By Steve Cook, lawyer and commercial property expert at Parfitt Cresswell
As a landlord, or a potential landlord, you will want to maximise the return on your commercial property investment. The landlords who get this right follow a few key rules.
Finding a tenant
The easiest and often safest way to do this is to put the property into the hands of an experienced commercial property letting agent. The agent will have their finger on the pulse of the local market and know how much rent can be charged.
It is important to select your tenant carefully. Make sure you take up references. The minimum should be a bank reference, accountant’s reference, a trade reference, a personal reference and, if the tenant is currently occupying rented accommodation, a landlord’s reference. Again the agent should actively help you with this.
Contract – Terms of Lease
You should negotiate the terms of the contract carefully. You need to consider the length of the lease, any fitting-out period required by the tenant, the rent reviews, any break dates, schedule of condition and security of tenure. And of course, the amount of rent.
The length of the lease is negotiable and will depend on the tenant’s business. Some tenants will be looking for shorter flexible terms, others for longer terms. This will be impacted by how long the business has been operating and whether it is still growing.
Typically rent reviews should be contracted for at least every five years. Break clauses can be tenant only, landlord only or mutual. The terms may vary but the break clause should stipulate the length of notice required to be given and any other terms to be adhered to.
The 1954 Landlord & Tenant Act grants business tenants’ security of tenure. Broadly this means that at the end of the term of an existing lease the tenant can apply to the landlord to renew the lease on similar terms to the expiring lease. This gives the tenant security of tenure and enables them to carry on their business from those premises. A lease may be “contracted out” of the 1954 LTA by agreement. This gives the landlord flexibility regarding the premises. For example, if the landlord is looking to sell the premises 5 years’ time, with vacant possession, but wishes to profit from the premises in the meantime, they may go down the route of “contracting out” of the 1954 LTA.
Alterations and Dilapidation
It is common for a commercial tenant to want to make alterations to the premises. These alterations may be to “fit-out” the premises before they can move in and start trading. As landlord you will need to grant a Licence for Alterations to the tenant at the same time as the lease is granted. The licence will set out the permitted works and contain a schedule of works and materials to be used. The tenant will not be permitted to deviate from the prescribed works.
Many tenants will ask for a rent-free period to allow them time to carry out this “fit-out”. Of course, you will need this to be as short as possible. It’s therefore important to negotiate and limit the term allowed for this.
One of the issues that can cause expensive legal issues, when the tenancy ends, is the condition of the premises. The Schedule of Condition should include photographic evidence of the condition at the date the lease was taken. The lease should stipulate that the premises do not have to be returned to the landlord in any better state and condition than in which they were taken. This detailed record of the condition of the premises, seen and agreed by both parties, will normally avoid any lengthy and expensive dilapidations claims.
Safe guarding the payment of rent
You will want to ensure that the rent is paid. You should consider:
- Rent Deposit. This is an efficient way of securing any unpaid rent. A sum of money is lodged by the tenant with the landlord and held by the landlord in a separate account. The amount remains the tenant’s and must be returned to the tenant on the expiration of the lease, along with interest earned on it, but can be used by the landlord to off-set any arrears of rent during the term of the lease. A three or six month rent deposit is the norm.
- Personal Guarantees. If the tenant is a company without a “track record” the landlord should consider taking a personal guarantee from the tenant’s directors. This will mean that if the company fails to pay the rent the directors of the company will become personally liable to pay it. A personal guarantee can also be taken where the tenant is an individual and the landlord considers that the tenant does not have a good “track record”. A second individual, perhaps a member of the tenant’s family who is more creditworthy, can be asked to be a guarantor for the landlord. Then the tenant has the possibility of recovering the rent from two individuals.
Final top tip. Before you do anything please speak to your solicitor who will be able to explain your rights and responsibilities in more depth.