Commercial landlordism can be a lucrative market but it’s certainly not for those with a short fuse or lacking in patience. Fostering a property with value takes time and effort – not just with the building, but with the people who occupy it, too.
Many can make assumptions that residential and commercial landlordism are quite similar. While there are many overlaps, the reality is that commercial landlordism requires a different type of relationship to tenants. While many landlords will never meet any of the people who rent their residential properties – thanks to property management companies – some commercial landlords prefer a more hands-on approach.
Whether that’s them visiting their tenants personally, or hiring employees to do this, it’s very important for commercial landlords to keep an eye on their properties for a number of very good reasons. In this article, we’re going to discuss how you can be a better landlord to your tenants while also protecting your property from any potential loss of value resulting from a lease.
First of all, let’s just cover some of the basics and why it can be so important to have a good relationship. There are a number of issues that disrupt the relationship between a tenant and a commercial landlord. Everything from disputes relating to dilapidations, to rent arrears, squatters, to unlawfully sub-letting or even forfeiture can go wrong.
This can lead to many disputes. In fact, 2021 saw the launch of the first ever body to represent commercial tenants in the UK – the Commercial Tenants Association (CTA) – to help the near 1 million commercial tenants in the UK be represented. A recent survey by the new organisation found that not only were 75% of all respondents dissatisfied as tenants, but that 88% didn’t have the knowledge and support to deal with their tenancy issues.
This presents a few outcomes: firstly, that commercial landlords don’t appear to be building good enough relationships with their tenants and, secondly, tenants are not receiving enough support from their landlords to the point that they have to question what is or isn’t within their remit as tenants. It is likely that many of these problems could be rectified with a better relationship between the tenants and their respective landlords.
We’ll come back to these problems. But, first, let’s just cover commercial landlordism. In order for you to be on a good footing, it’s important to know the basics if you are investing for the first time. Location and consultation are two key tenants of a successful commercial landlord. Knowing where the best commercial properties can be found, and accepting that you don’t know everything and it’s important to consult professionals who can help guide you to making the right purchases and decisions. It’s important to keep in mind that commercial landlordism is different from residential landlordism, too. Even experienced residential landlords will need experience around them to help them make the right calls at first.
If you’re investing in commercial landlordism, it’s all about the long-term. That’s where you’ll find the growth. An average lease can be up to 7 years which means that, unlike with residential properties, you’re not likely to be switching tenants every 6 months. On the flip-side, keep in mind that these long-term leases mean that your assets are tied up and it’s not easy to sell them in a hurry. If you get it right, expect good, long-term income for decades with a higher percentage of return than residential properties.
In most instances, commercial landlordism is about maintaining your property (or properties) to ensure they are always at their full market value to make them ready to sell when you need to in the future. Remember: unlike residential properties, commercial properties have many people coming and going. The potential property management costs, repairs and maintenance can, for this reason, stack up as wear and tear happens faster. Also, a market crash – such as many saw with the COVID-19 lockdowns – can lead to long void periods without rent.
So with some of those basics out of the way, let’s examine ways in which you can protect yourself as a landlord from tenants. Some of these methods are simple and fairly straightforward while others are a bit more specific.
First of all, it should go without saying that you need to be scrutinising who your tenants are going to be. Things such as credit checks are important to establish the financial health of a tenant – including any prior leases or any information on assets. While you’re doing this, it’s important to check up on any information of potential guarantors for similar information that can help inform a decision. References should also be provided to help you adjudge the character of your potential tenant.
Remember: unlike residential properties, where there is a sea of people happy to accept a 6-month lease, commercial properties can be more like a loch with a limited of fish in supply. When you lock someone in as a tenant, you’ll likely want it to be longer-term so there needs to be more scrutiny. In some instances, it may be better for your long-term finances if the property remains unoccupied for an additional two months if a stronger candidate can be found.
Another way to tell if you have a good tenant in your hand is their business plan. Either your new tenant will be someone with a pre-existing business, with data available for you to consult so you can determine if they are a worthwhile venture, or they will be starting from scratch. In the case of the latter, requesting to see their business plan will allow you to determine if you believe in the strength of their business.
Should you not, it is surely not worth your while taking on a tenant who you think is destined to fail. After all, a commercial tenant with a failing business is a commercial tenant you will soon be haranguing with legal letters and potentially taking to court for arrears.
Insurance is also a huge protective net for landlords against tenants (and other risks). While there is no requirement for commercial landlords to necessarily have insurance, it is not only good practice but is essential for protecting your business interests.
There are four types of insurance that commercial landlords should be interested in: building, employers’ liability, property owner’s liability and, lastly, unoccupied property insurance. Building insurance protects owners against the cost of any damage arising from natural disasters – such as flooding, storms or earthquakes – as well as damage from fires, smoke, subsidence and even vandalism. This is an absolute must if you want to protect your investments.
Employers’ liability is only necessary should you employ anyone to help you monitor and/or maintain your properties as part of your commercial landlordism. Property owner’s liability is very important as it protects you from paying out to members of the public should your building have caused any damage to a person or their property. Finally, unoccupied property insurance allows you to claim for criminal activity or faults that can damage an unoccupied property.
