Commercial property can be a great investment. Be it a large factory or the local fish and chip shop, a commercial property landlord is a business owner with obligations to maximise the rental income from the property and safeguard its value for future sale. On the other hand, the landlord also has legal responsibilities towards the tenant, employees hired to run the property and members of the public. Here is a quick guide to becoming a commercial landlord from Romain Coleman, the London commercial property solicitors.
Investing in commercial property is increasingly becoming an attractive option for proprietors. However, as with any significant venture, it’s important to weigh up the costs and benefits before choosing to invest in commercial property.
Provides a steady income – Letting out a commercial property will give the owner a stream of revenue for as long as the length of the lease, which can potentially be for decades, depending on the tenant. This means that you can enjoy the benefits of a long-term, steady stream of income with a reduced level of risk compared to other investments.
Diversifies risk – Diversification is the key to minimising losses, therefore, investing in commercial property can help you to reduce your risk. If you invest all of your time and money into residential property, one hit to the market could leave you in a difficult position. Whereas, if you spread your investments across several areas such as annuities, shares and commercial property, you’ll be in a stronger position. If one market crashes, you’ll have the other investments to fall back on. Depending on the nature of the commercial property, it may also be possible to let it to two or more tenants, further reducing the risk of the property becoming entirely vacant.
Capital growth – In general, owning property is considered a sound investment as property values tend to increase over time. Therefore, you’re likely to make good returns on your initial investment, in addition to the rental income. The same is true of commercial property, and if you’re proactive in your property management, you can reduce your costs, increase your profits and maximise your returns.
While the rental income should ideally cover all business costs of the property owner, it is prudent to have a budget to cover the expenditures that a landlord incurs in the course of the business to avoid any unpleasant surprises when the property is vacant, and the costs catch up on you:
Mortgage – If the commercial property owner is an investor buying-to-let, then the mortgage will likely make up the bulk of the landlord’s costs. Generally, commercial mortgages are for 15 years or more, and the premises will be at risk if the mortgagor is unable to keep up repayments.
Letting agent fees – The landlord will often delegate the job of finding tenants to an agent who will advertise, interview and run credit checks on prospects. There are also management service providers that take on the full task of getting tenants as well as manage the property on the landlord’s behalf. In England, the government will ban agents charging high administrative fees to tenants from June 2019. To cover the cost, agents are likely to charge the landlord more money for finding tenants.
Insurance – Commercial landlords sometimes assume considerable risks, and may need to take on various kinds of insurance to shield them from unexpected circumstances.
Safety checks, repairs and maintenance – The landlord has a responsibility to maintain the general upkeep of the property, as well as make unexpected repairs as needs arise.
Legal fees and administrative charges – Renting out a property comes with a host of small costs that may seem trivial individually, but can really add up. These include tenancy agreements, registering with a deposit protection scheme, obtaining certifications of compliance, utilities, security measures and bookkeepers.
Taxes – Profits made on renting out properties will be subject to taxes, the costs of maintaining and managing your property will come under expenses. Make sure to keep all expenses and keep the invoices for any work done.
Cost of your time as a landlord – Letting out property will take time and energy, from securing tenants to maintaining the property. Even with a letting agent, there will still be times when the landlord will need to get involved, and the effort spent should be monitored as a cost.
When you let out your commercial premises, you take on certain responsibilities towards your tenant. These obligations and responsibilities may be laid down in law, or be listed in the lease agreement. The legislation, however, tends to have more weight when it comes to ensuring the overall safety of tenants and leaseholders, employees of the landlord and members of the public. While the lease may sometimes shift the responsibility to the leaseholder, the landlord is ultimately answerable when it comes to many health and safety issues. A good commercial property solicitor should be able to acquaint the new landlord with the relevant legislation.
Health and safety at work – Depending on the lease, the landlord for commercial property may be responsible for ensuring a number of health and safety responsibilities on the property including workplace temperature, ventilation, lighting, water supply and hygiene.
Gas and electrical safety – As the landlord, gas and electrical safety will usually be your responsibility. You will need to ensure a registered gas safe engineer and an electrical safety engineer inspect the property on a regular basis, and remember to hang on to the certificates provided.
