18 Jul The 3 Biggest Mistakes that Business Owners End Up Regretting and How to Immediately Fix Them
The prospect of finding a new commercial space and set up office in London, can be exciting for any business owner. However, going in without expert support, solid action plan and guidance is usually fraught with doubt and high risk. We commonly see small business owners make mistakes when attempting to lease and buy commercial property for sale in London, for their new restaurant, furniture retail premises, industrial unit for coffee roasting or soy sauce manufacturing, to name a few. These mistakes end up costing business owners down the line and even cripple their growth and when it takes hold, it happens fast. Very fast!
We have seen business owners make multiple errors they later regretted, and to help out, we’ve outlined the three (3) of the biggest mistakes and how to immediately fix them;
1. Failing to Understand ALL the Costs Associated with Commercial Leases
When it comes to identifying and determining your next commercial space, take a ‘Top Down’ view and overall assessment of all the associated costs. Certainly, the rent is a major factor when you take on a new lease, however failing to see other expenses that are associated with a commercial space is not acceptable – especially if you want to scale and expand your business.
Here’s a checklist of basic expenses that a commercial space tenant should know of before signing a lease:
– Inside or Outside the Landlord and Tenant Act 1954
Ahead of signing the lease for the new commercial premises, ensure you are guided by the Real Estate Advisory team and your legal team, on whether the lease terms are inside or outside The Act. Why?
Inside the Act, protects the tenant. When the lease expires, the landlord cannot ask or enforce you to leave the premises. This is music to the ears of top restaurateurs, established brands, quality manufacturers, and business owners in multiple sectors who want control of their destiny.
Outside of the Act or terms excluding Section 24 – 28 of the Landlord and Tenant Act 1954, means that once the contractual date expires, the business owners must leave the premises immediately. It is the landlord’s right to enter and re-take possession of the building or premises as confirmed in the lease. Furthermore, if you do not upkeep the property and maintain it, or are a nuisance to neighbours, have constant police call outs due to anti-social behaviour, fire brigade call outs because you’re running a private shisha lounge without windows or escape routes, your rent is consistently in arrears, the landlord has the opportunity to repossess the property from you and also keep your deposit! It has been known to happen. So ensure you have a dedicated Real Estate Advisory team around you and be aware of your rights, before you sign.
If you have signed ‘Outside of the Act’, and have cause for concern, call the Stonelink International team on + 44 (0)207 993 4081 and we will assist you or at least guide you, in the right direction.
– Operating Expenses
As a business owner if you are signing a full-service lease, find out what the base year expenses will be for lease. Then, look through historical expenses of the building to see how much they’ve increased over the years and a pattern will emerge. This information is powerful, and you’ll come to find it increases over time and it is always passed through to the tenant. Expenses include such as service charges, commercial premises maintenance upkeep, along with Business Rates, all can be a major expense affecting the bottom line.
– Communication and Cloud Infrastructure Expenses
A business owner should determine the cost of setting up phone systems, Internet and Cloud System and the company they choose, to become their supplier. This is very important. Whether the move is to a new location or you’re ready to expand your business in your current location, these expenses should be determined before the final decision is made. Be aware of contractual terms and the period your signing into, along with ensuring you have the option to break the contract at little to no cost, should you have to, for whatever reason.
Insurance is critical. Is there an insurance policy on the property that matches with the requirements of the lease? If not, what will be the cost of increasing the policy? A company must have their insurance broker review the lease before the director’s sign it. This is very important. The case of Palliser in the Palliser Ltd v Fate was a clear verdict on the outcome one faces should they remain negligent or take a ‘whatever’ approach to the type of insurance policy selected.
If you have cause for concern or would like more information, call the Stonelink International team on + 44 (0)207 993 4081 and we will assist you or at least guide you, in the right direction.
