Top 100 Tips for Businesses - #11 Commercial Leases
5 things tenants and landlords need to know before signing on the dotted line
Commercial property is on the up currently, with an increase in demand fuelled partly by changes to the Stamp Duty rules and the reduction in mortgage interest rate relief for residential properties in 2016.
Many seasoned investors are taking the opportunity to diversify their portfolios into everything from serviced accommodation to shops and offices, lured by more favourable taxation, the potential for higher yields, and the greater ease that comes with the more hands-off relationship typical between landlords and their commercial tenants.
And it’s easy to see why they are tempted – especially in East Yorkshire where Hull’s status as City of Culture 2017 is contributing to a renewed business confidence and sense of opportunity – as well as inward investment from as far afield as Europe.
While commercial property investment is undoubtedly appealing, though, like any business venture, you need to go into it with your eyes open and robust documentation in place. Our Director and commercial property expert Kelly Bannister shares some essential rules of thumb for commercial landlords and tenants alike.
1) Who’s responsibility is repair work?
As a landlord, you want to make sure your tenant looks after your property and it is usual to include repairing obligations in your lease. However, if the lease is for three years or less, you need to be realistic about your expectations.
For example, it’s reasonable for you to expect your tenant to leave the interior of your property as they find it, but arguably not for them to have to repair a leaky roof/the structure on a shorter term lease. If you feel there’s a chance the tenant could be in the property longer, then something called a ‘full repairing and insuring’ (FRI) lease – handing over all maintenance responsibilities to the tenant – may be appropriate’. However, a fair compromise would be to include a ‘schedule of condition’ which caps the tenant’s contribution at a reasonable level, dependent on the condition of the property when they take on the lease
2) Insuring against damage.
Insurance is vital for both landlords and tenants. It is common practice for landlords to take out appropriate insurance and have their tenant pay them back.
This reassures the landlord that insurance is maintained, and tenant that damage will be repaired under the insurance policy. Loss of rent insurance will also cover the landlord against loss of earnings because a tenant may have the right to either suspend their rental payments or even terminate their rental agreement early if necessary repairs are not undertaken.
3) Pre-empting uninsured risks.
You need to make sure any lease you take out covers the potential issue of damage caused by uninsured risks. For example, damage caused by terror attacks or so-called ‘acts of god’. The British Property Federation Code now recommends that landlords clearly limit their repair liabilities in instances of uninsured damage, while agreeing to suspend rental payments in such cases instead to be fair to their tenants.
4) Get-out clauses.
Break clauses can be a good solution for both tenants and landlords. Tenants appreciate the greater flexibility and this can make your property more marketable. At the same time, it can be reassuring for a landlord too to know that they can regain control over a property should they need to, for example, sell it to raise funds.
From a landlord’s perspective, tenant break clauses should be subject to their tenant at least fulfilling their rental payments and submitting between three and six months’ written notice of termination. While you can make a break clause on other terms within the lease, we usually advise against this because other issues – including dilapidations that need sorting out – can be resolved when notice has been given and it could be considered unfair to prevent your tenant from exercising their right to terminate early, if challenged.
5) Energy efficiency.
Both landlords and tenants need to be aware of a new law potentially coming into force in 2018, relating to the energy standards of properties. The proposed Minimum Energy Standards outlined in the Energy Act 2011 could make it illegal to let residential or commercial properties with an Energy Performance Certificate rating of F or G. More on this in a future blog. Watch this space.
If you are a commercial landlord or tenant and need further advice on any of the issues mentioned above – or others – don’t hesitate to get in touch with Kelly via (01482) 974480 or 07887 850653.