Buying Residential vs Commercial Property: What is the Difference?

Buying a residential property might at first appear similar to buying premises intended for business use (commercial property). For example, many of us work from home now, whereas hopefully, few have ever slept in the office.

Many differences between residential and commercial property can indeed be superficial. A design agency may wish to set up shop in a cosy cottage in the middle of nowhere, whereas an accountancy firm may prefer a high-rise in a city centre.

However, there are many differences when it comes to how the property transaction will progress.

If you have had experience with the process to buy residential property, you may be surprised at how different a commercial property transaction can be.

1. Freehold vs leasehold requirements can vary

Usually, residential buyers wish to obtain long term interests in a property. If they are not purchasing the freehold, then buyers should typically aim for a 99-year lease (or as close to this as possible).

For commercial property, purchasers can prefer shorter-term arrangements. Whilst it depends greatly on the business, making a long-term investment in premises can be risky. As such, buyers looking for commercial properties often prefer to lease, and typically for a much shorter time than residential leases, e.g. up to 10 years.

2. Financing the sale can be different for residential and commercial properties

In commercial property, a lender can arrive at their decision to lend in a more risk-averse way. For example, the loan to value (LTV) for a commercial property is a maximum of 75%, usually lower. The LTV on a residential property can be as high as 95% (with some specialist providers allowing 97%).

The time it takes to progress the application can also be longer for a commercial transaction, as additional documents can be required by the bank.

Onward chains are unlikely for commercial transactions

As homebuyers may agree, being part of a chain can mean there is a greater chance that their purchase falls through.

Residential buyers may also experience a greater lack of control over their purchase, as they can be very dependent on a range of outside factors.

Commercial property transactions, however, are typically chain-free. This can make the process considerably smoother, as there are fewer delays and risks that disrupt a residential transaction.

4. Tax implications can differ

Commercial properties typically pay lower rates of Stamp Duty Land Tax (SDLT) than residential properties.

Whilst there was a recent, temporary reduced rate, residential property transactions can attract an SDLT charge as high as 12%. By contrast, commercial properties can only attract a maximum amount of 5%.

Despite SDLT, residential sellers can benefit from capital gains tax relief in certain circumstances when selling their main residence. There is no equivalent relief for selling commercial property.

5. Tenanted properties – security of tenure

By default, a commercial tenant has a statutory right to renew their lease when it ends. This applies unless the parties agree to ‘opt out’ of that right through a specific notice served before the lease is granted.

This may seem like it is the wrong way around. In residential leases, once the fixed term expires, the landlord can typically give two months’ notice in order to get the premises back to either re-let or occupy for their own use.

In residential leases, the landlord typically calls the shots, but in commercial leases, the tenant may hold the negotiating power.

Whilst there are similarities between residential and commercial property transactions, the legal process can be quite different. For legal advice relating to buying property for residential or business use, please get in touch with the team at Carlsons Solicitors.

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