2. Not Having the Property Surveyed and Properly Insured
Commercial property leases require the tenant to upkeep, maintain and repair the property. If they aren’t able to do so, it can lead to a warning and it’s known to also lead to repossession of the premises. The landlord will likely demand the premise is brought back to its original condition after the lease ends, as there no doubt this clause will be stated in the terms of the signed lease. Therefore, business owners shouldn’t make the mistake of not having their property surveyed by a RICS chartered surveyor, once they decide to table an offer for the premises.
Knowing the value of the property and the rent you pay on it and have it documented by a RICS chartered surveyor is credible and will stand up in court, should it be necessary. Moreover, a company is able to ensure that their insurance policy is in place for the full value of the commercial property. We can understand the importance of insuring the whole value of the commercial property from the Palliser Ltd v Fate Ltd case.
According to the case’s details, Fate Ltd was the freeholder of a property in London. It ran a restaurant on the ground floor while the upper floors of the building, were residential and demised to Palliser under a long 999 year lease. Fate took out a Licensed Trade Policy that provided ‘combined cover’ to the whole building. The property had been underinsured and Palliser Ltd did not obtain specific ‘commercial property insurance,’ that could protect them, in case of an unfortunate incident.
… that unfortunate incident!
When fire occurred at the property and caused significant damage, (a number of residents had to be saved from the upper floors by the fire brigade on that New Year day in 2010. What a start to the year!), the insurance company responded to the property’s reinstatement, including the upper floors. However, due to application of average, there was a shortfall. Palliser spent monies to reinstate the upper floors of the property totalling £300,000 and lost profits because of the inability of selling the flats totalling about £4m (according to Palliser). Fate was sued by Palliser for negligently causing the fire. Fate claimed indemnity under the Public Liability section of the insurance policy, which gave them cover for legal liability in case of damage to property that didn’t belong to Fate.
The Judge held that while upper floors were owned by Palliser under the lease, the property belonged to Fate as a freehold owner. Moreover, Fate had already been indemnified by the insurers for damage to upper floors of the property. Hence, there wasn’t any cover for Fate’s liability for the damage to upper floors. That is why Palliser’s claim for an indemnity wasn’t successful. The judge proceeded to find that the claim for the loss of profits i.e. £4m was speculative and hadn’t been proved.
The mistake Palliser Ltd made in this case is that they didn’t pay attention to the insurance policy on the leased property. Thus, they suffered a major loss and endured 9 years of legal wrangling and heartache in this case.
If you have cause for concern about your current status as a leaseholder, call the Stonelink International team on + 44 (0)207 993 4081 and we will assist you or at least guide you, in the right direction.
3. Working with the Wrong Real Estate Broker or Not Using One at All
Working with the wrong real estate broker or not using one can be a very costly error for any business owner in terms of losing time and not making the most of the broker’s experience, resources and expertise, no matter whether you are on the path to growth and expansion, trimming down, pivoting or merging and acquiring.
A search for the commercial space and environment that is right for your business and the culture and the happiness of employees could take anywhere between 30 to 90 days and in certain cases up to one year, all dependant on different factors. That’s a lot of time when working with a broker you could trust. It is important for business owners to make sure they select a dedicated real estate broker who works accordingly on an executable action plan with timeline, because if they don’t, it’ll be a miserable experience for both parties.
Furthermore, ensure you’re Real Estate Broker informs you of any work that is anticipated to exceed estimated costs (as outlined in the broker’s proposal), as you will need to approve, before proceeding with the work; alternatively, you may decide not to include the said work. More importantly, ensure fees are agreed in advance. This certainty allow you, the client, to budget accordingly. Ultimately, the broker must want to find the solutions that best suit all parties.
If you’re business is ready to expand and grow, perhaps trim down, pivot or ready to merge and acquire another company, or you simply want advice and guidance on your current state of affairs, we invite you to work with the experienced and dedicated team at Londons Real Estate Brokerage. Contact Stonelink International on + 44 (0) 207 993 4081 and by email [email protected]
The 3 Biggest Mistakes that Business Owners End Up Regretting and How to Immediately Fix Them