If you take a business lease – a shop, office, bar, etc – you will be paying rent to a landlord.
When the letting agent or landlord quotes you the rent for a property they’ll talk about so many thousand pounds a year or a month. (Property people have their own lingo. They might say so many thousand pounds “per year”, which just means “for each year”, or “per annum” which is the same thing in Latin. That’s often shortened to “p.a.”.)
If you’re taking a fairly short lease and they quote you so many thousand pounds a month, then you know you are going to be paying that amount each month. With yearly rent it’s different. You don’t pay it all in one yearly amount; you pay in instalments.
Traditionally, annual rent was paid four times a year – so it’s what we call “quarterly rent” – and the traditional payment dates were 25th March, 24th June, 29th September and 25th December.
Some leases specify rent payment dates which are three monthly intervals from when you move in. So if the lease is said to start on 5th February, that will be the first payment date, and then 5th May … 5th August … 5th November … and then 5th February in a year’s time again.
Some leases have rent paid monthly. But most of the time it’s going to be those usual quarter days.
Rent is payable in advance. That means that rent due on 25th March is for the period from 25th March until it’s due again on 24 June.
(Theoretically a deal could be done where rent is paid “in arrears” as we call it – meaning for the past. If rent was payable in arrears on 24th June it would mean it was the rent for the period from 25th March to 24th June. It rarely happens in practice.)
The day you move into your premises probably won’t conveniently be on one of the quarter days. So, your rent from the day you start paying rent is likely only to be a proportion of a quarter. Usually the way it’s done is that rent is calculated on a daily basis for the period from when you move in to the next quarter day. It’s full quarterly payments from then onward.
To give you an example, if your rent is £20,000 a year and it starts on 1st March, you’ll be paying for 24 days. You count the day you move in and you count the day before the quarter day – 24th March – and that gives you 24 days. You divide the annual rent of £20,000 by 365 to get the daily rate, and then multiply 24 for the number of days you are paying for. That gives £1,315.07, which is the exact amount you have to pay when you move in. When 25th March arrives you have to pay the full £5,000 for the next quarter (£20,000 divided by four)
An added complication is that rent doesn’t always start when you take up occupation. You might have a rent-free period. Let’s imagine you move in on 1st March but you have a three month rent-free period. That mean that you will start paying rent as from 1st June. So then you would be paying for 23 days – the number of days before the next full quarterly payment on 24th June.
The term of the lease is the specific number of years (or months, in the case of a short lease) and days, until the lease comes to an end. It has to have a start date. Often the term is given an arbitrary start date like 25th December of the year just past. If you sign the lease in February, you don’t want to be paying rent from last December! Don’t worry, the lease will say – and your solicitor will check – that rent starts when you move in and no earlier.
Every lease gives you a certain grace period for making the payment before anything nasty can happen. It’s usually 14 or 21 days. Sometimes the lease says “working days” rather than just “days”, which gives you a bit more time because you don’t have to count weekends. However, at the end of the grace period, the landlord can literally kick you out of the property. It’s called “re-entry”. The landlord may not want to kick you out, so you have to judge how much of a risk that is, but be aware that non-payment of rent can have very unpleasant and final consequences.
Often – but not always – you have to pay VAT on top of the rent. Whether you have to pay VAT doesn’t have anything to do with your business, it’s purely an issue of whether the building itself has been “vatted” – meaning that the landlord has chosen to charge VAT on the building’s rent and other expenses and account for it to the Inland Revenue. The landlords may have chosen to do this because they were incurring a large amount of VAT on refurbishment works, for example, and had to “opt for VAT” in order to recover the VAT. Now that they are part of the VAT regime, they have to charge VAT to tenants.
This may be a big issue for you. If you’re a small business and won’t be charging VAT yourself, the VAT on the rent and other expenses is an extra 20% cost to you. If you are charging VAT to customers, then the VAT won’t matter to you – apart from cash flow issues. If you are a charity, you definitely won’t want to move into a building which is “vatted” because charities can’t recover VAT.
The landlords may change the VAT status of the building during the term of the lease in which case you would then have to start paying VAT on the rent and other expenses.
The rent you pay is a business expense, so the rent is something you can set against the profits when it comes to paying your tax. In simplistic terms, let’s say your only business expense is rent – I know it’s not realistic, but just for the sake of example – if you earn £100,000, and you pay rent of £20,000, you pay tax on £80,000 not on £100,000.
Rent is not always the only “rent”. Depending on the type of premises and building, you may be paying a service charge, and you will almost certainly be paying a proportion of the building’s insurance premiums. Leases often say that insurance rent must be paid on demand because the landlord has to pay it when required by the insurance company. These costs are often also designated as “rent” in the lease.
You may also have to pay business rates.
You need to take all these costs into account before you make your decision on whether you can afford the premises.