Owning your business premises gives you security, a capital asset, and the ability to control your own space. The legal process is more complex than residential conveyancing, and the due diligence more substantial. Here is what to expect.
Freehold vs Long Leasehold
You can buy commercial property outright (freehold) or on a long lease — typically 99, 125, or 999 years. Both give you security of tenure, but the legal and financial implications differ.
Freehold gives you full ownership of the land and building. Long leasehold means you own the building for the term of the lease, subject to the lease terms — including any ground rent, service charge, and landlord consents for alterations.
In practice, most SME commercial purchases are freehold. Long leasehold commercial purchases are more common for office suites in managed buildings or units on larger development sites.
Searches and Due Diligence
Commercial property due diligence is more extensive than residential. Expect:
- Local authority search — planning history, road adoption, enforcement notices
- Environmental search — ground contamination, flood risk, proximity to environmental hazards
- Drainage search — connection to public sewers, adoption status
- Planning search — specific planning history and any outstanding enforcement action
- Mining and infrastructure searches — relevant to certain areas of Kent
- Highways search — particularly important if access to the property is via a private road
Beyond searches, your solicitor will investigate the title, check planning permissions match your intended use, review any existing tenancies if you are buying an investment property, and check for any restrictive covenants or easements that affect use or development.
VAT on Commercial Property
Commercial property transactions can be subject to VAT. Where a commercial property has been "opted to tax" by the seller, VAT at 20% is charged on the sale price. This can be a significant additional cost and affects your financing requirements.
If your business is VAT-registered and makes taxable supplies, you can recover the VAT — but you need the cash flow to fund it between payment and recovery. If your business is not VAT-registered, or makes exempt supplies, the VAT may be an irrecoverable cost.
Take VAT advice early. In some circumstances you can elect to waive the option to tax and avoid VAT on the transaction. In others, a Transfer of a Going Concern (TOGC) structure may apply, removing VAT from the transaction entirely.
Stamp Duty Land Tax
SDLT on commercial property is charged at: 0% up to £150,000; 2% on the next £100,000; 5% above £250,000. Different rates apply to leases (based on the net present value of the rent). Budget for SDLT from the outset. It is payable within 14 days of completion.
Financing
Commercial mortgages work differently from residential mortgages. Lenders typically lend between 60–75% of the property value. Interest rates are higher, terms are shorter, and personal guarantees from directors are more commonly required.
A SIPP (Self-Invested Personal Pension) can be a tax-efficient way to buy commercial property — the pension fund owns the property, the business pays rent into the pension fund, and growth in the property is free of capital gains tax. This requires specialist pension and legal advice.
The Purchase Process
The process broadly mirrors residential conveyancing — offer, instruction of solicitors, searches, title investigation, exchange, and completion — but the enquiries are more extensive, the title investigation more detailed, and the transaction timeline longer. Allow 8–16 weeks for a straightforward commercial purchase.
Bonsai Law acts for SMEs buying commercial premises across the UK. Talk to us early — the VAT, SDLT and financing structure are best planned before you agree terms.
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