Buying commercial property: a specialist step-by-step guide for trading businesses

Buying commercial property follows a clear sequence. The steps overlap a little in practice, but this is the order we see work best for a trading company buying its own premises:

1. Decide whether buying beats renting for where the business is now and where it is heading.
2. Set a budget covering the deposit, the commercial mortgage, stamp duty, VAT, fees and fit-out.
3. Get an early read on finance so you know what commercial mortgage lenders are likely to offer before you view.
4. Find premises that fit your operation, your staff and your customers.
5. Agree heads of terms with the seller: price, what is included, VAT position and timetable.
6. Apply for the business mortgage and let the lender instruct its RICS valuation.
7. Commission your own surveys: building survey, plus asbestos and environmental checks where the building or site calls for them.
8. Let your solicitor run the legals: title, searches, enquiries of the seller and due diligence.
9. Settle the ownership structure: company, personal names or pension.
10. Receive the mortgage offer, exchange contracts and complete.

Each step is covered below. If you only take one thing from the list, take step 3: the finance conversation belongs at the start, not after you have fallen for a building.

For a settled trading business, buying your own commercial property can be a sound long-term move. Instead of paying rent to a landlord, the business pays down a loan on an asset it owns, gains control over the building and protects itself from rent reviews and the risk of a lease not being renewed. Over a long holding period, any rise in the property's value accrues to you rather than to an investor.

It helps to be clear which kind of buyer you are. Commercial property investment means buying a building to let to tenants for income, judged on rental yield and the tenant's covenant, and loans on an investment property are underwritten on the rental income. Buying land or a building for development is a different product again. An owner-occupier buys commercial property to trade from, and lenders judge the deal mainly on the strength of the business. This guide is about the second kind, although some owner-occupiers let spare space and enjoy a little of both.

Owning is not right for everyone. Buying ties up capital that might earn more inside the business, it reduces your flexibility to move if you outgrow the space, and you take on repairs, insurance, business rates and property management costs that a tenant often passes to a landlord through a service charge. A business that expects to double in size within three years, or that is still proving its model, may be better renting for now.

Key considerations before buying commercial property:

• Will this location still suit the business in ten years?
• Can the business fund the deposit without starving working capital?
• Are the accounts strong enough to show the repayments are affordable?
• Would the building be easy to sell or let if circumstances changed?
• Do the facilities, from parking to power supply, fit how you operate?

We cover the trade-offs in more depth in our guide to renting or buying business premises.

Most lenders active in owner-occupier lending advance 70 to 75% of the purchase price or valuation, whichever is lower, and up to 80% for strong cases. That leaves a deposit of 20 to 30% to fund from the business or the directors. A buyer coming to commercial property for the first time is often surprised by this: buyers of residential properties are used to 5 or 10% deposits, but commercial mortgage lenders expect more equity because commercial properties are harder to value and slower to sell.

The deposit is only part of the costs of buying commercial property. Plan for:

• Stamp duty land tax in England and Northern Ireland, LBTT in Scotland or LTT in Wales. See our guide to stamp duty on commercial property for how it is worked out.
• VAT, if the seller has opted to tax the building. Whether and how you pay VAT on a commercial purchase is covered in our guide to VAT on commercial property purchases.
• Arrangement fee, typically 1 to 2% of the loan.
• Valuation, legal fees on both your side and the lender's, and survey costs.
• Fit-out and moving costs, which are rarely funded by the mortgage.
• Ongoing ownership costs: buildings insurance, repairs, business rates and any service charge on a multi-let estate.

Our guide to deposits and costs for business premises sets out each line, and the commercial mortgage calculator gives a first view of monthly repayments.

Can you buy commercial property with no money down?

Rarely in a straightforward way. Some buyers use additional security, such as equity in another property, to reduce the cash deposit, and some use a pension fund. Lenders still need to see a sound business and a sensible level of equity in the deal overall.

Commercial property for sale is marketed through agents, online listings such as Rightmove Commercial and Zoopla, auctions and, often, off-market through local surveyors. A wide range of commercial properties comes to market, and different types suit different businesses: offices, retail units, industrial units and warehouses, workshops, clinics, and mixed-use buildings with a flat above. Each sector brings its own lender appetite and its own potential for future growth in value, so a standard light industrial unit is usually easier to fund than a specialist building.

Buying commercial property at auction

Auctions can turn up good value, but exchange happens when the hammer falls and completion is usually due within a set period, often 28 days. Read the legal pack before bidding, have the commercial property surveyed in advance, and have funding agreed in principle. Many auction buyers use a short-term bridging loan to complete on time and refinance onto a commercial mortgage afterwards.

When you assess a building, look beyond the asking price:

• Location: the single biggest factor in long-term value. Think about access for staff, customers and deliveries, parking and local planning policy.
• Use class: whether your activity is permitted, or needs planning consent.
• Condition: roof, services, energy rating and any obvious repairs.
• Resale and letting appeal: lenders value the building as security, so a property that would sell or let easily helps your case.

