Costs to expect when renting business premises

Taking on new business premises is one of the most exciting moments of your life as an entrepreneur. But it doesn't come without a big financial investment.

That's why renting, rather than buying, is a good place to start. It allows you to test that location is suitable before you make a long-term commitment.

Regardless, it's vital that you take the time to understand the full scale of costs involved with a commercial lease. That means you can put sufficient money in place for the initial outlay, and budget for future and ongoing expenses.

In this blog, we lay out the main upfront, yearly and ongoing costs you'll pay when renting business premises. With this information, you can then factor those costs into your budgets and forecasts.

What to do before you agree a lease

Before you agree to take on any particular premises, assess whether they're:

• Affordable.

• Fit for your purpose.

• In a convenient location for your staff and customers.

Next, establish whether the revenue the site generates will exceed the cost of rent and maintenance, and how it will affect your existing expenses, cash flow and working capital.

By carrying out a break-even analysis and a profitability forecast, and seeking professional advice from experts, you'll make sure your new premises are right for your business and give yourself every chance of success.

What types of costs are likely to be involved in renting business premises?

Upfront and one-off costs

Rent deposit

Your landlord may need you to pay a rent deposit in cash as a security. They will usually place this money into a locked account, meaning they can only access it to cover the cost of property damage or any losses caused by you not paying rent.

If your landlord has to make deductions from it, they can ask you to top up the account. At the end of your lease, the landlord will return your deposit.

Premium

When selling a lease (also known as assigning a lease) for a commercial property, the landlord can charge a premium. Business tenants can also charge a premium when selling valuable leases to new tenants.

Stamp Duty Land Tax

If you're buying a business premises, or paying a premium on a lease, you may have to pay Stamp Duty Land Tax on the purchase if its value is more than £150,000. Rates differ depending on whether you're a first-time buyer or UK resident.

Fit-out costs

As the tenant, you'll be responsible for fitting out the property so that it meets your needs. These costs can be very high, so make sure you have enough funds in place, and can recoup them when you start trading. There may be support in the form of government grants and tax relief on building work available to you.

Professional fees

It's always a good idea to seek professional advice from a solicitor and a surveyor when taking on a commercial lease. So, make sure to budget for their professional fees (plus VAT).

Landlord consents

In some cases, landlords can charge you "reasonable" fees in exchange for giving you consent to alter, assign or sublet your property (sometimes confusingly called licences). You should seek professional advice on what would be considered reasonable fees, as there are no concrete rules.

Planning permissions

If you want to make significant changes or extensions to the property, you must get planning permission, which comes with extra fees.

Statutory obligations

By law, you must make sure your business premises and its key systems (water, electricity, sewerage) are well maintained and safe. A specialist tradesperson should carry out any necessary work.

Lease renewals

If you want to renew a lease, you'll have to pay further professional and administrative fees.

Dilapidations

Seek advice from a surveyor on dilapidations – the likely costs of returning the property to its previous condition at the end of a lease – so you can budget for them ahead of time.

Other end-of-lease costs

As well as dilapidations, you may have to pay to reinstate alterations and remove your fixtures, fittings and other items. If you're selling your lease or ending it early, you'll have to pay extra fees.

Yearly costs

Business rates

Any taxes paid on your commercial leasehold. Your local authority will issue your business rates bills between February and March every year.

The Valuation Office Agency (VOA) sets these rates based on the yearly market rent value, size of the property and how you use it. It usually revises the rates every five years. Charities, some small businesses and certain building types are eligible for business rates relief.

Service charge

Service charges cover building maintenance, such as:

• Heating.

• Lifts.

• Porters.

• Security.

• Lighting.

• Gardening.

• Cleaning of common areas.

• Rubbish disposal.

If you're renting part of a building, your service charge will be proportional to the amount of space you occupy. You may also be charged for servicing parking areas or access roads.

Licences

You'll have to pay fees for a premises licence, which typically allows you to sell and supply alcohol and host certain types of entertainment.

Ongoing costs

Utilities

As the tenant, you're responsible for paying for the gas, water and electricity you use, unless you've agreed an alternative arrangement with your landlord.

Rent in advance

You'll have to make advance payments on your rent either every month or every quarter. Even if your landlord doesn't explicitly demand rent (by issuing an invoice, for example), you must pay it according to the schedule agreed in your contract. If you don't, you could be fined or made to go to court.

VAT on rent

If you have to pay VAT on top of rent, make sure to keep organised VAT records so you can claim it back later.

Rent reviews

You should expect your landlord to review and possibly increase your rent at some point during your lease, so make sure to budget for this. If your rent does increase, your rates will too.

Buildings insurance

If you, as the tenant, are responsible for insuring the property, make sure to meet any conditions for the minimum level of cover, specific risks and names for insured parties. If your landlord is responsible for insurance, you'll most likely pay part of the premium.

Other insurance

As a business owner, you should take out extra insurance such as public liability, accidental damage, business interruption and contents cover.

Repair costs

Your commercial property contract will probably make you responsible for keeping the property in a good state of repair even if it didn't meet this standard when you started the lease.

Key things to consider

Alongside whether you can afford to rent the premises, ask yourself the following questions:

• Is the location practical for you, your staff and your customers?

• Are there good transport links and parking?

• Is there easy access for loading and unloading goods?

• What other businesses trade nearby?

• Will broadband connections or phone signal be an issue?

• How is the building heated?

• What extra costs will it take to make the space fit for purpose?

Things to remember

• Before signing a commercial lease, make sure you're prepared for the financial commitment.

• The lease will usually outline whether you or your landlord are responsible for a particular cost.

• You should always take professional advice from a surveyor and a lawyer before signing a lease.

• You can negotiate with your landlord over some of the costs outlined above (for example, the amount of deposit, or rent reviews). But some, such as insurance, can never be negotiated.

Your cultural and community space toolkit

If you're reading this guide as part of the Grow London Local toolkit for opening, running and growing a cultural or community space, next look at step 11: developing a fundraising strategy. 

Grow London Local: Support for London's small businesses

No matter where you're based in London, you'll find relevant support and guidance on business planning, sales and marketing and much more, as well as opportunities to connect with like-minded business owners. Visit Grow London Local now 

Disclaimer: This information is meant as a starting point only. While we've made all reasonable efforts, we make no warranties that the information is accurate and up-to-date and we won't be responsible for any errors or omissions in the information or any consequences of any errors or omissions. You should seek professional advice where appropriate.