Fire safety – The landlord or managing agent must ensure that they comply with fire safety regulations. The landlord is responsible for maintaining and checking shared fire safety equipment, such as a fire alarm system for the property.
Asbestos management – Take reasonable steps to determine the location and condition of materials likely to contain asbestos, record and share the information with tenants and contractors.
Energy performance – All owners of existing non-domestic premises are obliged to provide prospective tenants with an Energy Performance Certificate (EPC) under the Minimum Energy Efficiency Standards (MEES). The EPC provides information on energy efficiency using A-G ratings. It also includes recommendations for improvement in energy efficiency.
Property Upkeep – Depending on the terms of the rental lease, the landlord is generally responsible for the upkeep and maintenance of the external and common portions of the commercial property as well as any fixtures and fittings found therein.
There are some official documents a commercial property landlord will need to have. Some are required by law while others are simply good business practice.
Energy performance certificate (EPC) – From April 2018, commercial landlords are not legally allowed to rent out properties with a rating below E, at the risk of incurring a maximum fine of £4,000. By 2023, landlords will not be allowed to continue renting out properties with an EPC rating of band F or G if it is on an existing lease.
Tenants must be provided with a copy of the EPC to give them an idea of how expensive the property will be to maintain.
Gas and electricity certificates – As the landlord, you are responsible for gas and electrical safety on the premises. You will need to engage a registered gas safety engineer and electrical safety engineer to inspect the property on a regular basis, and provide the certificates to your tenants at the start of their tenancy and after each inspection. However, the tenant shall be responsible for any gas or electrical appliances they’ve installed themselves.
Managing asbestos – Depending on the terms of the lease, the landlord may be responsible for managing asbestos on the commercial property under the Control of Asbestos Regulations 2012. This will likely involve engaging an external accredited surveyor to carry out an asbestos survey. The material should then be analysed, the findings recorded followed by a health and safety risk assessment. This information should then be shared with anyone who may come into contact with the asbestos, e.g. contractors.
Health and safety – When renting a property for its business, the tenant must carry out a health and safety risk assessment in the workplace and take action to remove any hazards. The tenant is also responsible for providing a reasonable temperature, enough space, ventilation and lighting, toilets and washing facilities, drinking water and safe equipment. If the tenant fails to comply with health and safety laws, they can be prosecuted under the Health and Safety at Work etc. Act 1974. The landlord is responsible for any aspects of health and safety relating to communal areas defined in the lease. As a landlord, you must take reasonable steps to ensure that your tenant complies with these responsibilities.
Tenancy agreement – A good lease determines your rights and responsibilities with the tenant with regard to the length of the lease, who is responsible for maintenance for the property, service charges and timescales for rent reviews. A tenancy agreement will give you protection in most situations and can help should you need to clarify any potential disputes by addressing each parties responsibilities from the start.
Inventories – An inventory lists the fixtures and fittings that have been installed by the landlord, and states the condition of the property when it is handed over to the tenant. This minimises disputes when it comes to missing items or damages that were not noticed before renovation works. There are independent inventory service providers that can carry out written and photographic inventory for your commercial property.
Rent – A commercial property lease can be calculated by rent per square foot or as a percentage lease and can get quite complicated. The property owner should understand the costs of ownership and negotiate the rent to assure a positive cash flow. It would help the landlord to have an understanding of the state of the commercial property market, as well as how much their property can command.
Term of the lease – the next consideration is the term of the lease. There are benefits and drawbacks to both short-term and long-term leases. Short-term leases offer no stability but can give new businesses an opportunity to get a foothold in their market and means that if you get a problem tenant, you won’t have to deal with them for too long. Longer leases do offer you that stability, but if you are in dispute with your tenant, a longer lease could be a problem. You need to decide what works best for you.
Break clause – A break clause allows tenants to break the terms of their lease without any penalty. A break clause should be a reasonable time period in a longer lease so that tenants feel like they have options when committing to a longer lease.
Service Charges – These are service charges for any cleaning of communal areas, maintenance costs and other utilities.
