Attention all landlords! How to make your Commercial Property work for you in 2019: an ABC
For landlords, the greatest priority in the short term is likely to be maximising returns. However, with Brexit looming and the risk of uncertain markets, it is worth considering the following factors in an attempt to ensure the long-term security of your income stream.
Alterations and Fit-out Works
When a tenant takes a lease of a property, there will usually be some work required to bring the property up to the branding and specification of the tenant. Regardless of whether the tenant or landlord is carrying out the work, you will want to ensure that good quality materials are used and that bespoke alterations can easily be removed at the end of the term in order for the premises to be re-let. Where there are alterations to the property, it can be in the interests of both parties to document them in a licence for alterations, to ensure certainty of both parties’ obligations.
Flexibility is a key requirement for tenants signing up to new leases, especially with the uncertainties of the current market, tenants will favour the ability to be able to get out early if their business circumstances change. Whilst a landlord may be concerned that a tenant will exercise their break clause, it is possible to take that risk into consideration when establishing the rental value, especially given the greater flexibility which a break provides for a tenant.
Are you aware of all the regulatory requirements that a landlord will need to comply with as a building owner? Before letting a property, it is important to consider compliance with the Minimum Energy Efficiency Standards, asbestos management and fire safety regulations.
Designated Use Clauses
It is important to place controls on the tenant’s permitted use of the property, in order to prevent the tenant from unilaterally changing the business it operates, which could in turn affect the rent and / or repair of the premises and may require planning permission and/or works. If you own adjoining properties, any unauthorised changes could also impact upon neighbouring tenants.
It is always worth remembering that a bad tenant can cost more in the long run than a short term void, therefore it is important to properly screen tenants. This can involve ensuring that they will be able to pay rent and also comply with the repairing obligations in the lease. Obtaining references from the bank, a previous landlord and two trade references can assist. There will be new businesses that will be unable to provide these, but in such circumstances, you are able to set the price in accordance with the risk of letting to a start-up business.
To offer you as much protection as possible, it is possible to request a guarantor for the tenant. If your tenant is going to be a company, it may be worthwhile considering the directors or a substantial parent company to guarantee the tenant. An alternative option may be to request a rent deposit deed, which will provide you with some financial security in the event of non-performance by your tenant.
Getting Rent and Rent Reviews
When it comes to maximising returns, the rental figure is of the utmost importance, as landlords are balancing being competitive in the market and also receiving a respectable income. However, this isn’t the only rental position to be considered, do you want an opportunity to review the rent? It is common for rent reviews to be based on the ‘open market’ value at the date of the review, which does not provide much certainty as to the future rent. Fixed increases or index-linked reviews can give both your and tenants more certainty over the future rental costs.
How Long is the Lease Term?
The current uncertain climate means that tenants are less keen to commit to longer leases, meaning that the income stream is not as secure for as long. It is therefore wise to consider extending existing leases on favourable terms to the tenant or offering an incentive not to exercise a break clause, such as a rent-free period.
Incorporating Repairing Obligations
Deciding where the responsibility for repairing obligations should fall can always be a bone of contention for both landlords and tenants. For a long lease, or a lease of a new property, a full repairing obligation on the tenant is realistic, however, in a short lease, or a lease of a poor-quality building, it is probably more realistic to limit the obligation by way of repair in accordance with a schedule of condition.
If you have a multi-let property, the landlord is likely to be expected to keep the common parts of the property to a high standard of repair, if the tenants are required to keep their unit to an equally high standard of repair.
Just also worth noting an updated version of the Code of Leasing Business Premises (Code) is due to be released this year and is likely to be incorporated into a RICS Professional Statement, which means that RICS members will have to have regard to the Code when preparing Heads of Terms in relation to letting transactions.
Keeping control of the costs in entering negotiations is important. It can be a good idea to enlist the advice of an expert to assist in the negotiations, cutting corners when it comes to professional advice can result in it costing more if a problem arises later.
Let us know if you would like to discuss your letting transaction further.
This article is not a definitive statement of the law. It is designed as a free update on the law at the time of publishing. It is not a substitute for legal advice on specific facts and circumstances. BakerLaw LLP and/or the writer accepts no liability or responsibility for reliance on this article and recommends that you seek independent legal advice on your specific circumstances prior to taking any steps.