At the very ‘lease’ … check everything and then check and check again ….
Most of us are familiar with buying a residential freehold property, however when it comes to commercial premises, the would be business owner will find him or herself having to negotiate the complex world of the lease! A good gestoria or lawyer will help you unravel even the most confusing of leases however as the buyer you should also be aware of the pro's and con's of your lease before you sign on that dotted line. In other words, when it comes to leases … the more said the better!
I am looking to buy a bar/restaurant and have been shown both leasehold and freehold properties…. Which would I be better off buying?
Neither option is necessarily better than the other, it simply comes down to what will suit both you and your pocket! Obviously there are two key differences between purchasing a lease or a freehold property, one being ownership and the other being cost. Like most things in life you get what you pay for so if you can afford the freehold then you get to own the property with all the added benefits, if not you go for the lease and pay the rent!
On average a bar that might cost you only €50,000 as a leasehold (plus monthly rent) will cost you €150 -200,000 as a freehold (with no rent) As business mortgages are a little more difficult to obtain, it is easy to see why leaseholds are a much more viable option for new and first time business owners.
With a lease you pay one price for the lease and then monthly rent to the freeholder. Leases, known in Spain as Traspasos usually run for 5 - 10 years with the possibility of renewing once the term has ended, although rarely, some are known to last for a 20 year period. During the time of the lease the rent can only be increased by inflation which is set by the Spanish government, however when it comes to renewal the freeholder can and usually will put up the rent!
During the term of the lease, the leaseholder would also be expected to run the business according to the terms set out in the lease. Therefore if the lease states the premises must be run as a fast food takeaway, you can't simply turn the property into a restaurant. Similarly if you want to serve food in a bar you must check first that your lease allows for catering on the premises. There are so many different types of lease and licensing arrangements that it can be a minefield without expert advice. You are allowed to alter the general fittings and furnishings but not to make any structural or major changes to the premises. Finally the leaseholder would of course be responsible for all utility bills and charges.
If you have the budget to stretch to a freehold commercial property then the benefits are much greater. As the freeholder you can sell the lease of the business yourself receiving a premium up front and a monthly rent, or simply run the business yourself with no monthly rent to pay. As a word of warning, don't forget that new businesses tend to eat up spare cash especially during the first few years, so even if you have the funds for a freehold you might find it more cost effective to go for a less expensive lease, leaving you with more in your pocket for your new business and for ‘a rainy day’. However the converse is that with a freehold you always have control over the property and of course your money is invested in the property, so even if your business does not work out quite the way you planned, you still have a fixed asset in the property itself.
For those without the finances to purchase either a freehold or leasehold, another option would be to rent. It is very unusual for bar owners or landlords to rent their business as opposed to selling the lease, however as far as shops (locals) are concerned many of the Spanish owners will rent out their properties without selling the lease, creating the possibility of starting a business with only a deposit and one months rent in advance. However most of these rental options are for new or empty locals so you may well have to invest in all the fixtures and fittings, decoration and all the legal and licensing issues relevant to your business. For those who are looking to get off the ground with minimal outlay this could be an option, but your long term prospects might be limited as you would have little control over your premises in the same way as if you were living in a rented apartment. So having done all that work your rental agreement could potentially be terminated leaving you without a business and subsequently out of pocket!
Friends of ours recently tried to sell their leasehold bar but were told the terms stated they were not allowed to sell. Can something like this really happen and if so how can you protect yourself?
There are many lease ‘horror stories’ but the good news is most are exaggerated and with the help of a good agent or gestoria, they can be resolved. The key to avoiding problems when you decide to sell your business or property is to make sure you get the best possible advice and check everything at the buying stage.
We would strongly advise anyone buying any type of property in Spain to utilize the services of a reputable lawyer or gestoria to examine the terms of the lease and that those terms are then translated for you to understand. Do not assume all leases are the same and do not sign anything until you are absolutely clear about all the terms and how they will affect you throughout the term of the agreement. For example, it is important to find out what will happen when the lease is due for renewal. You should be entitled to renew your lease for a lengthy period without any problems, however some contracts may state that freeholders can take back the lease without having to renew or can only renew on an annual basis. The contract may also state that the lease may not be sold on to a third party. We have also known cases of rogue agents selling a property as a lease when in fact it is only a rental agreement and in one instance this was with the advice of a corrupt gestoria recommended by and working in league with the agent!
Clauses such as these should be picked up and explained to you by your gestoria and ironed out BEFORE signing any contract so that both you and the freeholder are happy with the terms. In the event that you had been given poor advice when buying there are still ways a good gestoria can help you solve your problem. If for example your friends have found a keen buyer, it's likely that the freeholder will want to provide a new lease for them, but this may result in a rent increase and your friends may have to negotiate the terms of the new agreement with the freeholder via their agent or gestoria.
Make sure you understand all the wording in your lease and don't be afraid to ask obvious questions even if you feel silly going over and over the same points. For example don't assume that just because you are buying a property termed as a 'café bar' the property can actually be used as a café bar! It could be that you run your café bar for years only to find that when you try to sell the lease, the lease stated all along the property was licensed for drinks only. In a case like this not only would you have been breaking the terms of your lease but your café bar is then much more difficult to sell. Once again a reputable and professional gestoria should spot these potential problems before you sign, and if you are still in doubt you are well within your rights to ask for a complete official translation of your lease before signing.
All this sounds rather scary but remember lease horror stories tend to be the exception rather than the rule and in most cases you will find that leases are fair and equitable. As long as you follow the correct channels and don't cut corners you should be fine and always check the small print!
For example, most buyers forget to ask about the freeholder’s commission which will be charged when selling the lease on. This could be anything from 0 to 20%, so it is important that you are aware of this prior to signing the lease and that the exact percentage is written into your lease document. Some people buy a bar with a view to selling it on quickly and are not told by the owner or the agent that this ‘kick back’ to the landlord exists, only to find that the bar or business that they bought wasn’t such a good investment after all!
So in terms of leases, don't be put off by a complex and frightening looking document. At the end of the day, just ensure that you obtain professional advice and that you have covered every angle. If you follow these rules you'll have nothing to worry about!
