In the business world, the use of property is obviously important. It is necessary to conduct business, manage affairs, produce and store products or to offer different localities access to your goods and services. A business must carefully consider whether it is appropriate to venture down the road of commercial conveyancing or commercial leases as the two forms of property acquisition differ substantially in their advantages and disadvantages.
If the business does decide to buy property, then it will have to understand the process of commercial conveyancing which is the transfer of ownership from one party to another. The buyer is required to legally obtain ‘title’ to the land – the assurance that the seller has the right to sell it; and acquires on purchase the land and accompanied rights, minus specified restrictions. This process involves the exchange of contracts before ‘completion’ – when the property is actually transferred, and is facilitated by a complex system of land registration.
In the United Kingdom commercial conveyancing is usually carried out by an expert – a solicitor or licensed conveyancer, although one may do it themselves, which saves money, but will involve a substantial investment of time and effort involving difficult legal materials. In England and Wales, the agreement becomes legally binding at the exchange of contracts. For this to happen, the buyer will usually agree on a price, arrange a survey and then instruct a solicitor or licensed conveyancer to undertake searched and develop a contract. There is a risk of either party pulling out, however, as it can take a substantial amount of time to obtain deeds for a property – usually two or three months. In Scotland the contract tends to be concluded earlier, and the initial offer is legally binding, so surveys tend to occur before bidding. This reduces the threat of parties pulling out, although buyers may face survey costs for bids that were unsuccessful.
Commercial leases refer to an interest in real property offered by a lessor to a firm, for commercial purposes, for a specified time period. The lessee then possesses the property in exchange for the payment of consideration, which may be fixed or variable.
The advantages of commercial leases is that businesses may initially save money. Leasing is less capital-intensive than is the full purchase of property, and gives considerable flexibility compared to ownership. After the term runs out there are generally no obligations for the business to renew its lease. Leasing may also provide tangible benefits in regard to tax calculations: lease payments are expenses that can be offset from revenue when taxable profit is calculated.
The disadvantages are that businesses may miss out on capital gains from purchased property increasing in value, although this obviously depends on the nature of the market. Furthermore, the notion of leasing providing flexibility should not be exaggerated: terminating a lease before its term can be costly and difficult, and subletting requires the lessor’s consent and is unlikely to cover the original value of the lease. Lastly, lessors may tie rent payments to the businesses’ value, which means that success can bring with it a more expensive leasing arrangement.