There are various groups and services that a commercial property owner can turn to or join for professional advice and help for a fee so that landlords need not go it alone.
Property Plus – Our Property Plus service is a subscription-based telephone helpline dedicated to giving legal advice to landlords and property owners. We provide up-to-date information and advice on a range of property issues including:
Landlord associations – There are a number of organisations and associations representing professionals and businesses in the UK’s commercial property sector. Bodies like the British Council for Offices, the British Retail Consortium, British Property Federation and the Confederation of British Industry provide standards for the sector and serve as governing bodies for commercial property professionals by providing accreditation and training.
Letting agencies – Letting agencies handle the day-to-day management of your property for the landlord. They will advertise the property, find and vet tenants and tend to their everyday needs. The agent will also handle inspections and make sure that the property is compliant with the legal requirements.
The landlord should consider getting references from the potential tenant’s banks, trade partners and previous landlords. Also, consider the length of the lease and the prospective tenant’s financial strength. A blue chip tenant with good financial standing or a government department in a long-term lease will give the property a higher valuation. This affects the overall value of the property, and also the landlord’s ability to secure financing.
Make sure that the business looking to rent fits the commercial property class that has been assigned to the property. This is known in the industry as commercial property ‘use classes’, (The Town and Country Planning (Use Classes) Order 1987) and while the local planning authority has the final say, it is worth highlighting to any potential businesses looking to lease the property.
There are letting agents who will advertise, interview and run credit checks on prospective tenants for commercial landlords. There are also online commercial property portal sites that the landlord can use to advertise their property. Taking the time to get the right tenant can pay off tremendously.
There are a number of services that a commercial property solicitor can provide to a landlord. Some of these include:
An owner who lets out commercial property assumes risks that are different from owner-occupied businesses, and insurers take this into consideration when quoting rates. A commercial property solicitor can advise the landlord on the risks they are exposed to, and which insurance would make sense for them.
Your local commercial property solicitor may be able to assess the relevance of each insurance to your property and advise you accordingly.
Income Tax – If an individual lets commercial property in the UK, they are subject to income tax at their marginal tax rates on the net rental income.
National Insurance – A commercial landlord’s business qualifies as ‘running a property business’, and is liable for Class 2 National Insurance Tax if their annual profits exceed £6,205..
Stamp Duty Land Tax (SDLT) – This is a lump-sum tax that is payable if buying land or property that amounts to more than a set figure. It is applicable to commercial property and some commercial leases, depending on the terms of the lease. Stamp duty can change every few years, so landlords need to keep this in mind.
Capital Gains Tax – Landlords will be liable for Capital Gains Tax (CGT) if they sell a property that has increased in value.
It may seem that there are many tax issues for a commercial property owner to keep track of, and a new landlord may feel overwhelmed. This is where a seasoned commercial property solicitor like Romain Coleman can help.
Eviction and possession – There are situations that compel a commercial landlord to take back possession of the premises, the most common being that the tenant is behind on the rent. Other factors include not keeping the property in good repair, being a nuisance to neighbours, or subletting the property without the landlord’s consent.
Ending and renewing a commercial tenancy – Under the Landlord and Tenant Act 1954, tenants of a business premise are entitled to renew the lease and stay in the property after the end of the lease term. They have the right to continue to stay in the property on the same terms as the expired lease unless either party takes some action. There are exceptions to the rule, such as mining tenants, service tenants and farm business tenants who do not have an automatic right to renew their lease. Landlords can decline to renew a lease if they can prove to a court that the tenant was in breach of tenancy agreements, can offer an alternative property that is equally suitable, or wants to demolish the building entirely.
As a tenant with the protection of the legislation has the security of tenure, the landlord does not have the automatic right to re-enter and repossess the property at the end of the term. A landlord who wants to end a commercial lease must provide the tenant with a written notice of at least six months before the intended termination date. The landlord should also indicate whether they are open to a new tenancy agreement. There are strict requirements for these notices, and a landlord should consult a commercial property solicitor like Romain Coleman to ensure that it is done correctly.
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