Edition 2 – Tips for Landlords

 

Commercial landlords have several priorities when it comes to letting their commercial assets, most of which are focused on maximizing the returns on their investment.  This may be the most obvious item to prioritize from a financial perspective however, there are several other factors that must be considered to ensure security on your asset’s income stream.

 

Tenant Selection:

It has been argued that avoiding void periods in between commercial leases is a top priority as you want to ensure a continuous income stream to maximize the value of your asset, however, Landlords can make mistakes by selecting tenants that could cost them more in the long run.  Tenant selection and screening is vital for Landlords as you will need to ensure that the prospective tenant can afford to pay their rent, and as a minimum comply with their repairing obligations under their lease to ensure that your asset is protected.  Typically, three years of accounts should be obtained to ascertain the financial standing of the tenant as well as previous landlord references.  With new startup businesses this can be difficult, therefore, a larger rent deposit can be obtained at the start of the lease to mitigate the risk to the landlord.

 

Rent and Rent Reviews:

Rent is a major factor in ensuring their asset is producing a strong income stream and it is important to obtain professional advice to ascertain Market Rent and whether there will be an opportunity to review the rents in the future, and if so, on what basis.  Rent Review clauses are a feature of most modern commercial leases which are granted for a term in excess of 3-5 years.  Typically, most rent reviews are to the open Market Rent of the property, however, it is important to seek professional advice to confirm whether this would be the most suitable approach.  Alternative methods, such as implementing index linked reviews, either retail or consumer prices indexes, or even fixed increases can mitigate the risk entirely.

 

Lease term:

A tenant’s lease term is another function of income, as the longer the tenants lease, the more secure the rental income.  The issues that can arise for Landlords is that there are fewer tenants who want to commit to longer leases unless certain tenants conduct extensive/expensive fit-out works.  In some cases, Landlords will want to incentivize tenants with a strong covenant to stay in occupation and this can be done by including an option to extend the original lease on favorable terms.  Or, by giving additional rent free periods if the tenant chooses not to exercise their break clause within their lease.

 

Break clauses:

One of the most valuable characteristics to assume for a lease at review are regular tenant break options. The structure of the break clause and any conditions attached are also important and need to be considered carefully.  Due to the number of uncertainties that are affecting the global markets at present, tenants are keen to build flexibility into their leases to give them an option to vacate the premises should their circumstances change.

Landlords are understandably reluctant to offer termination rights to tenants, but they should also be cognizant of the commercial value of these rights to prospective tenants.  Landlords should always assume that a break clause will be exercised, however, it is possible to price that risk into the rental value or to offer some other value to the tenant who chooses not to exercise that right, such as rent-free periods, as the potential disruption and cost of relocating the business may not be financially viable.

 

Repairing obligations:

A contentious item that typically arises between landlords and tenants are the repairing obligations, which are typically set out in the lease.  These can vary due to a number of factors, such as the age of the property, the lease term and the type of premises being let. If the property is new, it is likely that the repairing obligations will be higher for the tenant, however, if the tenant is occupying a space in an older property on a short lease, the repairing obligations will likely be significantly lower.  Another distinction to note is the difference between “repairs” and “maintenance.” For example, if a lease requires the tenant to “maintain” the HVAC system, the tenant may be responsible for scheduling routine inspections with a vendor and regularly changing the air filter.  But, if the lease does not require the tenant to “repair” the HVAC system, and it breaks, then the landlord would still be obligated to make any necessary repairs. A commercial lease should contain clear obligations and well-defined standards for the repair and maintenance of the premises under the lease to reduce the risk of dispute and misunderstanding between the parties.

 

What can PLUM Property Management offer you?

In today’s complex real estate markets, selecting the right commercial property management company is one of the most important decisions Landlords can make.  At Plum, we have six experienced Chartered Surveyors who can obtain the maximum return on an asset by improving cash flow, retaining tenants, and increasing value.  If you are looking for a commercial property manager, please get in touch today on 936-0435 or email info@plum.ky.