A Landlord’s Guide to Letting Commercial Property

It is important to obtain a valuation from a commercial estate agent. There is a big difference between agents that specialise in commercial property or have a separate department dealing with commercial than a residential agent that happens to “dabble” in commercial property.

We would always suggest that you obtain at least two valuations, as it helps to better validate your expectations against the property itself and the market conditions.

Here’s some important things to consider when assessing the value of your property:

• What is the size and condition of your property?
• The location of your property (proximity to public amenities, public transport etc)
• The recent and current market trends of similar properties
• Any additional features or qualities that your property offers
• The demand and supply factors relating to your property.

Prior to commencing any formal marketing of your property, you should look to check and obtain the following things:

• Mortgage agreement – if your property is subject to a mortgage, then you will need your lenders or Bank’s consent to let the property. Whilst most agree to a letting it’s well worth while getting ahead of the game here and checking in advance. Getting a direct contact with someone can be a real bonus.
• Leasehold restrictions – if you want to let a leasehold commercial property then you will need to check your lease to see if there are any restrictions within it.
• EPC (Energy Performance Certificate) – an Energy Performance Certificate (EPC) rates how energy efficient your building is, using grades from A to G. Currently your property must sit within the A-E banding to be compliant, anything below an E will require some remedial works to be carried out to improve the rating, prior to marketing. You can be fined for not having a valid EPC. To check if your building has a valid EPC you can visit the online government portal – https://www.gov.uk/find-energy-certificate
• Asbestos report – if your property was built before 2000, you should have an asbestos report. Whilst this is not a legal requirement it is “best practice”. A landlord must keep in place its own records and a written plan to manage asbestos and they are required to provide information about the location and condition of the asbestos to anybody who is liable to disturb it.
• EICR (Electrical Installation Condition Report) – unlike EICR inspections for residential landlords, EICRs for commercial buildings are not yet a legal requirement. However, an electrical certificate can show that the electrical installation in a building is safe and compliant, in line with regulations, such as The Health and Safety at Work Act.
• Lease plan – it is always important to have an accurate plan attached to a Lease. If letting the entire property, then you may be able to use a title plan, but if a lease is for part of a building it is important to have a detailed floor plan together with appropriately coloured plans showing the area to be let.

When selecting the agent who is going to act on your behalf it’s important to consider the following:

• Experience and expertise – it should go without saying, but using experienced commercial property agents is a must. It simply doesn’t make sense to ask advice of someone who mainly works in the residential market, as they’re highly unlikely to have an in-depth understanding of the office, retail, industrial or other commercial property sectors.
• Extensive local knowledge – we also recommend choosing a local property agency where possible. The property market ranges significantly across the UK — for instance, the price of commercial property for rent or sale in Brighton will differ greatly from that in London or Worthing. As such, it’s important to work with an agent who knows the area you’re buying or renting in. A local agent will have an in-depth understanding of the area’s market demand and pricing trends. A top commercial property agent will also have plenty of connections in the community and can introduce you to new spaces as they come on the market.
• Previous work – a commercial property agent’s past work can give a strong indication of their experience and track record. It’s helpful to look at some recent deals to see what kind of properties they’ve handled. Ideally, you want to go with an agent who has supported businesses in securing the types of properties you need.
• Marketing – find out exactly how the agent will market your property. The days are gone of just sticking up a board and hoping the phone rings. Talk to them about online portals, social media, databases etc. Find out how quickly they can get your property onto the market.
• Company background – do your research about the company, find out who you will be dealing with and ask questions. You will need a proactive, engaging, enthusiastic agent to deal with your property on your behalf, but you also want an agent that’s going to be honest and trustworthy.

Don’t be fooled in going with the agent that provides you with the highest valuation and the lowest fee. It is likely that the agent will be keen to get your property onto the market and will then call you 4-6 weeks later to lower the rent.