One other way to protect yourself is, of course, a strong lease. This is an absolute necessity if you want to protect yourself as a landlord. Setting out the terms clearly and consistently not only helps you set the boundaries of what you expect from a tenant, but it can actually help them understand more clearly what they can and cannot do. This can cut down any miscommunication immensely and prevent any legal costs later.
With that in mind, let’s move onto what you can do to protect your tenants.
It’s often portrayed in the media that landlords and tenants can’t get on. Of course, we only ever hear about when something goes wrong and we very rarely hear about when it goes right. With nearly one million commercial tenants in the UK, it’s fair to say that many relationships between tenants and landlords go quite well.
However, this is often due to no problems arising. As soon as a problem arises, the relationship can take a turn for the worse and, while someone may win the court case, the legal route is often a pyrrhic victory – meaning you’ve accrued loses to get that victory. Time, stress, effort, money on legal fees… there’s potential for this to be avoided by having a good relationship with your tenants.
Yet, in most guides on how to be a commercial landlord, the focus is often on the statutory minimums and tactics to make the most money. While these things are important, it’s possible to also boost your income as a landlord by being pleasant to your tenants.
It starts during the vetting process and when drafting the lease. We’ve talked about ways to protect yourself, such as scrutinising your potential tenant’s business plan, and this due diligence also has the knock-on effect of showing an interest in the business. It allows you to observe what they need and may even allow you to make suggestions based on the layout of the property.
A lease is also a good place to put your foot down and set your boundaries. While this may seem like it is not in the spirit of fostering a good relationship with a tenant, it’s actually quite the opposite. Many of us thrive when we know the boundaries of a relationship.
Not only that, but it can be worthwhile tailoring a lease to a tenant’s specific needs. While a default tenancy agreement covering all the basics is fine, showing that you are flexible will help a tenant feel that they are not being pitched ‘against’ you from the off. And it also has the additional benefit of giving you better protection, too.
All of these things are important in building rapport. Through rapport comes loyalty. As aforementioned, the key to the success of being a commercial landlord is a long-term leases. A happy tenant is less likely to take an opportunity to move to a new location – even if that location has the potential to cause an upsurge in business – if you have cultivated a good relationship with them built on trust and understanding.
Being accessible and responsive is hugely important in establishing this rapport. When something goes wrong, a tenant wants to be able to know that you are going to be able to alleviate the problem as soon as possible. This is why regular maintenance is so important as if a tenant suffers a problem that could affect their business, it will subsequently have a knock-on effect on your monthly earnings.
A good example would be if the lock of a shop’s front-facing door is broken. With customers unable to get in, this can dampen a business’ revenue stream until the problem is sorted. A fast response from a landlord is going to be met with positivity by the tenant and, of course, ensures the business is maintaining its revenue stream.
If you look to grow your portfolio beyond one property, it can help to have these longer-term tenants as examples of how you’ve helped them maintain profitability and ensured success. Likewise, a business that enjoyed success at one of your property’s can also be used to entice good quality tenants to your services.
Maintenance is also important not just because you have a legal or moral responsibility to maintain your properties to a high-standard, but because it protects your assets. You’re always wanting to ensure that your property is reaching its full market value in case you need to unexpectedly turn the property around in the near future.
If you are in desperate need of a sale, and learn that the property has problems because of an irregular maintenance schedule, this will cost you money to bring it back to its best condition. It’s far wiser to keep the property in good condition at all times. Ultimately, it keeps your tenant’s happy and it protects your investment. It’s a win-win.
Maintenance generally includes things such as gas supply and fire safety checks, electrical supply and appliance checks, the maintenance of fixtures and fittings and even the management of asbestos that could be at one of your properties. This also has the additional boost of keeping you as an active presence at your property. It reminds your tenant that the building is still someone else’s asset and, as such, should be treated with care.
The fostering of a relationship between a tenant and a landlord can lead to a long, productive partnership where both parties benefit. If you grow your portfolio, you may even find yourself with a property that would better suit your tenants needs and plans if they are looking to upscale their business. If you have a bad relationship with your tenant, this sort of event just won’t be possible.
Most of the work done to protect you as a commercial landlord is done in the lease, but the protection of your investment and revenue can often be down to the attentiveness and care you show to your tenant and the property they occupy.
Despite your best efforts, a commercial landlord in the industry long enough is going to run into a dispute with their tenants. This is why it’s always important to have a good commercial property lawyer on your side.
Based out of London, Romain Coleman’s team of qualified, highly experienced solicitors will help you get through these issues. As we only represent commercial landlords, and not commercial tenants, you can rest assured that we will have your best interests at heart.
These are some of the issues that fall under our area of expertise:
We will always try to avoid going to court as we understand and appreciate how much time, money and effort this process can cost our clients. We will always use Alternative Dispute Resolution (ADR) methods such as arbitration and mediation to try and resolve any disputes but we can also help take your issue to the courts.
To talk to one of our qualified, highly experienced commercial property solicitors today, just call Romain Coleman on 0208 520 4555 or use our online contact form.