If you are thinking of buying a commercial property that already has tenants, you may be wondering what are the benefits and risks involved.
In this blog post, Dan Smith, Director of M4 Property Consultants explains some of the key aspects of purchasing a property with existing leases. It also includes what you should do to protect your interests and avoid potential pitfalls.
For further information or specific advice relating to your situation please get in touch.
Benefits of Buying a Commercial Property with Tenants
One of the main advantages of buying a commercial property with tenants is that you can start receiving rental income from day one, without having to worry about finding and attracting new tenants.
You may also benefit from having a stable and long-term source of income, especially if the tenants have signed leases for several years.
Other Factors to Take into Consideration
However, buying a commercial property with tenants also comes with some challenges and responsibilities. As the new owner of the property, you will inherit all the rights and obligations of the previous landlord under the existing leases. This means that you will have to comply with the terms and conditions of the tenancy agreements. These can include potentially maintaining the property in good condition, providing services and facilities, and dealing with any issues or disputes that may arise with the tenants.
You will also have to respect the security of tenure of the tenants, which may give them the right to renew their lease at the end of the current lease etc.
Therefore, before buying a commercial property with tenants, it is essential that you do your due diligence. Also, check all the relevant information and documents related to the property and the leases.
Here are some of the things that you should consider when buying a commercial property with tenants:
– Land registry
You should verify that the seller is the legal owner of the property and that there are no charges or encumbrances on the title. These include mortgages, liens, or easements. Also check if there are any restrictions or covenants on the use of the property, such as planning permissions, local regulations, or environmental issues. Your solicitor would usually deal with this.
– Health and safety standards
You should inspect the property and ensure that it meets all the applicable health and safety standards, such as fire safety, asbestos management, electrical safety, gas safety, etc. You should also obtain certificates or reports from qualified professionals to confirm that the property complies with these standards.
– Existing leases
You should review all the existing leases and understand their terms and conditions. These include duration, rent amount, rent review clauses, break clauses, service charges, insurance obligations, repair obligations, etc.
You should also check if there are any arrears or disputes between the landlord and the tenants, or if there are any pending or potential claims or litigation involving the property or the leases. A surveyor may be best placed to assist with this.
– Rent
Is the current rent that the tenant is paying a fair market rent? If the rent is below the market rent you may be able to increase this and the next review or lease expiry which would enhance the value of the asset. If the property is over-rented it could be that whilst the investment looks attractive initially, it may not be so attractive if the rent will reduce on lease expiry or if the tenant goes bust and you need to re-let the property.
– Rent deposit deeds
You should check if there are any rent deposit deeds in place, which are agreements between the landlord and the tenant where the tenant pays a sum of money as a security for their obligations under the lease.
If there are any rent deposit deeds, you should ensure that they are transferred to you upon completion of the sale, or that they are refunded to the tenants if they are no longer required.
– Tenant covenant
Does the tenant have a proven financial record? Are they likely to be able to meet their lease obligations (not just rent) moving forward? Look at the accounts of the business. A general rule of thumb is that the net profit should be three times the rent payable. The financial strength of the tenant can have a big impact on the value of the property.
– Commercial landlords
You should also consider your own obligations and responsibilities as a commercial landlord. Also be aware of your legal duties and liabilities towards your tenants. These include complying with anti-discrimination laws, protecting personal data, providing energy performance certificates, etc. You should also keep accurate records and accounts of your rental income and expenses and pay any taxes or fees that may apply.
– Management
How are you going to manage the property? If it is a multi-let property there may be service charge arrangements in place that will need to be managed. Who will collect rent and chase tenants when they don’t pay. Talk to a management surveyor and understand what your potential costs may be for property management.
Buying a commercial property with tenants can be a lucrative investment opportunity. It also requires careful planning and preparation. To avoid any unpleasant surprises or costly mistakes, it is advisable that you seek professional legal advice before entering into any contract or agreement.
If you are interested in buying a commercial property with tenants, please contact us. We have a team of experienced and qualified solicitors who can assist you with all your commercial property needs.
