Property investment is a reliable source of ongoing revenue subject to a careful choice of tenant. If you have capital to invest in bricks and mortar and you choose to invest in commercial property rather than residential property with a view to renting it out, then, as with domestic rentals, you have to meet certain obligations to maintain the condition of the building and to look after the interests of your tenants.
From the outset, the most important advice we can give you if you are thinking of moving into commercial property rental is to make sure you have a good solicitor on your side – one who is well versed in the finer points of lease negotiation, commercial property and all the legislation governing the relationship of landlord and tenant.
Agreeing the market rent is a key part of negotiating a lease for which experienced valuation advice is recommended. In addition to this negotiation has to take place to establish who is responsible for what during the time your tenant is in the property. Whereas with domestic agreements the responsibilities are quite evenly split between tenant and landlord, commercial leases can be more complex. Negotiating the terms of a lease may take longer and require the expertise of a specialist solicitor to help you come to an agreement with your new tenants. Bear in mind, too, that when a lease comes up for renewal at the end of the term, assuming you have granted your tenant the right to renew, you and your tenant may need to re-examine the expired lease and to negotiate new provisions for the purpose of the new lease. Your ability to negotiate new provisions in the new lease will be more restricted than would be the case if your tenant does not have the right to renew.
With commercial property, there may be other considerations to factor in, such as public access to your building and additional health and safety aspects to consider.
Top of the list for any commercial landlord are health and safety considerations. Under a commercial tenancy agreement or lease, there should be clear definitions to cover who is responsible for what. In the majority of the cases, it is the tenant who is responsible for carrying out health and safety checks. Subject to the terms of the lease, landlords are often still held accountable for the overall condition of the common areas and the exterior of the building (especially if it overlooks public paths and walkways), but generally the tenant will be responsible for making sure that it is a safe environment for workers and visitors.
If you have an FRI lease agreement (where the tenant is fully responsible for maintaining and repairing the whole building and paying for the cost of insurance) then you can choose which insurance company you take out cover with, and then reclaim the cost of the premiums from the tenant. It is also possible to require the tenant to pay a ‘Service Charge’ to cover the cost of maintaining the common areas to include the structure of the building if the tenant has only an internal repairing obligation and to cover buildings insurance and health and safety management of communal areas such as reception lobbies, lifts, hallways and break rooms.
Your tenants may want to make changes to the format of a space, redecorate, or fit specialist machinery. It may be necessary to enter into a Licence for Alterations with the tenant to permit the tenant to carry out certain alterations on terms to be agreed and set out in the document, to include the tenant’s obligation to comply with all statutory obligations and with provision for the tenant to have to reinstate the premises to its original condition on expiry of the lease. Under Landlord and Tenant legislation, if the lease permits the tenant to do certain things, subject only to the consent of the landlord, the landlord cannot unreasonably withhold consent. It may be necessary in relation to certain matters to provide in the lease an absolute prohibition against certain actions by the tenant so that the landlord’s obligation to act reasonably does not come into question.
The safe installation of utilities including the maintenance and testing of gas and electricity supplies is the landlord’s responsibility at the time the lease is granted, although the landlord will want to pass across to the tenant the responsibility for these matters during the tenancy. As landlord you will be required to provide experts inspection certificates regarding the installations. Any gas or electrical items installed by the tenant will be the tenant’s responsibility, but the tenant will be obliged to provide evidence of safety inspection.
This is still a big problem, especially in older commercial buildings. It may not be necessary to have to remove any asbestos found in the property, but the landlord will have to show it is being properly managed. Once the lease is granted the responsibility for asbestos will pass to the tenant during the tenancy to maintain up to date reports and to comply with any recommendations. Failure to do so carries heavy penalties.
This code of practice lays out clearly what your responsibilities as a commercial landlord are, and while you’re not legally obliged to follow the code, it is often used by insurers to determine if a property is an acceptable risk. It’s well worth reading the Code as it goes into some detail about your responsibilities on the legal aspects of lease negotiations, rent reviews, ongoing management and subletting.
These regulations originate from the Energy Act 2011 and came into force in relation to new leases from April 2018 imposing an obligation on the landlord to ensure his building satisfies the minimum energy efficiency standard which is a rating of “E”. This may require expenditure on the building to satisfy the standard and provisions about this will need to be included in the lease.
If you are thinking of expanding your property portfolio to include rental commercial property, speak to a property law expert to make sure you understand your obligations and those of your tenant and how to stay on the right side of the law. It is also important to have good quality legal representation if you are negotiating a new lease with your tenant or if any disputes arise during the course of the tenancy regarding maintenance and safety aspects and the general management of the building and disrepair, commonly known as dilapidations.