As every successful salon entrepreneur knows, keeping your monthly fixed costs down is essential if you want to run a profitable business. And after your salaries, your salon premises are likely to be your biggest monthly overhead.
The majority of hair or beauty salons occupy leasehold (rather than freehold) premises. That is, someone else owns the property (the Landlord) and you (the Tenant) pay them rent each month or quarter (every 3 months).
Save money on your salon premises by getting professional advice early
As most leases are for at least 3 years, and can be for up to 20 years, your salon premises are a big financial commitment. If you’re starting a new salon, or re-locating, it really pays to take legal advice early. And certainly before a pushy agent gets you to shake hands on the deal.
The first stage in taking new premises is to agree the main points in outline – commonly referred to as the Heads of Terms. This is usually done before the lawyers get involved and the Landlord’s estate agent deals with it.
The secret here to saving money is to get your lawyer involved before you agree Heads of Terms. Potentially, this early legal advice can save you tens of thousands of pounds and sleepless nights.
Watch out for these costly salon premises pitfalls:
Think carefully about the length of salon lease
First agree the lease “Term” as the lawyers call it. In plain English – how long the lease lasts for and, therefore, how long you’re legally bound to pay the rent and other outgoings such as rates and repairs.
What is the best length for a hair or beauty salon lease? There isn’t an easy answer – you need to strike the right balance for you.
If it is too short you may have to relocate early in your salon business life and this is costly. Too long, and you’re possibly stuck in premises that are now too small for your successful salon.
If these look like your ideal salon premises and you think the chances you’ll want to stay then hedge your bets, take a longer term and negotiate a “Break Clause” (don’t worry – all is revealed below).
What is a Lease Break Clause and why is it important for my salon business?
In a nutshell, a Break Clause allows you to terminate the lease early on a given date. For example, if you’ve taken a 10 year lease, you reach a deal to ‘break’ (end) the lease after 5 years.
What you need to negotiate is a “Tenant-only break clause” which will allow you to terminate the lease early on a given date IF it suits you. This is particularly valuable as it gives you flexibility. For example, if you are a new start-up salon business having the option to terminate the lease early (i.e. at the date of the break clause) if your salon is not going as well as you would like it to is very valuable. I know you don’t want to contemplate failure at this stage, but believe me, a clause like this could save you thousands of pounds later.
Be careful if the Landlord wants the Break Clause to be mutual – i.e. the Landlord can end the lease early as well as the Tenant. Resist this – clearly you do not want the Landlord threatening to terminate your lease if your salon business is doing well.
As you can see, leases are complex and you are bound by law, hence the importance of getting professional legal advice as soon as you decide the premises could be right for you.
Is VAT going to be charged on your salon rental?
Check at the outset if the Landlord has opted to charge VAT on the rent.
Many Landlords are obliged (or choose) to be VAT registered. If they are registered, then add an additional 20% (as at February 2014) to your rental costs.
VAT is fine if your new salon is VAT registered itself. You can just claim it back in your VAT Return.
However, if you’re starting up a salon then you may not be VAT registered and so cannot reclaim the VAT element. This can make your salon premises 20% more expensive than you thought. Ouch!
What other property outgoings am I legally bound to pay besides the rent?
Leases require the Tenant to pay other monthly/quarterly costs besides the rent. And these are enforceable by law so don’t dismiss them lightly.
I’m talking about things such as building insurance, utility costs and service charge. Plus, don’t forget to factor business rates and water rates into your cash flow and salon business plan.
The best way to protect yourself against nasty surprises is to request accurate figures from the Landlord before agreeing the Heads of Terms. Service charges, in particular, can be surprisingly high if your salon is in a shopping mall or centre.
Can I cut the cost of the rent deposit for my hair or beauty salon?
If you’re just starting out, or are a limited company, the chances are the Landlord will require you to pay a Rent Deposit or provide a rent guarantor.
The level of Rent Deposit varies, but an amount equal to between 3 and 9 months is not unusual. This money is tied up for many years and that’s not good for your cash flow. It also increases the capital you need to invest initially in your salon business.
So make every effort to reduce the number of months deposit required. Tying up 3 months rent is a lot less painful for you than 9 months.
Also ask for the Rent Deposit to be released back to you after a fixed period if the Landlord hasn’t had to call on it.
How to strike the best deal and save money on your Rent Review clause
Leases that are longer than 3 years usually contain Rent Review clauses. These do what they say on the tin. Namely they allow the Landlord to initiate a review of the amount of rent at set 3 or 5 yearly intervals. Here are some basic tips:
- You don’t want to be negotiating with your Landlord every 3 years so push the reviews out to every 5 years if you can.
- Of all the clauses in your lease the Rent Review clause is the one to quiz your own lawyer about and ensure you get the best terms. It is potentially an expensive minefield if you don’t involve an expert.
- In particular, make sure you fully understand the basis on which your rent will be reviewed. Is it calculated by comparing like properties in the same area (open market) or linked to retail price index ( inflation basis)?
Can you legally use the premises as a salon?
One to check at the outset to potentially save you a wild goose chase (and costs). Does the authorised planning use of the property allow it to be used as a hair or beauty salon?
If not, you’ll need to apply for a change of use. And this costs you both time and money. To change the planning user class, an application must be made with the local planning office, but first you need to obtain the Landlord’s formal consent to the change of use. And guess what. The landlord invariably charges you for the privilege of giving his consent in a formal Licence document.
Who is responsible for the costs of repairs to my salon building?
Most business leases are full repairing and insuring ones (the estate agents’ jargon for this is ‘FRI’). Be on your guard. Take legal advice early. These obligations can be potentially very onerous.
The Repair clause frequently includes liability for the structural state/repair of the building. If your salon is in an older building (as many High Street properties are) then this is even more cause for vigilance. You could get a very nasty bill for major repairs to the roof and windows, for example, in a few years.
Again, my advice is consult your lawyer as early as you can. They may recommend a ‘schedule of condition’ is drawn up – it depends on the exact circumstances. This is a description, in words and photographs, of the current state of the building to show its condition when you took it on.
Getting the repairing obligations clear, and your liability limited, before you sign up will almost certainly save you a small fortune at the end of the lease – or when you want to sell your salon as a going-concern.
If, at the start, you’re doing a lot of structural work to improve the building to get your salon up and running – re-wiring, plumbing, new toilets etc. – then negotiate with the Landlord to either reduce the on-going rent or get a rent free period. After all, you’re improving the fabric of the building and this is to the landlord’s advantage.
Any other hidden salon premises costs?
In addition to your own legal costs and those of any surveyor/architect you employ you may be asked to pay the Landlord’s legal and surveyor’s costs. It is commercially less acceptable these days so:
- First, strongly argue that each party pays its own costs.
- If this fails, then at least agree a cap on the Landlord’s costs so you avoid any expensive surprises down the line.
All this may sound daunting and complex. And it is. Agreeing the right the right deal from the start will save you money and time later so don’t stint on getting legal advice as soon as you set eyes on your ideal salon premises.
Then fun bit comes after the commercial lease negotiations – designing and planning your new hair or beauty salon. You’ll find professional tips on making the most of your space and creating the best layout plus trade tricks on buying salon furniture and equipment in this blog post.