Bonaire in Business: Lease or buy?

Blog

20 May 2015

Sooner or later, every entrepreneur faces the question whether to lease or buy a business premises. This is often a commercial decision, but also requires careful consideration from a legal perspective.

Buying

Be careful what you buy. Buying can mean several things: an apartment right, a right of long lease, or (and this is what many entrepreneurs assume) a so-called full ownership. When buying full ownership, you will acquire all the rights. However, the right of use can be restricted by so-called easements, which make you tolerate or omit some things. This may concern for instance the right of way. In addition, the right of use can be restricted by restrictive clauses in the spatial plan. Therefore, it is wise to consult the deed of transfer.

Long lease

When you buy a right of long lease, you acquire a right of use that gives more or less the same options for use as the right of ownership. The big difference is that the right of use can be restricted in the deed of long lease, and the obligation to pay an annual fee for the right of long lease (the ‘ground rent’). The deed of long lease states how you can use the premises or building. This may entail restrictions for the right of use. The right of long lease is often used by the Public Entity Bonaire (Openbaar Lichaam Bonaire or OLB), because with this right the OLB is able to ‘control’ the use of land and buildings. Before the purchase of a right of long lease, it is very important to verify in the deed of long lease what the permitted use and ground rent due are. If the use of the right of long lease is in conflict with the permitted use, the long lease can be terminated.

The amount of the ground rent is described in the deed of long lease. The deed also states that this ground rent can be revised at fixed times. This means that the costs of the long lease are not fully foreseeable in advance. Especially in Bonaire, where in recent years revisions of the ground rent up to no less than 400% have taken place. Thus, it is important to verify what the ground lease is at the time you buy the right of long lease and at what times the ground rent can be revised. This prevents surprises.

Although a long lease cannot simply be terminated, it is possible. For instance after the term of the long lease has expired. Therefore, when buying a right of long lease, it is wise to check how long the long lease continues. Almost all long lease conditions indicate that the owner (often the OLB) has to give permission for transfer of the right of long lease. Note that this permission is applied for and obtained in time.

The value of a right of long lease often is somewhat less than the value of full ownership. This difference is not very substantial in Bonaire. It can make a difference for the height of the (mortgage) loan.

Apartment right

When buying a retail space in common buildings, entrepreneurs often buy an apartment right. This means that for part of the building (your ‘apartment’) you have the exclusive right of use and in addition you can use the common areas. When you buy an apartment right, you automatically become (partial) owner of the building and member of the owners’ association. The membership of the owners’ association cannot be terminated. This means that you have to contribute to the costs of the building and the owners’ association pro rata.

As a consequence, the costs for a right of apartment are not foreseeable in advance either, because the costs of the owners’ association for maintenance and insurance of the building can differ. When you buy an apartment right, it is wise to verify how the owners’ association is doing and whether it has sufficient reserves to carry out maintenance and renovation.

Lease

An alternative for buying is leasing. You then pay a monthly rent for the use of a building or retail space. Beside the basic rent, you often owe the lessor service charges for cleaning or other services. These service charges have to be made transparent and settled each year. The lease agreement mentions whether adjustment of the rent is possible and how the adjusted rent is calculated. It is also possible to agree on a fixed rent, of course. This provides certainty about the costs.

Whether, by whom, and when the lease can be terminated are matters the lessor and lessee agree on. Often the lease is entered into for a fixed period of time with the option of renewal. During these fixed periods, the lease cannot be terminated, except in exceptional circumstances. It is often agreed that the lessor can terminate the lease if he needs the building for his own use. As lessee it is important to consider the question if this is desired, because you could then be evicted from one day to the next. Even if the lessor can terminate the lease, Bonaire has a regime of security of tenure. This regime provides safeguards against termination, so that the lessee in any event has time to find something else. Based on these rules, termination by the lessor is not possible at all sometimes. Many lessees do not know that and easily let themselves be evicted.

Leasing entails that you as lessee do not have to bother yourself with necessary maintenance. Again, be careful what you agree on this point, because the lessor will sometimes want to shift the maintenance obligation to the lessee. This is a matter of negotiating properly and recording it properly in the lease agreement.

The options to adjust a leased space are sometimes limited and depend on obtaining permission from the lessor. These adjustments often have to be reversed again at the end of the lease.

Buy or lease?

The entrepreneur who wants flexibility and certainty about the costs is better of leasing.

The entrepreneur who has possibilities to invest (whether or not by obtaining a loan) chooses to buy. Preferably the purchase that provides most certainty about the costs in the long run, such as purchase of full ownership. When you buy a right of long lease or an apartment right, please note the obligations stated in the ‘small print’ in order to prevent surprises.

Tom Peeters is an experienced and specialized real estate lawyer and head of our Bonaire office. He regularly publishes about project development, sustainable energy projects, cooperative structures and (public) procurement. Via this blog he shares his knowledge about these and other legal topics that concern entrepreneurs in Bonaire.