A Guide to the Property Market of England & Wales
Part VI - Property and Associated Costs
Introduction
In any property transaction costs are incurred. These generally fall into three categories: professional fees together with associated costs; initial capital costs; and subsequent revenue costs.
Professional Fees, Legal Fees and Associated Costs
Legal Fees and Associated Costs
Depending on market conditions, a tenant will generally either pay all the costs of preparing legal documentation and as such would have to pay the landlord's legal fees as well as his own or alternatively pay his own costs alone. This is a matter of negotiation.
Charges vary, but many solicitors base their fees on the time spent, although it is increasingly standard practice to negotiate a fixed sum at the outset. It is of course wise to agree the fee arrangements at the outset and ascertain your liability for the cost of the landlord's solicitor, if applicable.
Legal costs are generally incurred whether or not a transaction proceeds to a successful conclusion.
In the instance where a lease is to be assigned or the premises are to be sub-let, a potential occupier will usually bear the costs of obtaining the consent of the superior landlord for both approving them as occupiers as well as approving their proposed fitting-out works. These costs are not usually significant.
The various fees mentioned above would also be subject to VAT.
In 2003 legislation brought about two important changes in respect of leases. From October 2003, many if not most leases will become registrable at H M Land Registry to protect tenant’s ownership. Certain other attendant rights may also need to be registered against the landlord’s neighbouring land. Your lawyer will be able to advise you about both these aspects and also the level of Land Registry fees, which are relatively modest.
A second major change is the replacement of Stamp Duty with Stamp Duty Land Tax (SDLT). Commercial leases are likely to bear substantially increased tax both on grant of new leases, but also on some leases at the fifth anniversary and in certain circumstances on assignment and on holding over at the end of the lease. Again, your lawyer will advise the extent of tenant’s liability.
The SDLT is calculated on the gross rent over the term of the lease discounted for Net Present Value (NPV). Currently the rate of duty payable is 1% of NPV, but with a zero rate band slice of £150,000 for non-residential property and in some cases on mixed use property.
SDLT is also charged on freehold transactions at rate bands varying from 0% to 4.8% on the whole of the purchase price depending on value. Tax is payable within thirty days of the tenant or owner having a right to occupy the property.
The tax changes with effect from 1st December 2003 are complex, but there are significant reliefs and exemptions available. Please take specialist advise on this from Hexell Wylie or your lawyers.
Surveyors' Fees
These are generally negotiable on a square metre (square foot) basis but were initially based on the scale fee originally set out by the professional body of the Royal Institution of Chartered Surveyors. The scale fee set out for a leasehold acquisition equated to 10% of the annual exclusive rent agreed or the rent passing, whichever was applicable, together with 2.5% of any premium paid. With regard to a freehold acquisition, the stated fee varied depending on the purchase price agreed, but over a figure of £1 million charged at 1%. These fees must be agreed on or prior to the appointment of the surveyors.
Should a building survey or any other specialist advice outside the normal agency field be requested, then this work will be charged in addition to the above on a basis to be agreed.
Again the above fee is subject to VAT.
Capital Costs (Expenditure)
Considerable costs can be expended in fitting out the accommodation which might be incurred through refurbishment, partitioning and provision of carpeting, furniture and telephones etc. In most instances professional advisers will have to be appointed and such appointments may include space planning consultants, architects and Quantity Surveyors. The total costs will vary considerably depending on the work involved and the standard of finish required. It is worth mentioning that dependant on market conditions, a lessor may be prepared to cover some or indeed all of these costs, usually by way of rent free periods, or more unusually by way of a capital sum.
Revenue Costs
Introduction
Three elements make up the overall costs of occupying premises:
The landlord’s charges (rent and service charge), business rates (local taxes), and the costs of running the offices (occupational costs).
Rent
Landlords charge a rent based on the area of space occupied which is often referred to as the net internal area (NIA). This is the space occupied by the tenant excluding any service core areas or common parts such as lifts, staircases, lobbies and WC’s. Measurement to calculate this area is usually defined by a measuring code issued by the Royal Institution of Chartered Surveyors.
Service Charge
The tenant, in a multi-occupied building, will be liable for a service charge, the amount of which very much depends on the service provided. Occupiers of both multi-occupied and single occupied buildings within an office campus development will be liable for an estate service charge, as referred to earlier.
Insurance
Again, this has been referred to previously and is dependent upon prevailing insurance premium rates. Insurance premiums now attract a consumer tax.
Business Rates (local taxes)
Business rates (rates) are a tax levied by the local authority to cover the costs of providing services in the area. These charges have a significant impact on the overall costs of occupying premises. Rates are calculated by applying the national non-domestic rate (Uniformed Business Rate - UBR), which is revised annually, to the rateable value of the building. The UBR is set by Central Government on the 1st April each year and will generally be increased in line with the rate of inflation. .
The rateable value is determined through periodic revaluation’s by the Valuation Office (a Central Government Department) of the property’s rental value, details of which are recorded at the local rating office. Currently rating revaluations take place every five years.
Occupational Costs
Occupiers will normally be responsible for organising and paying for the services essential for the running of their business, i.e. electricity, telephone and security within the demised premises.
Part I - Property Tenure
Part II - Property Leases
Part III - The Legal Principles in the Acquisition of Office Property
Part IV - The Legal Principles in the Disposal of Office Property
Part V - Lease Provisions
Part VI - Property and Associated Costs
Part VII - The Steps to Acquiring Offices
Part VIII - Conclusion
Glossary of Terms