To lease or buy: What’s best for your business?

By Julia Ingham and Jared Cains / WRMK

8 Aug, 2022

If you’re a business owner looking for new premises, is it best to lease, or if you can, take advantage of the softening property market and buy your property outright? There are pros and cons to each option, so the answer will depend on your business and the stage it’s at.

Leasing
Leasing is a good option for many businesses – there’s less capital required up front and you have more flexibility if your business is growing or its requirements change. There’s also less risk: you won’t have to outlay a huge chunk of capital that is not actively bringing in any income, and you’re only committed for the term of the lease. You don’t have to sell up to move on to alternative premises. There is usually a broader range of premises to choose from as a tenant as well.

However, leasing does have its downsides – mainly, less control over your space. If the premises are in poor or average condition to start with you may need to spend money to bring them up to scratch, and you won’t be compensated or see any capital gain from the improvements you make. You’ll also need the landlord’s consent to change or alter the premises before you go ahead with your plans.

The catch with leasing is your space may feel like your own, but it’s not. Your landlord is quite entitled to force you to vacate the premises as soon as your lease term is up. In addition, rent is usually subject to regular or periodic rent reviews and you have very little, if any, control over the amount of any rent increase.

Having a good relationship and open communication with your landlord makes a big difference. A difficult landlord can cause issues, particularly if they are not meeting their obligations under the lease.

Buying
If you have the capital and want freedom to use your premises however you like, for as long as you like, buying your premises can be a good option. Your property is an asset that may appreciate in value, and you can use it as security for raising funds/borrowing, which you can’t do with an ordinary commercial lease.

You also don’t have to deal with a difficult or unreasonable landlord or worry about rent increases, and you can alter the property as you want. On the flip side though, maintenance and compliance with building regulations (e.g. earthquake strengthening) will be your responsibility.

Buying your premises requires a significant outlay of capital up front. If you have to borrow to fund the purchase, you’ll need to factor in interest payments and potential interest rate rises in future.

You will want to be sure that the premises will meet your business requirements for a reasonable period of time. It’s not always quick or easy to sell property, and there is no guarantee the property will increase in value over time either. The property market can be fickle and factors such as location, age and the condition of the property will influence its resale value.

Whether you own or lease your premises, if you find yourself with too much space, sub-leasing it out may be an option to generate some extra income. For tenants, you’ll need to check the terms of your existing lease, and notify your landlord before doing so.

If you would like advice about whether leasing, buying or subleasing is right for your business in the current market, a chat with your lawyer is a good place to start.

n To contact WRMK visit wrmk.co.nz or call (09) 470 2459.

Lease or buy? There are pros and cons to each option, so it pays to do your homework.