Complete guide to being a commercial landlord

Commercial landlord guide

Foys Solicitor’s commercial property experts share top tips with commercial landlords in South Yorkshire, Nottinghamshire and Derbyshire in this complete guide to becoming a successful commercial landlord.

The complete guide to becoming a commercial landlord

Commercial property can be a worthwhile, profitable investment.

Whether it’s an expansive warehouse or a quaint local food outlet, a commercial property landlord is a business owner with obligations to maximise the rental income from the property and safeguard its value for future sale. Further to this, the landlord also has a duty of care that includes legal responsibilities towards the tenant, employees hired to run the property and members of the public.

At Foys, our commercial property solicitors have been assisting commercial landlords in Yorkshire, Nottinghamshire and Derbyshire for decades, so we have compiled this complete guide to becoming a successful landlord for you. This guide covers:

  • Will commercial property ownership suit me?
  • Becoming a commercial landlord
  • Costs of being a commercial landlord
  • Responsibilities of a landlord
  • Regulatory compliance
  • Setting rent and fees
  • Support for landlords
  • Finding the right tenant
  • Legal cover and insurance
  • Taxes that commercial landlords are liable for
  • Terminating a commercial lease
  • How we can help commercial landlords

Will commercial property ownership suit me?

Becoming a successful commercial property landlord, you need to have the right temperament to manage a commercial property and also have the foresight to find a property in a desirable locale in order to make letting out your premises a viable source of income.

“Location, location, location”, as property experts like to say when referring to the most critical factors in determining the desirability of a property. While it is true that most commercial landlords prefer to purchase premises located in densely populated, high-traffic locations, increasingly more commercial tenants are choosing to establish outside these areas because they conduct their business activities online, reaching clients in the four corners of the world. Hence, it all depends on the property and the type of business.

Becoming a commercial landlord

Investing in commercial property is becoming an increasingly attractive option for proprietors. However, as is routine with any significant venture, it’s important to weigh up the costs and benefits before committing to an investment in commercial property.

Common reasons motivating one to be a commercial landlord are:

Provides a steady Income

Letting out a commercial property will provide the owner with a consistent revenue stream for the entire length of the lease, which, depending on the tenant, could last for decades. This means that you can enjoy the benefits of a long-term, steady stream of income with a reduced level of risk compared to other investments.

Diversifies risk

Diversification is the key to minimising loss. Therefore, investing in commercial property can help you to mitigate the risk of your investments. If you invest the bulk of your time and money into residential property, one hit to the market could leave you in a difficult position. But if your investments are spread across several areas such as annuities, shares and commercial property, you’re generally in a stronger position. If one market crashes, you’ll have the other investments to fall back on. Depending on the nature of the commercial property, it may also be feasible to let it to two or more tenants, further reducing the risk of the property becoming entirely vacant.

Capital growth

Typically, owning property is considered a sound investment, as property values tend to increase over time. Therefore, you’re likely to make good returns on your initial investment, in addition to the rental income. The same can be said of commercial property, and if you’re proactive in your property management, you can minimise your expenditure, increase your profits and maximise your returns.

Costs of being a commercial landlord

While the incoming revenue from rent should ideally cover all business costs of the property owner, it is good practice to have a budget that covers any expenditures a landlord may incur in the course of the business. This is to avoid any unpleasant surprises when a property becomes vacant, in which case the costs can begin to catch up on you.

Mortgage

If the commercial property owner is a buy-to-let investor, then the mortgage will likely make up the majority of the landlord’s costs. Generally, commercial mortgages are for 15 years or more, and the premises will be at risk if the mortgagor is unable to keep up repayments.

Letting agent fees

The landlord will often delegate the job of finding tenants to an agent whose job it is to advertise, interview and run credit checks on prospects. There are also management service providers that take on the full task of finding tenants, as well as managing the property on the landlord’s behalf. In England, the government will ban agents charging high administrative fees to tenants from June 2019. To cover the cost, agents are likely to charge you the landlord more money for finding tenants.

