Legal factors to consider when starting a hospitality business

Published on
25 August 2021
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When starting up your own hospitality business, there are many factors to consider, with legal considerations being one of them. Amanda Marwood from Harrison Drury solicitors talks us through some of the key legal issues to consider when launching a new hospitality 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 issues to consider as to whether the property is right for you.

Freehold

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 licensing consents). However, historic transfers of freehold property often include covenants restricting 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.

A common covenant in one that seeks to prevent the sale of alcohol – a key concern if you are looking to run a guesthouse or hotel and wish to serve alcohol or run a bar. Others often prevent development without approval of plans from prior landowners. More frequently, we come across titles to a property may include restrictions on use to a “private dwellinghouse” or restrict trade or business - or both.

A recent case involved a consideration of whether a user covenant that prohibited the carrying on of
a trade or business and use other than as a private dwelling house had been breached. Regarding the private dwellinghouse restriction, this turned on the question of whether the provision of serviced accommodation on a commercial basis was or was not, use as a “private dwellinghouse”. It was concluded that the use of residential property for short‐term occupation by a succession of paying guests is a breach of a covenant requiring use only as a private residence or dwelling house.

With regard to the trade or business restriction, the Court concluded that there is a distinction
between conducting business in a property and using a property for short‐term residential purposes,
albeit as part of a business. Letting a property for short‐term residential use was not a breach of the
prohibition against carrying on a trade or business on the property. No activity was carried on at the
property which in itself amounted to a business.

This case is important in that it distinguishes between the two restrictions. As such, title restrictions on use as a trade or business for holiday lettings can now be discounted. However, if the restriction on use as a private dwellinghouse is recorded on a property’s title this will preclude use as a holiday let, and your solicitor would need to advise you as to what options, if any, are available to enable the purchase to proceed; whether that be by facilitating the release of the covenant (if possible) or ascertaining if it is possible to indemnify against the breach. It is essential that your solicitor 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.

Leasehold

This would be by way of purchasing what is termed a long leasehold interest, where you are
purchasing a property which is leasehold by virtue of, for example, a 150 year lease (the length of
lease terms are variable). This may be by way of purchase of an existing property, or a newbuild which is being sold by way of lease.

The lease will stipulate how the property may be used and what can be done to it. Such leases commonly incorporate restrictions to prohibit use as a private dwellinghouse. As mentioned above, this will prohibit holiday let use. Your solicitor would be wise to immediately check the lease restrictions on sight of the lease to ensure there are no restrictions on your intended use. If there are, this could mean a deed of variation may need to be negotiated to permit the intended use (unless this is the grant of a new lease when the lease terms are perhaps capable of negotiation), or in the alternate, indemnity insurance may be required. If neither of these two options are available, this could mean you cannot proceed with the purchase.

Whether purchasing freehold or leasehold property, it is essential to let your solicitor know at the outset what your intended use is so that any restrictive covenants can be checked. This can give you the certainty that you are free to do what you need to with the property, but consideration needs to be given to future plans so that the lease doesn’t preclude your vision becoming a reality.

Getting the right planning permission, and licensing consents

If you are making physical alterations to the property or are changing its use, you may need planning
permission. Additionally, in areas 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.

If you are wanting to provide a licensable activity such as the 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. 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.

Being clear on tax and allowances

Stamp Duty Land Tax (SDLT) can be a large, upfront 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. If you are purchasing a business such as a guest house or hotel, it is usual that the total purchase price is apportioned between the property, the fixtures and fittings, and goodwill. SDLT is only payable on the “property” element so you may be able to substantially reduce your SDLT liability by appropriately apportioning the purchase price to the individual elements.

There is, however, usually some negotiation on this with a seller to reach a mutually tax beneficial ground. Where the property is clearly commercial, such as a hotel, SDLT is usually straightforward. SDLT can however be much more complex if the property consists of more than one “dwelling”. 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. We would suggest you discuss this with your solicitor, and you may also want to take tax advice on this at an early stage.

Buy‐to‐let and holiday homes fall under the residential property rates – with higher rates typically
applying.

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. This is a topic you should
most certainly take tax advice on.

Are you thinking about starting a hospitality business?

At The Cumberland, we specialise in mortgages for the hospitality sector. Find out more about the mortgage options available for hotels, guest houses, B&Bs and holiday lets.

For more information from a legal perspective, please contact Amanda Marwood at Harrison Drury solicitors on 01539 751464.

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