What Landlords of commercial property need to know before granting a lease?
Landlords granting leases need to consider many things. Do you own the freehold of the property or do you have a lease yourself? If you have a lease, you need to check the terms of your lease to see if it allows an underlease and if so, what, if any conditions, must go in the underlease. If you own a lease yourself, talk to us before you offer the property for sale as we may need to insert relevant restrictions in the sale particulars that your agents prepare. Freeholds can also have restrictions on certain uses so check with Toomey Legal before you offer the property for rent.
Are you renting the whole of a building or part of a building? If you are letting the whole of the building, then you need to consider whether you or the Tenant is responsible for repairing and redecorating the whole of the building. You may need to grant a longer term lease than if you keep the liability for repairs. The decision is a balance for you to make between the two options.
If you are renting out a part of a building, then you need to consider how you split the responsibility for the repair of the building. An easy way of doing this is to have a service charge. All the costs associated with the building can be split between all the Tenants in the proportion that their premises bear to the whole building. Service charges have obligations for Landlords that you may not wish to comply with. As an alternative, you can specify in the lease a percentage of liability for total repairs and list what is covered. There is a danger that you may miss something so talk to us before deciding on what may work best for you. If there are existing leases in place of other parts of the building already, then any change is difficult, but possible.
How long do you want to rent out the property for? The length of the lease (called the Term) is a key decision. Some Tenants will be looking for continuity and a longer term whilst others will be put off by the commitment of a longer term. This decision also effects the investment value of the reversion interest that is the freehold interest subject to the lease.
What level of repair are you going to impose on the Tenant? You need to be realistic in what you ask for. If you have an old, second tier property then asking for a good and substantial repairing obligation will impose a real cost to the Tenant and will depress the rent that you will achieve.
Alienation is another key point. Will you let the Tenant underlet the property? What conditions will you impose on any assignment? Will you look for an AGA? An AGA is an Authorised Guarantee Agreement and is where the outgoing tenant guarantees the rent and other covenants of the incoming Tenant whilst they are still the Tenant.
Other key terms. Rent obviously, but not just how much, but how often? Weekly, monthly, quarterly? When and how will the rent be reviewed? What will be the authorised use of the premises? The wider the use allowed, the higher the rent achievable as more potential tenants will be interested in it. However, the less control you will have and you may have to consider neighbouring tenants?
Costs – are you going to ask the Tenant to pay your legal costs? This used to be a standard term but not anymore. Do not expect this unless you have a very strong bargaining position. Better to talk to us and agree a fixed price for drafting the lease and agree a higher rent from the Tenant!
Do you have an asbestos survey? Do you have a EPC? From 2018 restrictions will start prohibiting a Landlord to rent out a property with an energy rating of worse than E so you should be aware of the property’s energy rating before you rent out a property.
Don’t wait until you have finalised the Memorandum of Agreement before you talk to us. Whilst your agent is key in knowing the market, we can ensure that the Heads of Terms cover all the points important to you as well as any legal points highlighted above. Having to alter them at a later stage delays the matter, costs more and may mean your Tenant looks to renegotiate other terms or looks at alternative properties. Talk to us first so that we can get the Tenant in quicker and you will receive the rent earlier!