In this article, we’ll explain the key importance of commercial letting, allowing landlords to make an informed decision in deciding whether investing in either a residential or commercial property is right for them.
In simple terms, a commercial landlord is where an individual rents out property for business use rather than residential properties. A commercial property is defined as a building used solely for business purposes, they can vary from offices, retail, expansive industrial warehouse, gyms, leisure and healthcare.
It may be very transparent what constitues a commercial lease or a residential lease, however, to understand the key differences, we must ought to know the risks and benefits associated for landlords as to which leasing is more desired.
Many landlords will find that having a residential property portfolio will suit their interests due to the lower deposit and less complicated investment structure. However, more experienced landlords tend to find that opting for commercial leasing for their commercial properties offers a significant value within the commercial market over time, lured by the potential benefits from incorporiating altenative business models.
It is very important to know what entails the role of a commercial landlord’s responsibility before deciding to pursue to acquire a commercial property.
The split of responsibilities between commercial landlords and tenants is not clean-cut. Much of it is decided on a lease-by-lease basis, and each party’s exact responsibilities should be carefully laid out in the lease agreement. However, there are several important obligations which tend to fall to the landlord under statutory provisions such as the Landlord and Tenant Act 1954.
Below are some examples of responsibilities:
Landlords must comply with various regulations, including those related to energy efficiency (EPCs), and the Code for Leasing Business Premises.
Right to not allow automatic renewal right, or also known as ‘contracted out’ Contracting out of the Landlord and Tenant Act 1954 (LTA 1954) means that tenants waive their right to renew their lease, effectively giving the landlord control over whether to offer a new lease at the end of the term and on what terms.
Longer leases – Commercial landlords prefer a fixed longer leases in place, a typical long lease would be 15-20 years or longer.
Increased tenant security, most new commercial leases would require a rent deposit from the tenant. This initial investment makes the tenant secure which is hassle free for the Landlord as it avoids managing difficult tenant who fail to maintain payments.
Most landlords would find high return of investment, this is due to the size of the building and the location. Landlords tend to charge more rent for commercial buildings compared to residential properties.
Less responsibility for repairs and maintenance – Landlords must ensure they manage all property repairs and maintenance, however, in certain commercial leases, the Landlord obliges the tenant to have full repairing responsibility over the commercial property as well as taking out insurance, this sort of lease is also known as Full Repairing and Insuring (FRI). This means it is less hassle and fewer property maintenance expenses for the Landlord.
Potential Landlord and Tenant dispute, Commercial leases can involve complex legal terms which can be time-consuming and costly for landlords. Furthermore, if a tenant defaults on rent or violates lease terms, the landlord may face legal proceedings and potential vacancy, impacting their income.
Property to be in adequate and be in a higher standard state before tenants to move in. Higher initial investment from many Landlords are discouraged from entering the commercial property market.
Maintenance and repair - While some leases may assign repair responsibilities to the tenant, landlords are still responsible for the structural integrity of the property and certain maintenance issues. This can involve significant costs, especially if the property is older or requires major repairs during the lease term.
Strict lending criteria – lenders see commercial properties as risky compared to residential properties. As a result, mortgages on commercial properties have higher rates and stricter lending criteria which usually require a larger deposit.
Landlord may be liable for business rates on commercial property if the property is void for an extended period. Although an exemption is applied usually for the first three months, after this period the rate becomes payable.
When deciding whether commercial leasing is right for you, it’s important to have a clear understanding of the important differences. There are different laws which apply differently but similarly to residential and commercial properties, so we advise any landlords to understand their responsibilities.
Should you require any further advice then please do not hesitate to contact us on syed.hoque@lawcomm.co.uk or 01489 864 160