Insurance

Commercial landlords sometimes assume considerable risks, and may need to take on various kinds of insurance to protect them from unexpected circumstances.

Safety checks, repairs and maintenance

The landlord has a responsibility to maintain the general upkeep of the property, as well as make repairs when necessary.

Legal fees and administrative charges

Renting out a property comes with a host of small costs that may seem trivial on their own, but collectively, they can really add up. These include tenancy agreements, registering with a deposit protection scheme, obtaining certifications of compliance, utilities, security measures and bookkeepers.

Taxes

Profits made on renting out properties will be subject to taxes. The costs of maintaining and managing your property will be classified as expenses. Make sure to keep all expenses and keep the invoices for any work done.

Cost of your time as a landlord

Letting out property will take time and energy, from securing tenants to maintaining the property. Even with a letting agent, there will still be times when the landlord will need to get involved, and the effort spent should be monitored as a cost.

Responsibilities of a commercial landlord

When you let out your commercial premises, you assume certain duties and responsibilities with respect to your tenant. These obligations and responsibilities may be statutory or be listed in the lease agreement. The legislation, however, tends to have more weight when it comes to ensuring the overall safety of tenants, leaseholders, employees of the landlord and members of the public. While the lease may sometimes shift the responsibility to the leaseholder, the landlord is ultimately answerable when it comes to many health and safety issues. A good commercial property solicitor should be able to acquaint the new landlord with the relevant legislation.

Health and safety at work

Depending on the lease, the landlord for commercial property may be responsible for ensuring a number of health and safety requirements are met including workplace temperature, ventilation, lighting, water supply and hygiene.

Gas and electrical safety

As the landlord, gas and electrical safety will generally be your responsibility. You will need to ensure a registered gas-safe engineer and an electrical safety engineer inspect the property on a regular basis, and remember to hold on to the certificates provided.

Fire safety

The landlord or managing agent must ensure that they comply with fire safety regulations. The landlord is responsible for maintaining and checking shared fire safety equipment, such as a fire alarm system for the property.

Asbestos management

Take reasonable steps to determine the location and condition of materials likely to contain asbestos, record and share the information with tenants and contractors.

Energy performance

All owners of existing non-domestic premises are obligated to provide prospective tenants with an Energy Performance Certificate (EPC) under the Minimum Energy Efficiency Standards(MEES). The EPC provides information on energy efficiency using A-G ratings. It also includes recommendations for improvement in energy efficiency.

Property Upkeep

Depending on the terms of the rental lease, the landlord is generally responsible for the upkeep, maintenance and repair of the external and common portions of the commercial property, as well as any fixtures and fittings found therein.

Regulatory compliance

There are a number of official documents a commercial property landlord will need to have. Some are statutory and required by law, while others are simply good business practice.

Energy performance certificate (EPC)

From April 2018, commercial landlords are not legally allowed to rent out properties with a rating below E, at the risk of incurring a maximum fine of £4,000. By 2023, landlords will not be allowed to continue renting out properties with an EPC rating of band F or G if it is on an existing lease.

Tenants must be provided with a copy of the EPC to give them an idea of how expensive the property will be to maintain.

Gas and electricity certificates

As the landlord, you are responsible for gas and electrical safety on the premises. You will need to engage a registered gas safety engineer and electrical safety engineer to inspect the property on a regular basis, and provide the certificates to your tenants at the start of their tenancy and after each inspection. However, the tenant shall be responsible for any gas or electrical appliances they’ve installed themselves.

Managing asbestos

Depending on the terms of the lease, the landlord may be responsible for managing asbestos on the commercial property under the Control of Asbestos Regulations 2012. This will likely involve engaging an external accredited surveyor to carry out an asbestos survey. The material should then be analysed and the findings recorded, followed by a health and safety risk assessment. This information should then be shared with anyone who comes into contact with the asbestos, e.g. contractors.