Once you have selected your agent, arrange to see a copy of their Terms of Engagement or Terms of Business. Ensure there are no long-term contract commitments (some agents ask you to sign up to 16–20-week contracts) and be aware of any upfront or abortive costs that you may incur. This is a contract between you and the agent so it should be studied, not just signed and returned.`

Once an agent is appointed, they will carry out a marketing campaign on your property which will include several viewings with interested parties at your property. So how do you know you have secured the best tenant?

Here are a few tips:

• Credit checks and referencing – a good commercial agent will always investigate your prospective tenants before putting them forward to lease your property. Agents, if instructed, can obtain credit checks (with the consent of the tenant) which will inform you of their credit score, any County Court Judgements (CCJs) etc. You could also ask your agent to obtain written references from a tenant’s bank, accountant, trade supplier or previous landlords
• Deposit – unless the tenant is a large PLC or has a particularly strong set of accounts then request a rental deposit is paid upon completion of the lease, which is held for the duration of which they remain tenants at your property. This deposit can be utilised if the tenant cannot meet their lease obligations with you. Deposits range from three to six months, depending on the landlord, size of property etc.
• Guarantors – if the tenant wishes to take the lease in a newly formed Limited Company then is recommended that you ask for personal guarantor to be provided. It’s important that your agent ensures that the guarantor has the financial means to stand, as they will be responsible for the rent if the tenant defaults.

Once terms have been agreed between yourself and a new tenant it’s important that the agent records these clearly in a document known as “Heads of Terms”. This document is then circulated to all parties involved in the transaction and enables your solicitor to draw up the lease using information that has been agreed. A brief Heads of Terms is likely to include the following:

• The name and address of the landlord and tenant
• The name, address and contact details of both the landlords and tenants’ solicitors
• The term of the lease – e.g. how long is the lease to be for. Is the lease to be inside or outside of the Landlord & Tenant Act. Is the lease to be fully repairing & insuring or internal liability only
• Does the lease contain any break clauses?
• Confirmation of the rent being paid by the tenant and the payment dates of which it should be paid
• Whether there is to be a rent review during the term of the lease
• Confirmation of the amount paid as a rent deposit
• Confirmation of what use is being allowed in the property
• Confirmation on who is liable for legal costs, business rates, utilities etc
• Any conditions which are to be attributed to the lease or property.

Two terms that you may want to consider:

• Schedule of Condition – before the lease starts, a report on the condition and repair should be recorded in a document, known as a Photographic Schedule of Condition. This is important if the property has been refurbished, as there is then a professional record to refer to at the end of the lease.
• Security of Tenure – landlords must decide at the outset whether tenants are to have security of tenure under the Landlord & Tenant Act 1954. That will depend on the landlord’s future intentions for the building and the length of the lease. If the lease is to be excluded, prepare the relevant notices to be served to the tenant prior to the commencement of the lease. If the lease is not excluded, tenants will normally have security of tenure which means they are entitled to a new lease when the old one expires.

The speed of which a transaction completes will be determined by many factors. but usually, this process takes between 4-8 weeks from an offer being accepted. On the day of completion, you will need to be clear with your agent what type of handover you require. Some agents offer to read meters (water, gas and electric) whilst others just provide a key handing over service. It’s important that you close off any accounts with utility providers, whilst also notifying the local authority of a change in tenancy so they can update their records for business rates purposes.

Also ensure you receive a copy of the lease from your lawyer and make a note of any “break dates” or “Rent Reviews”.

When you let your commercial property, you may wish to use a property management service. This will give the agent the responsibility of looking after the property on your behalf. Services would normally include:

• Rent – collecting and chasing any debts
• Maintenance – arranging and supervising contractors to deal with ongoing maintenance and repairs
• Property inspections – periodic inspections may be required for insurance purposes
• Emergencies – being available day or night to deal with urgent property issues
• Lease renewals and rent reviews – to keep on top of the important dates within the lease.

We hope that you now understand more about the process involved in being a landlord and letting a commercial property.