As a commercial landlord, you have a lot to consider when it comes to letting your property to a new tenant. Ensuring that you protect your interests and foster a mutually beneficial relationship with your tenant requires due diligence and care. These tips for letting your commercial property will help you keep your priorities straight and manage a smooth and secure rental process.

Screen Your Tenants

Screening tenants is essential if you are to make sure that they will be able to meet their rental obligations and afford any maintenance or repairs to the property that they will be obliged to undertake during their tenure. If you’re having trouble finding a tenant, you may feel that any tenant will be better than no tenant—at least you’ll keep your income stream going. And while you might get lucky and have no trouble with your tenant, you could find yourself in a situation that costs you more than the void period would have done. For example, if they’re able to pay rent but can’t afford the cost of maintenance, you risk your asset losing value, which could potentially cost you more than the rent you would have lost while you waited for a more suitable tenant. The standard screening procedure for new commercial tenants involves requesting bank statements, and, ideally, references from two prior landlords. This won’t always be possible for new businesses, in which case you’ll need to go into more granular detail to assess your new tenants’ financial situation.

Request Added Security

To protect your interests, you may wish to ask for an additional security in the form of either a guarantor or deposit. For example, if you’re considering leasing to a business, you could request that the company directors stand as personal guarantors for the rent. This means they are individually liable for rental payments if the business folds during the lease term. A larger parent company can also act as guarantor, providing security within the agreement for all parties. If this is not an option for your new tenant, a rent deposit is a good alternative. Three months’ rent upfront is standard practice, but in lieu of a guarantor, anything from six to twelve months can be negotiated.

Third Party Consent

Many landlords get to the point of signing before realising that third party consent was required, delaying the rental process until consent is obtained. To avoid delays, it’s important to ensure that there is nothing stopping you from leasing the property at the agreed start date. Even if you are the owner of a property, you may not have the right to lease the premises without consulting relevant third parties. For example, you may need permission from your mortgage lender if you don’t own the property outright. If you have a leasehold, you might need to consult your landlord, who could require you to pay any surveyor or legal fees that they incur, so be sure to include these in your financial planning. Consent from property management companies is also frequently required where a building is located in a larger property complex. These types of relationships can be intricate, so to avoid delays it’s best to consult a solicitor who can tell you whether third party consent is required.

Security of Tenure

Unless you deal with the provisions laid out by the Landlord and Tenant Act of 1954 within your tenancy agreement, the tenant will automatically come under the protection of the Act once the tenancy has run its course. This means that the tenancy will not be terminated at the end of the lease period, and if the tenant wishes to continue to occupy the property, they will legally be allowed to stay. If it’s your preference that the lease should end when the tendency period is complete, giving both parties the freedom to either agree to a new lease or move on, this must be agreed to as part of the lease. This is known as ‘contracting out’.

Seek Advice on Rent Level

A glance at Rightmove or Zoopla might give you some idea of what rent you should be able to get for your property, but it is advisable to consult a property expert to ensure that you’re setting your rent at the optimal market rate. Not only will you be less likely to rent your property for less than its worth, but you stand a better chance of avoiding a situation in which you’ve set the rent too high and fail to get a tenant, resulting in your property sitting on the market with a visible rent reduction, which can deter interest. A property agent could also advise you on how to navigate rental negotiations to maximise your rent for the course of the tenancy. For example, you may wish to rent to a startup that can’t afford the full rent now, but looks set to afford it in a couple of years time. In that case, an agent might advise you to stipulate a rent review every couple of years, building in gradual rent increases to either meet market rate or a pre-agreed value.

Consider Your Future Plans

Many landlords make the mistake of leasing informally to friends or trusted tenants, forgoing the formal lease in the interests of cost saving. The informal understanding may work well for both parties, but it’s worth considering what would happen if you decided to sell the property midway through the tenancy. If you’re selling a property with a tenant in situ, your buyer may be put off the sale by the prospect of taking on a tenant without a legally binding lease agreement. Likewise, if you need to take out a mortgage on your asset, you may find that the bank is reluctant to lend you the funds without a formal lease agreement between you and your tenant. So even if it seems a good idea now, an informal lease situation may cause you hassles down the line if there’s any chance you might wish to sell.

Compliance

Before you hand over your property to your new tenant, you’re legally required to tick all the relevant boxes in terms of compliance. This is for your tenant’s safety, and the protection of your asset. With the number of regulatory requirements continually on the increase, it’s vital to keep track of what has and hasn’t been certified, what date those certifications were obtained, and when they’ll need renewing. You’ll need to comply with energy efficiency standards, fire safety regulations and asbestos management, to name but a few. In the interests of attracting a good tenant, it’s advisable to have all these certifications in place in advance of putting your property on the market.

