IRISH BUSINESS LAW

Lease Or Buy?

After wages and salaries, your business premises are likely to be the second biggest expense that you'll have, so the choice you make is very important.

Renting
Depending on the funds available, it is generally easier for a new business to start off in a rented property. Funds must be husbanded wisely and sometimes spending money to purchase can seem foolish if it doesn't leave enough cash on hand to fund the buying of stock and equipment.

There are, of course, pros and cons associated with renting. Renting usually requires less initial outlay and, in general, provides more flexibility. But, unless you have a long term lease, you are giving money every month to a Landlord and you are not building equity or value in the premises for yourself. However, if you need to move you may be able to do so at very short notice. The premises may be held on a long or short term lease or may even be month to month.

A short term lease is usually less than 4 years and 9 months. This is the way the Landlord is protected, because you, the tenant, do not have the right to extend the term of the lease.

A Long Term Lease
If you have a long term lease then you have rights to renew the lease when the initial term expires. You would also have the right to sell on your interest in the property subject, of course, to the Landlord's approval.

Additionally, you usually have no responsibility for maintenance to the outside of the building when you don't own the property, however, you are probably required to keep up the interior. On the other hand, you could be, and probably are, subject to rent hikes – called rent reviews. This is a review of the fair market rent of the property and most leases make provisions for reviews every five years. However, everything is negotiable, so it's always worth negotiating with the landlord and checking how and when the rent will be reviewed, before you sign the lease.

If cash flow is weak, you may be entitled to sub-let the premises or, if you cannot continue in business, assign the premises to a new tenant - all of course, subject to the Landlord's approval.

Buying
Mortgage repayments are likely to be similar to, or sometimes less than, rental payments and such payments aren't subject to rent increases. (Unless of course, you have an adjustable rate mortgage subject to the vicissitudes of the markets.)

Because you own the property you can do as you please as long as it is legal, subject to Planning. If you wish, you can rent part of the premises to another party to help with the mortgage. (Be careful when doing this and be sure to take legal advice prior to renting) Also, the interest payments on a commercial mortgage may be tax-deductible and any increase in the value of the property will translate into an increase in the value of your assets. So, when the time comes for you to cease trading, whether by choice or market forces, you have a valuable asset. You could choose to sell the asset or, depending on how much you owe, you could rent out the building for income.

On the downside, when you purchase, you usually have to use more of your available funds to use as a down payment. So, if cash is tight, you may need to rent initially until you have the financial power to purchase.

Remember, your credit history and track record are paramount. So ensure you pay your bills on time and employ a good accountant to prepare annual accounts for you. Banks usually require such accounts.

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