Health and safety

When renting a property for its business, your tenant must carry out a health and safety risk assessment in the workplace and take action to remove any hazards. They are also responsible for providing a reasonable temperature, enough space, ventilation and lighting, toilets and washing facilities, drinking water and safe equipment. If the tenant fails to comply with health and safety laws, they can be prosecuted under the Health and Safety at Work etc. Act 1974. The landlord is responsible for many aspects of health and safety relating to communal areas defined in the lease. As a landlord, you must take reasonable steps to ensure that your tenant complies with these responsibilities.

Tenancy agreement

A good lease determines your rights and responsibilities towards the tenant with regard to the length of the lease, who is responsible for maintenance for the property, service charges and timescales for rent reviews. A tenancy agreement will give you protection in most situations and can assist in the event that you need to clarify any potential disputes by outlining each party’s rights and responsibilities.

Inventories

An inventory lists the fixtures and fittings that have been installed by the landlord, and states the condition of the property when it is handed over to the tenant. This minimises disputes when it comes to missing items or damages that were not noticed before renovation works. There are independent inventory service providers that can carry out written and photographic inventory for your commercial property.

Setting rent and fees

Rent

A commercial property lease can be calculated by rent per square foot or as a percentage lease, both of which can get quite complicated. The property owner should understand the costs of ownership and negotiate the rent to assure a positive cash flow. It would help the landlord to have an understanding of the state of the commercial property market, as well as how much their property can command.

Term of the lease

the next consideration is the term of the lease. There are benefits and drawbacks to both short-term and long-term leases. Short-term leases offer little stability, but can give new businesses an opportunity to get a foothold in their market and mean that if you get a problem tenant, you won’t have to deal with them for too long. Longer leases offer more stability, but if a dispute eventuates, there could be a problem. While you decide what works best for you, bear in mind that drafting a solid contract that covers all the essential is vital, so contact one of our specialist commercial property lawyers, we’re happy to assist.

Break clause

A break clause allows tenants to break the terms of their lease without any penalty. A break clause should be a reasonable time period in a longer lease so that tenants feel like they have options when committing to a longer lease.

Service Charges

These are service charges for any cleaning of communal areas, maintenance costs and other utilities.

Support for commercial landlords

There are various groups and services that a commercial property owner can turn to or join for professional advice and support. Many of these will charge a fee, however, they are good networks for landlords that don’t want to ‘go it alone’.

Landlord associations

There are a number of organisations and associations representing professionals and businesses in the UK’s commercial property sector. Bodies like the British Council for Offices, the British Retail Consortium, British Property Federation and the Confederation of British Industry provide standards for the sector and serve as governing bodies for commercial property professionals by providing accreditation and training.

Letting agencies

Although letting agencies usually handle advertisement, finding and vetting tenants, they may also help with day-to-day management of your property for a fee. Sometimes, the agent will also handle inspections and make sure that the property is compliant with the legal requirements.

Finding the right tenant

As a landlord, you should consider getting references from the potential tenant’s banks, trade partners and previous landlords. Also, consider the length of the lease and the prospective tenant’s financial strength. A blue-chip tenant with good financial standing or a government department in a long-term lease will give the property a higher valuation. This affects the overall value of the property, as well as your ability to secure financing as a landlord.

Make sure that the business looking to rent fits the commercial property class that has been assigned to the property. This is known in the industry as commercial property ‘use classes’ (The Town and Country Planning (Use Classes) Order 1987). While the local planning authority has the final say, it is worth noting to any potential businesses looking to lease the property.

There are letting agents who will advertise, interview and run credit checks on prospective tenants for commercial landlords. There are also online commercial property portal sites that the landlord can use to advertise their property. Taking the time to get the right tenant can pay off tremendously.

