Gillian Crump, Partner, Commercial Law
Property investment is pretty much guaranteed to generate ongoing revenue, so if you’ve got the capital to invest in bricks and mortar, then the advice is to ‘go for it’.
If you choose to invest in commercial property rather than domestic stock and then rent it out, then, as with domestic rentals, you have to meet certain obligations to both 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’s well versed in the finer points of lease negotiation, commercial property and those all-important Landlord and Tenant Acts 1927 and 1954.
Negotiating a lease
Not only does negotiating a lease involve setting the monthly/annual rental value, it is also the time to lay out quite clearly 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 that once a lease is up for renewal, you and your tenant may need to re-examine clauses in the old lease and make amendments so that responsibilities are more clearly defined.
With commercial property, there may be other considerations to give thought to, such as the fact that the public will have access to your building, and that you have additional health and safety aspects to take into account. Let’s have a quick look at the obligations for commercial landlords.
Health and Safety
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. In multi-let-buildings landlords are still held accountable for the overall condition of 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’s a safe environment for workers and visitors. If the tenant occupies the whole building however the he/she will usually be responsible for all repairs.
If you have an FRI lease agreement (Full Repairing and Insuring) then you can choose which insurance company you take out cover with, and then reclaim the cost of the premiums from the tenants. It is also possible to claim a ‘Service Charge’ from tenants to cover the cost of repairs, 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. You will need to ensure that your agreement clearly stipulates what changes can be made, and what can’t. Under the Landlord and Tenant Act 1927, you cannot withhold consent to any reasonable requests, although what constitutes a ‘reasonable request’ is a little hazy.
Utilities – Gas and Electric
The safe installation of utilities including the maintenance and testing of gas and electricity supplies is down to the landlords, so you’ll need to make sure all required inspections are carried out on time and that certificates have been issued. Any gas or electrical items installed by the tenant are their responsibility, but it pays to make sure they are keeping up with the checks and certification.
Security of Tenure
If the tenant has security of tenure under the Landlord and Tenant Act 1954 then the tenant has the right to request a new lease on broadly the same terms as the principal lease, though the rent would be updated and changes might be made where there have been changes in the relevant law. There are a number of grounds on which the landlord can refuse this. To avoid the possibility of an unwanted renewal of a lease, landlords may decide to offer a lease without any right to renew it under the 1954 Act, but it is crucial that the procedure set out in the Act is strictly followed.
This is still a big problem, especially in older commercial buildings. Surprisingly, it may not be necessary to actually remove any asbestos that’s found on your property, but it is up to you as the landlord to ensure it’s managed properly. Failure to do so could result in a very big fine (up to £20,000) and/or a two-year prison sentence.
The 2007 Code for Leasing Business Premises in England and Wales
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.
Talk to the experts
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 both your and your tenants’ obligations, and how to stay on the right side of the law. It’s also important to have good quality legal representation if you’re negotiating a lease with your tenant or have any disputes over whom is responsible for what when it comes to maintenance, safety aspects, and the general management of a commercially rented property.
For more information about our Commercial Property services, please contact a member of the Commercial Law team on 01244 356 789 or email email@example.com
Please note: This is not legal advice; it is intended to provide information of general interest about current legal issues.