What is a lease premium for on a commercial property lease?

[Jim Beam]

Hi
I’m looking at leasing a new business property but I’m confused as to how leases actually work. In particular the lease premium.
For example:
If I buy a lease on a shop for 20 years, the rent is £6k PA and the lease premium is £100k. What am I getting for the premium?
If I come out of the lease after an agreed break clause do I get the premium back? Or is it lost? If I sold the lease to someone else after 10 years would I charge them a premium of £50k (half lease term left?).
If I keep the shop for the full lease term and then decide to carry on running it would I need to pay the landlord another premium? Or can I sell the lease on to someone else for £100k???
Thanks in advance for any simple explanations

 

[vvaannmmaann]

HMRC tells us that,
"A premium is a capital sum paid to the landlord on the granting of a lease. A premium will normally be met where the rent payable under the lease is less than a full market rent. It will usually take the form of a cash payment but it could be in the form of money's worth, for example the tenant may agree to undertake certain work on the landlord's behalf and for the landlord's benefit.
In Scotland, a premium is usually called a grassum."

More here about the subject.
http://wiki.lawdepot.co.uk/wiki/Commercial_Lease_Agreement_FAQ_-_United_Kingdom-England

 

[Jim Beam]

Thanks for your reply and the link.

Does that mean then that I can offset the premium against tax?
And if I come out of a 20 year lease after 10 years does the landlord have to give me half the premium back?

 

[vvaannmmaann]

Sorry I have no idea.
Hopefully someone will come along to help,although it may be after the weekend.

 

[Maxwell83]

If you're paying a premium, it's because you are obtaining a property interest that has value.

So a 20 year lease with a below MV rent is valuable (I'm assuming that the rent IS below MV or why else would you pay a premium?).

Once you've entered that lease, you must think of it as an asset - why would you want to walk away from it? you don't - instead you will want to sell it. So assuming you have the right to assign the lease then yes, you would charge the assignee a premium upon assignment.

The amount of the premium will depend on a number of factors like number of years left, difference between the actual rent and the fair MV at the time, etc etc, but your example of charging half after 10 years is a nice simplified one. Whether it will be worth that in 10 years will be a matter for negotiation between you and the assignee. Ideally you would get it valued as you would any property interest.

As for whether the landlord would be obliged to give you back some of your premium if you wanted out, I doubt it (what does the lease say?). However as it is a valuable interest then he could buy it back off you (i.e. he pays you £X amount in exchange for you surrendering the lease). I did a few of these types of surrenders for landlords with prime London properties after the recession where the rent under the current leases was much much lower than they could have got on the open market. It was worth them paying their tenants upwards of £75k to get them out early so they could re-rent at much higher rates.

You should really use a good solicitor for large premium leases, there is too much at stake to not get the best protection. The lease could be wildly unfair in the landlord's favour and the result could be that you end up with a property interest with less value than it would have had becuase you are restricted in what you can do with it.

 

[Jim Beam]

Thanks for your reply, obviously I would use a solicitor if I were buying a lease but I really wanted to try to understand what the terminology meant.

So, final question (possibly..) can I get tax relief on the premium?

 

[Scalloway]

From here

http://www.hmrc.gov.uk/manuals/pimmanual/pim2305.htm

If the payer is using the property for business purposes, then relief is given in computing the business profits, spread over the period of the lease

 

[hipwuk]

A premium could be applied for a number of reasons - if the property is in a desirable area, the rent is below market value, if there is any goodwill attached, etc. For example, if the lease is sold as an ongoing concern, then there will be value attached to the business and the premium will reflect that. When you wish to assign the lease, you can apply a premium to the incoming tenant, which reflects the premises at that particular point in time. In short, no you don't get your premium back from the landlord, you get the premium from the incoming tenant (as the new tenant is essentially purchasing the lease from you). Please be aware that any incoming tenants will need to be vetted by the Landlord and approved of before you assign the lease (no Landlord wants a dodgy tenant).

 

[Jim Beam]

A premium could be applied for a number of reasons - if the property is in a desirable area, the rent is below market value, if there is any goodwill attached, etc. For example, if the lease is sold as an ongoing concern, then there will be value attached to the business and the premium will reflect that. When you wish to assign the lease, you can apply a premium to the incoming tenant, which reflects the premises at that particular point in time. In short, no you don't get your premium back from the landlord, you get the premium from the incoming tenant (as the new tenant is essentially purchasing the lease from you). Please be aware that any incoming tenants will need to be vetted by the Landlord and approved of before you assign the lease (no Landlord wants a dodgy tenant).

so is the premium effectively goodwill?

thanks

 

[Chris Ashdown]

Remember you would be responsible for all rent and repair costs for the length of the lease or up to a break clause, if you sub let and they latter went bust or stopped paying you would be called on to make good the missed payments or repairs as well as continue to pay till the next break clause or end of lease

Look around and see how long units like the one you want stay closed between new tennants taking over sometimes many years

Even as a limited company you would in 99 percent of cases be required to guarantee the lease on a personal guarantee

 

[hipwuk]

Premium and goodwill are completely different, but sometimes can get jumbled up. In it's simplest form - premium is the value of the commercial lease in monetary terms (which can include goodwill), and goodwill is the value of the business (I know there is a better explanation!).

 

[Funding for Communities]

Hi Jim,

Goodwill is specific to a business and does not apply in this case. In the bad old days premium was called key money in other words a sum of money paid to get the key to the property. The more valuable the lease the more premium you will pay. In some run down areas you can get a reverse premium where the tenant will pay you a sum to take the remainder of the lease however as the economy has picked up these are becoming rare. What premium you get for the lease in 10 yrs depends on many factors not least what happens to the area the premises are in.

Good luck if you go ahead

Mike