Legal cover and insurance

Legal services for commercial landlords

There are a number of services that a commercial property solicitor can provide to a landlord. Some of these include:

  • Dilapidations – In a commercial lease, these are damages or defects to a property, which a tenant is legally obliged to put right under the terms of their lease.
  • Disputes – Reach a positive solution with regards to any tenant/landlord disputes you may have.
  • Possession claims – Help establish a possession claim if a tenant owes rent on the property.
  • Property disrepair claims – Protect yourself against a property disrepair claim that your tenant may bring against you if there is no substantial evidence to this claim.
  • Service charges – Help you to establish who is responsible for the payment of service charges, either you as a landlord or the tenant.
  • Breach of convenience – we can help you understand your rights as a landlord regarding accessing your property to inspect it or to carry out repairs.
  • Rent arrears – we can help you understand your evicting rights if you need to evict your tenant due to issues with rent payments.

Insurance

An owner who lets out commercial property assumes risks that are different from typical owner-occupied businesses, and insurers take this into consideration when quoting rates. A commercial property solicitor can advise the landlord on the risks they are exposed to, and the type of insurance that would make the most sense for them.

  • Building Insurance – This involves physical threats to the building and any property within, like fire, flood, subsidence and storms.
  • Property owners’ liability insurance – The property owner may need cover against claims from members of the public who suffer injury or property damage while on the premises.
  • Landlord’s liability insurance – This covers the landlord against compensation claims from tenants and leaseholders.
  • Public liability insurance – Not mandatory, but protects the landlord from claims when a member of the public suffers injury or property damage while on the premises.
  • Employers’ liability insurance – Covers an employee’s injury or illness as a result of their employment.
  • Unoccupied property insurance – Insures against the increased risk of buildings that are left empty for extended periods from criminal activity and maintenance neglect.

Your local commercial property solicitors at Foys advise accordingly.

Taxes that commercial landlords are liable for

Income Tax

If an individual lets commercial property in the UK, they are subject to income tax at their marginal tax rates on the net rental income.

National Insurance

A commercial landlord’s business qualifies as ‘running a property business’, and is liable for Class 2 National Insurance Tax if their annual profits exceed £6,205.

Stamp Duty Land Tax (SDLT)

This is a lump-sum tax that is payable if the purchase of land or property amounts to more than a set figure. It is applicable to commercial property and some commercial leases, depending on the terms of the lease. Stamp duty can change every few years, so landlords need to keep this in mind.

Capital Gains Tax

Landlords will be liable for Capital Gains Tax (CGT) if they sell a property that has increased in value.

Terminating a commercial lease

Eviction and possession

A situation may arise that compels a commercial landlord to take back possession of the premises, the most common being that the tenant’s rent is in arrears. Other factors include not keeping the property in good repair, being a nuisance to neighbours, or subletting the property without the landlord’s consent.

Ending and renewing a commercial tenancy

Under the Landlord and Tenant Act 1954, tenants of a business premise are entitled to renew the lease and stay in the property after the end of the lease term. This is known as ‘security of tenure’. There are exceptions to the rule, such as mining tenants, service tenants and farm business tenants who do not have an automatic right to renew their lease.

When discussing your commercial lease with us, we can cover if you want your lease to include or exclude security of tenure. Without having this clearly written in the contract, you may need to prove to a court when you decline to renew a lease.

A landlord who wants to end a commercial lease must provide the tenant with a written notice of at least six months before the intended termination date. The landlord should also indicate whether they are open to a new tenancy agreement. There are strict requirements for these notices, and a landlord should consult an experienced commercial property solicitor like Foys Solicitors to ensure that it is done correctly.

How Foys can help commercial landlords

We are specialist commercial property solicitors with offices in Doncaster, Retford, Worksop, Clowne, Rotherham, Sheffield-Waterhorpe and Sheffield-Chapeltown, the legal authority on commercial business matters in Yorkshire, Nottinghamshire and Derbyshire. We can assist you in weighing up the legal requirements and practical viability of becoming a successful commercial landlord in your location.

Free initial consultation and no hidden fee

We understand that working with a lawyer can be expensive, which is why we encourage you to contact us for a free no-obligation meeting where we can understand your case and give you a good idea of the cost.

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