Flexible Lease Terms

In the current economic climate, commercial landlords are finding it increasingly difficult to secure long term lease agreements. A proliferation of startups has changed the workspace landscape, with flexible workspace and co-working facilities undermining demand for long-term leases. Demand for retail space has also dramatically lowered, as online shopping becomes more popular. To adapt to this new order, landlords are building flexible terms into their leases in order to attract tenants who are willing to take on long term leases but are unable to commit to rigid terms. For example, pre-agreed rent holidays—that take effect when a tenant opts not to exercise their break clause—can incentivise a tenant to take on the long-term commitment.

Consider Including a Break Clause

Under volatile market conditions, many businesses are reluctant to enter into long term lease agreements on commercial property without the assurance that if their business projections are wrong and their circumstances change, they can be released from the agreement. That doesn’t necessarily mean that they will be unable to pay rent. On the contrary, many businesses want to retain the right to move to larger premises if they need to expand their business quickly. It goes without saying that break clauses are not ideal for landlords, but they can pay off in the long term if you’re careful to build potential rental losses into your pricing, and offer incentives for long term adherence to the lease.

Be Transparent About Repairs

The question of which party is responsible for repairs to a commercial property is an infamous sticking-point between landlords and tenants. To attract—and retain—a good tenant, it’s useful to think through the question carefully ahead of time and pin down the ins-and-outs of repair obligations within the terms of your lease. In doing so, consider factors like the duration of the lease and the current condition of the building. If you’re signing a long term lease and the property is relatively new and in good nick, you could expect the tenant to shoulder a greater share of the responsibility for repairs. On the other hand, if it’s an older building that needs fairly regular maintenance and the tenant won’t be staying for long, you’re more likely to attract and retain a tenant on the understanding that you will take care of the majority of repairs.

If there’s a service charge involved for a multi-occupancy property, make sure that the maintenance of the larger property is beneficial to the current tenant. For example, if you have a value-adding refurbishment in the pipeline, don’t start that work unless you have a long-term tenant in situ, as a short-term tenant could push back on your service charge. Rather, conduct regular, small-scale repairs to keep the property in good condition.

Include a Use Clause

When you’re screening your prospective tenant, be sure to consider their proposed business use for the property. Agreeing what the property will be used for means your tenant won’t be able to suddenly change what type of business they operate, protecting your asset from unforeseen wear and tear. A Use Clause also insures against the potential harm a change of your tenants’ business could do to your future rent prospects, as well as the negative impact it could have on other tenants in the vicinity.

Alterations and Business Fit-out

When a tenant moves into your premises, they are likely to want to erect their own signage and fit out the space for their business use. A landlord who resists this type of alteration is unlikely to find a long-term tenant, but allowing your tenant to fit out the property for their use doesn’t have to mean they have carte blanche. You can stipulate in writing that all alterations should be made with good quality building materials, and that branding and structures such as reception desks must be removed at the termination of the tenancy, facilitating a smooth re-letting process. Not only does formalising the licence for alterations in the lease agreement protect your asset, but the tenant is assured that any improvements they make to the property will not be taken into account in a rent review and result in a rent increase.

Seek Legal Advice

Especially if you’re leasing a commercial property for the first time, it’s a great idea to seek legal advice before you begin the process. Even experienced commercial landlords will benefit from legal counsel, as each tenant is different, and shifts in the market and changing regulations can make it tricky to dot all the i’s and cross all the t’s.

Consult the New Code of Leasing Business Premises

If you’ve ever perused the 2007 version of this extremely useful tome, you’ll know it contains everything commercial landlords and tenants need to know before embarking on a commercial rental agreement. While the points made in your well-thumbed 2007 version are merely suggestions, in February 2020, the Code was updated with the intention of incorporating its policies into industry standards. We’ve given you a highlights reel here, but it’s well worth checking out the updated code for yourself. You can download a PDF via this link.

Can’t Find a Tenant for Your Commercial Property?

Uncertainty in the commercial property market has left many landlords unable to find suitable tenants. If you’ve been struggling to lease your commercial premises, you might opt to forgo your rental income and keep the property vacant until the right tenant comes along. While that may be sensible, it also costs you money. Vacant property insurance, business rates, and security costs can compound your loss of the rental income stream, and after a while that unsuitable tenant you turned down a while ago might start to seem like a good option. Before you go down that route, consider Blue Door Property Guardians—we offer live-in security that costs you nothing! Not only do you save everything you would otherwise spend on traditional security measures like manned patrols and CCTV, but you can also save on business rates. To learn more, register your property with us and we’ll give you a call today.