Experienced residential landlord but Newbie to commercial – Request for help

by Readers Question

11:42 AM, 16th July 2013
About 5 years ago

Experienced residential landlord but Newbie to commercial – Request for help

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Experienced residential landlord but Newbie to commercial – Request for help

Having been letting flats above shops I have now for the first time been asked to let the shop underneath one!

I have gleaned from the web that shops are generally let on 15 year self repairing leases and that normally a solicitor draws that side of the business up, but from a letting point of view does it follow the same process, i.e

1. Advertise ( Obviously or you would not have a tenant – but what do you charge for the let, price per square foot for the annual rent etc etc)

2. Referencing – Individuals or companies or both?

3. Lease – At what point do you pass it all over to the solicitor? When does my job finish and his starts?

4. Inventories- Do you have to do one and in what detail?

5. Rent Insurance Guarantee – is there such a thing for commercial / retail properties?

6. Does each party pay for their own legals or does the lessee pay for the Landlords?

All and any advice gratefully received.

regards,

Garyshop



Comments

15:25 PM, 16th July 2013
About 5 years ago

Hi Gary,

Please see answers to your questions below:

1. Advertise (obviously or you would not have a tenant – but what do you charge for the let, price per square foot for the annual rent etc etc).

- Speak to a Surveyor or Commercial Lettings Agent to carry out a valuation and advise you of the recommended 'market' rent, and other terms such as Lease duration, rent review frequency etc. If the area is oversaturated with other shops to rent they may advise you to offer a rent free period initially say for between 3 - 6 months from completion of the Lease.

2. Referencing – Individuals or companies or both?

- The Surveyor/Agent will ask each prospective Tenant for references, usually 2 trade and 1 bank reference. Some will also carry out online credit reference checks. If the prospective Tenant is a Company you may wish the Directors to enter into personal guarantees also. The Surveyor/Agent will recommend a level of rental deposit based on the market conditions for the area and the results of the references. Usually this is 3 - 6 months rent.

3. Lease – At what point do you pass it all over to the solicitor? When does my job finish and his starts?

You will need to appoint a Solicitor to draft the Lease for you and act for you to complete the Lease once the terms of letting have been agreed by the Surveyor/Agent and they are at the stage they can issue 'Heads of Terms'.

4. Inventories- Do you have to do one and in what detail?

I would recommend a Schedule of Photographic Condition be annexed to the Lease to show the state and condition of the property at the start and reflect any 'Landlord's Fittings' which are included in the Lease of the property.

5. Rent Insurance Guarantee – is there such a thing for commercial / retail properties?

Usually you would just get a rental deposit secured under a Rent Deposit Deed and ask for Guarantors to be party to the Lease where relevant.

6. Does each party pay for their own legals or does the lessee pay for the Landlords?

This is a matter for negotiation by your Surveyor/Agent. Usually the Tenant pays the Landlord's legal fees on the grant of a new Lease.

Hope this helps,

Lucy, Clayton Mott Solicitors.

Adam Lewczynski

17:34 PM, 16th July 2013
About 5 years ago

Hi Gary, a word of warning first that commercial lettings and leases are a whole new ball game compared to residential. Very often commercial tenants use a commercial surveyor / agent to acquire units for them so if you come up against a pro who knows his market, you and your client could get your fingers burnt. Therefore if you want to advise your client properly I would suggest you either tell him to instruct an experienced agent.or you instruct a commercial agent / surveyor to work with you on a split fee basis.

I don't know where your property is, or how large it is, but as you will be well aware retail shops have taken a hammering in recent years. Depending on size / location you may need to value it on an ITZA basis (in terms of Zone A) and carefully assess comparable evidence. Commercial property capital values are heavily valued with regard to their rental value, so if you under let it your clients capital value will be seriously affected which in turn could lead to it failing to meet LTV covenants with his bank..

A good agent acting for the tenant will also have lots of tricks up his sleeve in terms of rent free periods, staggered rents, rent review clauses, service charge caps, break options, repairing liabilities etc so again you need to be able to advise your client accordingly or he could be left holding the baby!

