South: Use lease terms to manage your risk as a landlord, says Hicks Baker
Commercial leases differ significantly from residential leases in some important ways. The terms and conditions in the lease agreement between you and your tenants play an important role in managing your commercial risks as a landlord, writes Giles Blagden of commercial property consultants Hick Baker.
A good commercial property agent will help you to understand the obligations and shortcomings you may be taking on when you invest in a property with existing tenants. You will need to be aware that the terms of the existing lease for tenants with security of tenure cannot easily be altered on renewal.
If you are buying a let investment property for your own future use or perhaps redevelopment, gaining possession once the lease has ended may be far from straightforward, where the tenant has the right to a new lease. Even if you are able to satisfy the strict conditions enabling you to secure vacant possession you will be required to pay the tenant compensation.
As to the lease document itself, rather than thinking of lease terms as being ‘good’ or ‘bad’, it is better to think of them as balanced or out of balance.
Choose the property you invest in with care. If you struggle to find suitable tenants, they will have more ability to call the shots when it comes to discussing terms.
Our fundamental advice to landlords is to act fairly. Terms which are harsh on a tenant may ultimately work against you when the rent is up for review. The principle therefore should be to protect your interests by all means, but without seeking to impose unreasonably onerous obligations on your tenants. Ultimately you want good quality tenants with a sustainable business. Properties are also easier to manage if you are on good terms with your tenants.
In most cases you will want the lease to be as long as possible to provide security of income. Five or 10-year leases with break clauses, are the norm. Break clauses will usually have conditions attached so that it cannot be triggered, for example, if the property has not been paid or vacated and cleared of fixtures and fittings. Clauses requiring the premises to be returned in repair still are increasingly rare as they are considered unfair, it being so easy for a landlord to defeat a tenant’s attempt to break, by citing the most trivial items of disrepair.
Shorter leases are generally granted without giving the tenant security of tenure. In a rising rental market this can be helpful to landlords in securing rent increases and better terms on renewal, as the tenants bargaining position weakens as the lease end approaches.
The length of term will affect the extent of a tenants repairing obligations, notwithstanding the wording in the lease. For example, an obligation to repair a roof under a five-year lease will be less onerous than one for 20 years.
The rent review, alienation (ie assignment and subletting) alterations covenants, user and where relevant service charge covenants will all need care in drafting so as to balance the parties’ respective interests.
It needs to be borne in mind also that statute steps in to assist with the interpretation of some clauses and defeat the inclusion of others, so the unfamiliar need to be wary that the terms as set out in a lease may not have the effect they expect.
The commercial property specialists at Hicks Baker will advise you on what is normal practice in the market as well as identifying clauses that are most appropriate considering your financial objectives.
To discuss more about investing in Commercial Property, contact Giles Blagden on 0118 9557082 or email [email protected]
