Business Advice Sheet For Shop Tenants

There are a number of matters that need to be considered by a prospective tenant to ensure the premises they have found or hope to find will be suitable for their proposed use. It is apparent from the number of enquiries received from prospective new tenants that some are better prepared than others. Although most landlords hold the property purely as an investment it is also in their interests to ensure that the tenants are well prepared as it does not benefit them if a tenant runs into difficulties or the business closes. Set out below are some of the main points that need to be considered when selecting suitable shop premises.

Planning Use

The permitted use for most shops falls within Class A1 (retail). However, other shops may be within Class A2 (professional services – eg. insurance brokers, estate agents, banks). From 21^st April 2005 the Town & Country Planning (Use Classes) (Amendment) (England) Order 2005 came into force. This was designed primarily to regulate cafes, restaurants and wine bars, which were all grouped in Class A3. This has now been split into new categories:-

A3 – use for the sale of food and drink for consumption ON the premises      (restaurants and cafes) 

A4 – use as a public house, wine bar or other drinking establishment 

A5 – for the sale of hot food for consumption OFF the premises (hot food takeaways)

You need to ensure the premises you intend to acquire has the correct consent for the proposed use. If you are taking over an existing lease check that the permitted use includes your intended use, otherwise you will need the landlords consent for change. You should also be aware that Planning Permission for change of use from one category to another may be required from the Local Authority. The District Plan sets out regulations to restrict the number of non-retail establishments in prime shopping frontages; you should check whether this limit has already been reached.

Market Research

With any new business venture you must undertake market research to ensure there is adequate demand for the goods or services you intend to offer. Check out the competition.

The demand for shops is usually very strong which has increased rents significantly over the last few years. Harpenden, as an example, is a well known affluent area but is still subject to competition from surrounding towns. The increased level of rents now mean that some tenants are finding it hard to trade profitably, whilst others may continue to prosper.

You need to try and establish the level of turnover you are likely to achieve, and from this assess the amount you can afford to pay for the rent, having regard to the other operating costs and level of profit required.

Location, Location, Location!

Get to know the town or city. Where are the strongest pedestrian flows? Are you reliant on passing trade or is your business of a type that customers will come to you?

Naturally the shops in the busiest parts attract the highestrents but a secondary position may be just as good for you and save you money.

Leases

You should always take professional advice when renting or purchasing commercial premises. Will you be taking the unit over on a new lease or taking an existing lease where the terms are already established?

Most shop leases are for 10 years or longer and include rent review provisions at periodic intervals.

Usually a tenant is responsible for keeping the premises in good repair. A survey will reveal if the existing tenant has complied with their obligations, but similarly on a new lease you need to be aware that you may have to deal with existing repairs unless you take appropriate steps.

Business Rates

This is normally the tenants/occupiers responsibility. Each property has a rateable value (RV). The Government then levies a Uniform Business Rate (UBR) which is revised annually. The RV of each property can be established by ringing up the Council. Some relief is available for shops with small rateable values usually under £10,000, and you should check this with the Council.

Legislation

Be aware of your obligations as an occupier of business premises. Other matters to consider are the Disability Discrimination Act which came into force in October 2004. This means that service providers will have to consider making reasonable adjustments to the physical features of their property in order to overcome physical barriers to access. Will the property need to be altered to comply?

Similarly in April 2004 the Asbestos at Work Regulations were introduced. You should check whether the landlord or present tenant has had an asbestos audit undertaken and if so obtain a copy. If not, you will need to arrange for this to be carried out.

References

When you take on a lease the landlord will naturally want to ensure that you will be able to pay the rent. If you are an existing trader the best demonstration of this will be references from your current landlord, bank, accountant and traders (suppliers) that you do business with.

If you do not have these then the landlord will probably require personal guarantees (certainly if the tenant is a limited company) and possibly also a rent bond, perhaps three to six months rent, as additional security.

Future Liability

If during the course of a lease you want to re-locate or cease trading, you will normally have to find another tenant to take over the remaining term – this is called an assignment. Most leases will allow this, but the landlords consent is invariably required. They cannot usually withhold consent unreasonably but they do have the right to check that the new tenant is suitable and likely to be able to pay the rent.

You also need to be aware that you will normally be responsible for the new tenant and it is therefore in your own interests to find someone who will be reliable. If their business fails or they do not pay the rent, the landlord may be able to seek recovery from you.

Rental Levels

As mentioned earlier the rents for most shops in this area have increased significantly over recent years. The main factor governing the level of rent is the position and size of the premises. Trying to find out information about the level of rent is not as easy as finding out the value of your house, as it can vary depending on the terms of the lease and the permitted use. You should take advice from a surveyor who is familiar with the locality to check that the rent is within a realistic range. If you are taking over an existing lease which has a rent review due in the near future, try and establish what the likely level of rent will be so that you can make provision.

No-one said running a shop is easy, but too many tenants are ill prepared and cannot weather the storm when the market goes quiet. Do your homework thoroughly, take professional advice and hopefully it should be a rewarding experience for you and your customers.