Unless its a prime unit, 15 year FRI leases are a thing of the past. Many new leases may only be 5 or 10 years at best, with tenant only break options every few years.

You may also need to put in place a schedule of condition at the start of the lease which in turn may be used to settle dilapidations claims at the end of the tenancy. Again this is a specialist field and one which needs professional advice or your client could lose out on thousands.

As you can see, there are a whole load of factors to take into account and whilst the clients lawyer will help with the drafting of the lease you still need to negotiate the Heads of Terms.

Feel free to email me at adam@londonpropertyinvestments.com if you need any further help but, as I've said at the top, I would recommend that you get some help from a local professional agent / surveyor.

Good luck! Adam Lewczynski B.Sc. MRICS

Gary Nock

7:16 AM, 17th July 2013
About 5 years ago

Hi Lucy and Adam. Thanks very much for these detailed responses. I had a feeling that commercial is a more complex area than residential and you confirmed it. I think I may well act as an intermediary between my client and one of the larger commercial agents in the area to try and get him the best deal in exchange for a small commission. As an aside what sort of fee dies a commercial letting charge?

Mark Alexander

9:45 AM, 17th July 2013
About 5 years ago

Reply to the comment left by "Gary Nock" at "17/07/2013 - 07:16":

Hi Gary

Good decision. I own a few commercial properties in my SIPP and I leave it to commercial agents to do everything including dealing with lawyers. I pay 10% all in to the agent plus legal fees if I can't get the tenants to pay. My properties are offices and when the recession hit they were very hard to re-let. We took a 50% drop in rents compared to the previous arrangement after nearly 12 months of voids just to get them let and get at least some income flowing in as opposed to paying out on business rates and other property related expenses. Remember also that commercial EPC's are a lot more expensive. We even did three months rent free and paid all the legals on one three year deal just to get a tenant in. Tough times require tough decisions sometimes. I recommend you tell your client that you only specialise in residential lettings and ask him to appoint a commercial agent. If you get involved then it is YOU who will be judged and you might end up losing the residential management through no fault of your own. Re-letting commercial property really is a tough market at the moment and managing expectations for clients could be very difficult too.

Christie Limb

9:48 AM, 17th July 2013
About 5 years ago

1. Advertise ( Obviously or you would not have a tenant – but what do you charge for the let, price per square foot for the annual rent etc etc)

A surveyor would advise on the market rent for the property and possible terms of agreement. I would always suggest that you instruct a solicitor once a tenant has been found and whilst terms are being negotiated so that they can advised you on the legal aspect of the transaction.

2. Referencing – Individuals or companies or both?

I would always advise that you obtain trade and financial references. If you are leasing to a company I would also suggest that you request that one or more of the directors stand as a guarantor to the lease. You can also request a rent deposit from the tenant as further security.

3. Lease – At what point do you pass it all over to the solicitor? When does my job finish and his starts?

I would involve the solicitor as soon as a tenant has been found and during negotiations so that the solicitors yourself and the surveyor/agent can work together to get the lease terms agreed..

4. Inventories- Do you have to do one and in what detail?

I would suggest that you have one so there is no question over what the landlords items are at the end of the lease. Often a schedule of condition is requested by the tenant in any event and they request that the lease records that they are not required to put the property in any better state of condition than is evidenced in that schedule and attached to the lease.

5. Rent Insurance Guarantee – is there such a thing for commercial / retail properties?

As discussed above you can request a rent deposit from the tenant and held by you under a rent deposit deed.

6. Does each party pay their own legals or does the lessee pay for the landlords?

This is negotiable. In a landlord's market a landlord would ask the tenant to pay their fees. The commercial market has struggled over the recent years. This is an area that can be discussed but in the current market be prepared that you might have to pay your own legal fees.

Christie Limb
Partner
Fidler and Pepper

Gary Nock

11:00 AM, 17th July 2013
About 5 years ago

Hi Mark, Christie, Adam and Lucy,

I am writing my letter to my client as we speak regurgitating the excellent advice I have been given. Thank you all so much for your time and comments which has cost me nothing ( well - a small voluntary membership fee to Property 118 which just from this question has proved well worth it) and has saved me a lot of time, and probably money and effort.

Regards

Gary


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