Commercial landlords – what are your obligations?
Despite the uncertainty in some other markets, property investment is still regarded as a longer term source of ongoing revenue.
If you have the capital and choose to invest it in commercial property rather than domestic stock and then rent it out, then, as with domestic rentals, you have to meet certain obligations to both maintain the condition of the building and to look after the interests of your tenants.
From the outset, the most important advice we can give you if you are thinking of moving into commercial property rental is to make sure you have a good solicitor on your side – one who’s well versed in the finer points of lease negotiation, commercial property and that all-important Landlord and Tenant Act 1927.
Negotiating a lease
Not only does negotiating a lease involve setting the monthly/annual rental value, it is also a chance to lay out quite clearly who is responsible for what during the time your tenant is in the property. Whereas with domestic agreements the responsibilities are quite evenly split between tenant and landlord, commercial leases can be more complex. Negotiating the terms of a lease may take longer and require the expertise of a specialist solicitor and often a surveyor to help you come to an agreement with your new tenants. Bear in mind, too, that once a lease is up for renewal, you and your tenant may need to re-examine clauses in the old lease and make amendments so that responsibilities are more clearly defined. There can sometimes be a statutory restriction on amending substantial terms of the lease on renewal but this will depend on if your tenant benefits from security of tenure afforded by the 1954 Landlord and Tenant Act.
With commercial property, there may be other considerations to factor in, such as the fact that the public will have access to your building, and that you have additional health and safety aspects to take into account. Let’s take a quick look at some of the more pertinent obligations for commercial landlords.
Health and Safety
A priority for any commercial landlord are considerations of health and safety. Under a commercial lease, there should be clear definitions to cover who is responsible for what. In the majority of the cases, it is the tenant who is responsible for carrying out health and safety checks for the enterprise they carry out at the premises. Landlords are still held accountable for the overall condition of common areas (which can in some cases extend to the structure and roofs of the building) and the exterior of the building (especially if it overlooks public paths and walkways), but generally the tenant will be responsible for making sure that it’s a safe environment for workers and visitors.
If you have an FRI lease agreement (Full Repairing and Insuring) then you can choose which insurance company you take out cover with, and then reclaim the cost of the premiums from the tenants. It is also possible to claim a ‘Service Charge’ from tenants to cover the cost of repairs, insurance, and health and safety management of communal areas such as reception lobbies, lifts, hallways and break rooms.
Remember too that aside of health and safety issues, the environmental requirements for business give rise to a plethora of responsibilities some of which overlap with Health and Safety requirements. These will also relate to such matters as the proper storage, collection and disposal of waste whether produced by the landlord or the tenants.
The MEES Regulations which relate to energy efficiency in private rented buildings will also impact on the ability of a landlord to let or continue to let sub-standard property and separate metering regulations also impose requirements for the metering and measurement of energy expenditure. These can be onerous and costly and again, advice should be sought from your solicitor well in advance of you considering the letting of premises.
Your tenants may want to make changes to the format of a space, redecorate, or fit specialist machinery. You will need to ensure that your written agreement clearly stipulates what changes can be made, and what can’t. Under the Landlord and Tenant Act 1927, you cannot withhold consent to any reasonable requests, although what constitutes a ‘reasonable request’ is a little hazy although as a general rule of thumb, any requests for works that constitute improvements will be regarded as reasonable. There are also some complex rules that in some cases permit improvements to be carried out even if expressly prohibited in the agreement.
Utilities – Gas and Electric
The safe installation of utilities including the maintenance and testing of gas and electricity supplies is unless agreed otherwise with a tenant, down to the landlords, so you’ll need to make sure all required inspections are carried out on time and that certificates have been issued. Any gas or electrical items installed by the tenant are their responsibility, but it pays to make sure they are keeping up with the checks and certification. Often a covenant by the tenant to observe all statutory and regulatory requirements is a way to cover that obligation and have recourse to a contractual obligation rather than rely purely on statutory compliance.
This is still a big problem, especially in older buildings. Surprisingly, it may not be necessary to actually remove any asbestos that’s found on your property, but it is up to you as the landlord to ensure it’s managed properly. Failure to do so could result in an unlimited fine and custodial sentence not to mention reputational damage.
The 2007 Code for Leasing Business Premises in England and Wales
This Code of Practice lays out clearly what your responsibilities as a commercial landlord are, and while you’re not legally obliged to follow the Code, it is often used by insurers to determine if a property is an acceptable risk. It’s well worth reading the Code as it goes into some detail about your responsibilities on the legal aspects of lease negotiations, rent reviews, ongoing management and subletting.
Talk to the experts
If you are thinking of expanding your property portfolio to include rental commercial property, speak to a property law expert to make sure you understand both your and your tenants’ obligations, and how to stay on the right side of the law. It’s also important to have good quality legal representation if you’re negotiating a lease with your tenant or have any disputes over whom is responsible for what when it comes to maintenance, safety aspects, and the general management of a commercially rented property.
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