Renting out commercial property - have you covered all the bases?

Commercial Property

Letting commercial space can be a complex process. Sally Peake advises on your legal obligations.

When thinking about renting out a commercial property, be clear about your own requirements before negotiating with prospective tenants.

For example, if you are planning to rent out space within a larger area think about the space you intend to let and the corresponding access rights. An office within a building ought to be self-sufficient, with direct access to the main common ways. It will also need access to toilet and kitchen facilities and an emergency escape route. An accurate floor plan will be required, not only for the floor on which the office is situated but for the rest of the building too.

So, before negotiating with a potential tenant you need to think about the practicalities of sharing space with an outsider. This should include the security of your own business, covering when and how you want to give access to the building. Do you, for example, want the tenant to have keys?

If you are a tenant, check your lease to find out what your landlord’s requirements are. You will also need to speak to the building insurers to ensure you comply with any requirements for sharing space.

Local commercial agents will be able to tell you the likely market rent and typical lease terms for the area. Terms will depend on several factors, including local demand for the type of property and the desirability of the building in question.

A surveyor will also advise on a number of matters. These include whether you should incorporate a rent review into the deal (this may not be appropriate if it is for a short-term let) and whether the agreement should give the tenant the statutory right to renew the arrangement at the end of the term.

Remember, when the market is saturated with supply, a would-be landlord may have to offer inducements such as rent-free periods or redecoration to coax a tenant.

Many new businesses struggle in the first three years, so if you are letting a relatively small office your approach might depend on whether the tenant is well established or new. While there is a lot be said for locking the tenant into a contract for a fixed number of years, you will not have any greater protection if the tenant goes bust during that period. A rent deposit arrangement is therefore more popular than ever, as it provides tangible protection and is easier to collect against than pursuing a personal guarantee.

Do you want to allow your tenant to alter the space? If you anticipate having it back in the near future you may prefer not to or to oblige them to reinstate at the end of the arrangement. Naturally, if a tenant goes bust before the end of the tenancy they will not reinstate, providing another reason to consider a rent deposit or to not allow any alterations.

You will continue to have an obligation to maintain the building when you rent out a space within it. You will therefore need to decide if the rent you charge should be all-inclusive or whether the tenant should contribute towards regular maintenance. The rent could include an element for the general upkeep of the building, or there could be a separate service charge.

If you wish to retain flexibility, consider granting a ‘licence to occupy’ rather than a lease. This means you can reorganise the premises more easily and it remains outside of the statutory provisions. It is essential that the document complies with the strict rules that determine whether an agreement is a lease or a licence.

As a landlord you must provide:

• an energy performance certificate (where there is heating or air conditioning in place);
• an asbestos audit;
• a fire risk assessment;
• an electrical risk assessment;
• a gas safety certificate.

You will need to ensure that the occupier of the space pays business rates. Find out from your local authority if the space is separately valued for rate purposes. If it is separately valued, then the tenant will normally be responsible for paying the rates directly. If not, then you need to establish whether it will be. In the meantime, you will have to collect the element attributed to the space and pass it on to the local authority.

You will need to consult a solicitor to make sure that the document drawn up between you and your tenant accurately reflects the terms agreed. Issues it covers should include:

• the extent of the property: will the tenant’s use comply with the permitted planning use? The tenant will need to arrange this but the property needs to be marketed with the actual planning use

• registration at HM Land Registry, if the lease is for a period of seven years or more. You may also need to provide a plan as part of the documentation, which you will need early in negotiations

• VAT: you will need to fulfil HMRC requirements if you want to recover VAT on the expenses from the building. It should be made clear to the tenant at the start that they will have to pay VAT on top of the rent.

 

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