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Property: Should you buy or lease your office?

5 Mins

Very few large office buildings are owner-occupied, primarily because they tend to be in multiple occupation but, most importantly, large multi-million pound offices buildings provide excellent investment assets for “institutional” investors (pension funds, insurance companies etc.) and occupiers do not generally want to tie up so much capital in property assets.

Owner occupation is far more prevalent amongst smaller companies and the vast majority of buildings in owner occupation tend to be smaller.

What are the pros and cons of leasing and buying offices?

Investment

Property investment is a bedrock of wealth in the UK and, for a lot of businesses, it makes a great deal of financial sense to own the offices they occupy. Property investment is likely to deliver strong financial returns over a long period of time and, if a business has sufficient capital that is not needed elsewhere in the business, then investment in the operational premises will deliver a great return on that capital.

Compare this to leasing offices, where every penny of rent paid is “dead money” going into the landlord’s pocket. Yes, it pays for the right to use the premises, but once the rent is paid, it is gone.

A business owner can purchase the property in a separate company. The business then pays the rent to that company. The rent is an allowable expense as regards tax, yet the business owner(s) is the recipient of the rent. In addition, over time, the value of the property is likely to increase, so the business owner benefits from rental income and capital growth.

For SMEs, ownership of the property through a Self Invested Pension Plan is particularly tax-efficient and gives the business far more control over its’ pension. 

Control

Owner-occupation gives the occupier control over property costs. The owner-occupier decides what services are required in the day-to-day running of the premises and who/where to procure those services from. 

A tenant of a multi-occupied building is in the hands of the landlord as to the running costs of the building. Although a responsible landlord will seek to keep the running costs as low as possible (while keeping the level and quality of services at a reasonable level), the tenant has no control over this. A tenant may seek to control costs by asking for a cap on the service charge, but this can sometimes work against the tenant in respect of the level/quality of services provided.

If an owner-occupier wants to make physical changes to the offices, all that is required is building regulations consent and (if appropriate) planning consent. A tenant also has to obtain landlord’s consent, which can add delays and also cost (if solicitors are involved).

Identity/Branding/Marketing

A self-contained building gives excellent branding opportunity for the occupier. The owner-occupier can (subject to planning consent) put their name on the building, and other signage/advertising, if required. 

A tenant in a multi-let building is unlikely to have any external name signage and the signage in the main building entrance is likely to be controlled by the landlord in a standard design (not the tenant’s own branding). Usually, the tenant’s own branding name sign only appears at the entrance to the office suite.

Flexibility

It is commonly accepted (and indeed a primary reason for leasing offices) that renting offices offers the tenant great flexibility. 

A tenant can decide how long they want to lease offices for, to suit the anticipated needs of the business, and can build break options into the lease if required. A tenant can also assign or sub-let the premises if no longer required, however flexibility in lease terms usually comes at a cost in terms of the financial deal and assignment or sub-letting is not necessarily that easy. 

Worried about costs? Speed of transactions? Fluctuations in value? Continue reading on page two to find out more.

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