Commercial v residential property: 5 differences

You would imagine that buying a property is one process, regardless of its intended use and occupancy.

The construction and design may also be fundamentally the same across residential and commercial premises; a commercial property could look like an endearing country cottage in the Cotswolds and a residential property could be mistaken for a block of offices in Shoreditch. Whilst the differences (the fact you sleep at one and tend to work at the other) may appear superficial, there are many differences when it comes to how the property transaction will progress. If you have had experience of a residential conveyancing transaction, you may be surprised at how different a commercial one can be.

Financing the property

One of the main distinctions in residential and commercial mortgages is how the lender arrives at its decision to lend (and how much it will allow you to borrow). It is not as simple as just looking at ability to repay the loan. The lender’s appetite for risk is also influenced by how quickly it can dispose of the property in a forced sale situation. To offset some of this risk the loan to value (LTV) for a commercial purchase (in contrast to a residential purchase) requires a greater deposit as the average so LTV will be 65-75% of its market value whereas a residential property can be up to 90%.

Other key differences between the two types of mortgages are the time it takes to process the application (it will likely take a lot longer for a commercial application to be processed) and the costs involved are usually much higher for a commercial application as additional documents will be required by the bank. It is important for buyers to factor this in their timescales because some of the reports can take weeks to be finalised and considered by the lender.

The chain

One of the more stressful aspects of a residential property transaction is the chain i.e. where you are buying from someone who is also buying and beyond. There can be multiple parties in the chain meaning there is a greater chance the purchase will fall through or that a party in a related transaction ends up dictating the timetable to everyone else in the chain. With a commercial sale or purchase, this is very unlikely to be the case and they are typically chain-free transactions. Having no chain makes the process a whole lot smoother and eradicates much of the delays and risks that can affect a residential deal.

Freehold v leasehold

One of the other key differences is how length of occupation influences property transactions. By and large residential buyers would prefer long term interests; either an outright freehold, or if not, then, at the least a long (e.g. 99 year) lease of their homes. With commercial transactions other factors come into play depending on the nature of your business. Making a long term investment in a site can be risky so businesses are more likely to take a shorter term position on a commercial property (i.e. a lease for up to 10 years) unless they can be sure that the site they’ve selected is future-proof.

Tax implications

The stamp duty (SDLT) rates for commercial/mixed use premises differ from the rates for residential premises. The start point for tax on residential properties is £125,000 (although the current SDLT holiday effectively raises that to £250,000 until the end of September this year) whereas the starting point for tax to be payable on commercial sites is £150,000. There are also different rates of tax payable (the highest is only 5% on commercial properties but can be as high as 15% on residential properties in certain circumstances) and there are a greater number of SDLT reliefs in relation to dealing with commercial sites rather than residential ones. Capital Gains (or Corporation) Tax should also be considered on any commercial property transaction – there is no equivalent of the tax relief available for selling your main residence.

Tenanted properties – security of tenure

Most buy to let investors will know that their tenants (as the law currently stands), have limited security of tenure. Once the fixed lease period 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. With commercial properties the opposite is usually true – by default a commercial tenant has a statutory right to renew their lease when it ends unless the parties have specifically agreed to ‘contract out’ of that right before the lease was granted. Without such contracting out the balance of power in negotiations can move in favour of the tenant if the landlord wants the premises back to let to someone else at a higher rent.

To conclude, whilst there are various similarities in the two types of property transaction, beneath the surface, there are various distinctions that need to be considered. The key differences boil down to timescale, cost and borrowing and each have a fundamental effect on the progress of the deal and need to be taken into account when deciding whether or not to proceed.