Once you agree a price, the agents draw up heads of terms: a short, usually non-binding document setting out the parties, the price, what is included, whether the sale is subject to VAT, any conditions such as finance or planning, and the target dates for exchange and completion. Get your solicitor to check them before they are issued, because the heads of terms shape the contract. If the purchase includes a flat or upper-floor residential element, look at our page on semi-commercial premises, as lending criteria differ.

Surveys are an essential part of buying commercial property. A commercial purchase usually involves several reports, each answering a different question.

RICS valuation for the lender

The lender instructs a valuation from a surveyor regulated by the Royal Institution of Chartered Surveyors (RICS). It confirms the market value and the security value of the building, and the loan is sized on that figure. You normally pay for it. The valuation is for the lender, not for you: it is not a check on condition.

Building survey

A full building survey from a chartered surveyor looks at the structure, roof, services and repairs, and estimates what needs spending. On an older or larger building it is money well spent, and it can support a price renegotiation if it finds defects.

Asbestos survey for older buildings

Older buildings, particularly those built before asbestos was banned in the late 1990s, may contain it in roofs, ceilings, pipe lagging and floor tiles. Under the Control of Asbestos Regulations, whoever owns or is responsible for maintaining non-domestic premises has a duty to manage asbestos (HSE: duty to manage). Ask the seller for the existing asbestos register and survey, and commission your own if it is missing or out of date.

Environmental and other specialist checks

An environmental search will flag contamination risk from past uses, such as former garages, workshops or industrial land, and flood risk. If the desktop search raises concerns, the lender may ask for a Phase 1 environmental report. Depending on the building, you may also want an M&E (mechanical and electrical) survey, a measured survey, or a check of the Energy Performance Certificate.

Your solicitor does the legal due diligence. Seek a firm with commercial property experience; residential property conveyancers are not usually set up for it, and understanding the legal costs at the outset avoids surprises. The solicitor will:

• Review the title at HM Land Registry, including rights of way, restrictive covenants and boundaries.
• Run local authority, drainage, environmental and other searches.
• Raise enquiries with the seller, usually on the Commercial Property Standard Enquiries forms.
• Check planning history, building regulation sign-offs and the permitted use.
• Review any existing leases if part of the building is let, which also matters to the lender.
• Agree the contract, confirm the VAT treatment and prepare the transfer.

The lender also needs a solicitor, sometimes the same firm acting for both, sometimes a separate one at your cost. The lender's solicitor reports on title before funds are released, so delays here delay completion. Good professional advisers on both the legal and finance side are what keep commercial property deals moving. Keep your solicitor and your broker talking so that the legal and finance timetables line up.

Before the mortgage application goes in, decide on property ownership: who will hold the commercial property. There are three common routes, and the right one depends on your tax position, so take accountancy and legal advice.

We explain the pension route on buying premises through a pension. We introduce pension purchases to the right specialists; we do not give pension advice. Whichever route you take, most lenders ask the directors for a personal guarantee, which we cover in personal guarantees explained.

Most trading companies finance buying commercial property with an owner-occupier commercial mortgage: a long-term loan secured on the premises the business occupies, repaid from trading profits. Indicative terms are 6.0 to 7.5% a year for owner-occupiers, 7.0 to 9.0% for trading businesses such as pubs, hotels and care homes, loan terms of 5 to 25 years, and arrangement fees of 1 to 2%, all subject to status, accounts and valuation. Current ranges are on our costs page.

Commercial mortgages from high-street banks, specialist lenders and private banks are assessed in broadly the same way, although appetite and pricing vary. A commercial mortgage is a long-term loan secured on the commercial property, and the loan is sized on both value and affordability. The lender weighs three factors: the business's ability to service the debt from its accounts, the value and saleability of the building, and the experience and commitment of the owners. Expect to provide two to three years of accounts, recent management figures, bank statements, details of the property and the source of your deposit. Where timing is tight, for example at a commercial property auction, business premises bridging can complete quickly and be refinanced onto a term loan later.

Once the valuation is back and underwriting is complete, the lender issues a formal mortgage offer. Your solicitor reports on title, you sign the contract, and contracts are exchanged with the deposit paid. Completion follows, often on the same day or within a few weeks, when the mortgage funds and balance are sent to the seller and ownership passes to you. Your solicitor then pays the stamp duty and registers the purchase at the Land Registry. Our how it works page sets out how we arrange financing for commercial property with you, from the first call to completion.

Commercial lending to a limited company is unregulated and falls outside the FCA's regulated mortgage perimeter. Where a deal would be regulated, for example lending to a sole trader or individual, or a property where the borrower or a close family member will live in part of it, we refer it to an appropriately authorised firm.