The Harrison Drury Blog

So, you want to go into the hospitality business?

Silas Heys from Harrison Drury solicitors talks through some of the key property issues to consider when launching a hospitality venture.

Property is something that all hospitality ventures have in common. Whether you intend to let a cottage to small groups or accommodate larger numbers in a hotel, and whether you are an individual seeking a nest egg, or a company diversifying your business, the following points almost always need to be considered before committing to your new venture.

Overcoming restrictive covenants

The property you have set your mind on for your hospitality venture might be for sale or to let. Either raises different issues to consider as to whether the property is right for your intentions.

Purchasing the freehold interest in a property means you are not beholden to a landlord, and can choose to use the property as you please (subject to planning and licencing consents – see below).  However, historic transfers of freehold property often include covenants restricting its use, particularly in picturesque locations such as Cumbria where past landowners will want to prevent future purchasers from changing the character and usage of the land.  The most common covenants seek to prevent the sale of alcohol – a key concern if your business will contain a bar or restaurant.  Others often prevent development without approval of plans from prior landowners.

It is essential that your conveyancer reviews the title documents and reports to you on such matters as early as possible, so that they can be resolved or your plans adapted to ensure there are no breaches which could leave you open to costly litigation.

Taking a lease of a property has many benefits, not least meaning precious capital for your business is not tied up in physical property, but the lease will always stipulate how the property may be used and what can be done to the property, as well as liabilities regarding repair and returning the property at the end of the term.  These covenants will almost always be more onerous than those on a freehold property, but crucially your solicitor can negotiate them with the landlord before you enter into the lease.  This can give you the certainty you need that you are free to do what you need to with the property in order to make the venture a success, but consideration needs to be given to future plans in order that the lease doesn’t preclude your vision becoming reality.

Getting the right planning permission and licencing consents

If you are making physical alterations to the property or are changing its use, you may need planning permission.  Additionally, in areas falling within a National Park, many buildings are listed or subject to further controls on development, including local occupancy restrictions.

Your solicitor will be able to advise of any such restrictions and whether appropriate consents are in place, but planning often requires a collaborative approach between your professional advisors who can ensure that you fully comply with requirements.  Failure to comply with either one of them could result in you having to undo any changes you have made, at your own cost.

Secondly, if you are to provide a licensable activity such as sale of alcohol or serving food between certain hours, you will need to have a premises licence.  When purchasing an existing business this licence can often form a large part of the consideration you pay, and it is crucial that it is transferred with the purchase of the property or assignment of the lease.  The licence does not run with the ownership of the property, and your solicitor will need to ensure that you can take the benefit of any premises licence to continue running the business.

Finally, you must remember that a successful application for planning permission does not override any restrictive covenants.  The local council does not review the title documents or any leases affecting a property when considering a planning application, because the requirement for planning permission is entirely separate from the requirements of any restrictive covenants.

Being clear on Tax and Allowances

Stamp Duty Land Tax (SDLT) can be a large, up-front outlay when purchasing or leasing property. It is important to carefully consider how much SDLT will have to be paid as different circumstances can lead to different rates.

You should always ensure you apportion the purchase price of any property correctly on fixtures and fittings, land/property and, if you are buying an established business, stock and goodwill.  SDLT is only payable on the land element so you may be able to substantially reduce your SDLT liability by appropriately apportioning the purchase price to individual elements.

Where the property is clearly commercial, such as an established hotel, SDLT is usually straightforward, but it is worth noting that SDLT is payable on the VAT payable on a purchase price of the land.  This means it is crucial you establish from the outset whether the property has been opted for VAT by the seller, as it could give a not insignificant increase to your initial outlay.

However, buy-to-let and holiday homes fall under more complex rules as part of the residential property rates.  Standard residential rates still apply but, if you already own an interest in residential property worth more than £40,000, the SDLT payable on the purchase of additional residential property will be increased by 3% of the total purchase price.

If you are purchasing numerous properties, or a main property with an annex or other granny flat, reliefs on SDLT such as Multiple Dwellings Relief may be able to reduce your assessment, even if you would ordinarily be liable for the 3% surcharge.  It is essential you discuss the plans with your solicitor who will be able to refer you to a specialist tax advisor if appropriate.

A further finance point is the existence of capital allowances, which may allow you to offset future tax liability for refurbishments and improvements against the previous seller’s pooled allowance.

This is a complex area, and the potential for savings on tax liability can be significant, so you should establish at the offer stage if there are any capital allowances available and speak to your solicitor and other professional advisors without delay.

Still keen?

Hospitality and leisure is a rewarding sector and a natural fit with the rugged beauty and culture that north-west has to offer, with its areas of outstanding natural beauty, national parks and vibrant towns and cities.  However, careful thought and discussion needs to be had with your professional advisors in order to ensure you make your move fully informed and with the minimum of risk.  If you are considering a new or enlarged venture in hospitality, make sure you consult a professional advisor at the earliest opportunity.

For more information, contact Silas Heys or Naomi Fell at Harrison Drury solicitors on silas.heys@harrison-drury.com or naomi.fell@harrison-drury.com

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