful restaurant, that the landlord must grant a new lease on expiry of the old. They might be very grateful for you for equipping a unit with a brand-new kitchen that a new tenant would be happy to pay a premium for!

Why don’t I just rent an A1 unit? They are more readily available and cheaper!

A1 units are cheaper and more available for a reason! An A1 use class is for shops and retail outlets – not a full-blown restaurant and bar. Whilst operators are ‘pushing the boundaries’ with their offers from A1 units by having central off-site kitchens, limited seating and a significant percentage of off- sales many start-ups, in my opinion, sail too close to the wind and have operations which really should be from A3 or A4 units (food/ drink and drink establishments respectively). These businesses are at constant risk of complaints, investigations and ultimately enforcement action which can easily destroy a business before it has become established. This does not mean that A1 units should be dismissed out of hand. It might be possible to either vary the planning use (whether permanently or for two years) or, if the premises has operated as a restaurant or bar continuously for at least 10 years it might be possible to obtain a Certificate of Lawful Use provided that the necessary evidence can be gathered.

What the street needs is a late-night bar! Why are the only units selling alcohol restaurants?

There could be a very good reason for this. If the premises is an area heavily saturated with licensed premises it could have been designated as a special policy area. Whilst the ramifications of a premises being located in such an area differs from council to council the upshot could be that a premises licence for the sale of alcohol will only be permitted if the sale of alcohol is ancillary to the provision of food and with a relatively sensible closing hour, that would prevent the opening of a late-night bar! Alternatively, it could be very vocal local residents which are preventing certain types of premises opening even if, on the face of it, there is demand.

If you have any doubts about a potential premises it is always best to ‘bottom out’ issues such as the above at an earlier stage to avoid wasting the funds raised and disappointed investors!