Choosing Office Premises

5. License, Lease or Buy?

Buying premises is usually a long-term investment. A lease is a rental agreement, usually over several years. A licence is a rental agreement on a more temporary basis.

All kinds of buildings can be bought or leased. The premises available on a licence are mainly offices, studios or workshops suitable for smaller businesses.

5.1 What services and facilities do you need?

• Licensed premises often give you access to shared fax and copying machines on a pay-as-you-go basis.Secretarial and switchboard services may be available, if required.Meeting rooms or extra offices can often be hired by the hour, half-day or day.
• Premises that are bought or leased do not usually offer day-to-day support services, nor the opportunity to use communal facilities for special projects.

5.2 How much flexibility will your business need?

• New or small businesses may prefer the easy-in, easy-out nature of a licence agreement.You can usually terminate a licence agreement at a month's notice.Your landlord can also give just one month's warning, but is unlikely to want to move you out if you are a good tenant.
• Leasing gives you security of tenure for the term of the lease, which is generally between three and 25 years.You should be able to negotiate a break clause that gives you an option to end the lease at, say, five-year intervals.Without a break clause, you might be left paying the rent many years after your business ceased to use the premises.
• In theory, buying gives you complete control over when you move out.In practice, this will be subject to market conditions and your ability to find a buyer for the property.If you no longer need the premises for your business, but cannot sell the property, you have the option to become a landlord and lease or license space to other businesses.

5.3 How much cash is available?

• With minimal legal fees (if any) and only a small deposit to pay, taking premises on a licence is usually the cheapest way to set up an office in the short term.Licence terms vary, but typically you will have to find a month's rent as a deposit and pay your rent monthly, or quarterly, in advance.Local authorities and Enterprise Agencies often subsidise rents in licensed office space, as one of their policies to encourage small businesses and start-ups.
• Rents on leases are usually paid quarterly in advance. You may also have to pay a deposit of, say, six months' rent.Most leases include provisions for rent reviews at fixed periods. Reviews can be a problem. In a rising market, your rent may increase considerably.If you take a lease and rents start to fall, you may be stuck paying above market rates for several years. (See Rent reviews and rating assessments).
• Buying ties up your money for a long time, especially as deposits for commercial property mortgages can be as high as 50 per cent.Few businesses buy office premises unless they have large amounts of spare cash and are looking for a long-term investment.Buying is obviously the most expensive option in the short term. But it usually works out less expensive than paying rent after the first ten years - and you do own the premises once any mortgage is paid off. (See Buying premises and Overdrafts and bank loans.)

5.4 How much liability will you have for repair and maintenance?

• Licensed space will be maintained and repaired by the landlord.
• If you lease, the landlord is usually responsible for external repairs and maintenance, and for any common areas. You may be responsible for internal repair and maintenance work.
• If you buy the premises, you are responsible for all the repairs and maintenance.
• Removing your alterations may involve extensive reinstatement such as replacing damaged ceilings.