Q – I am a residential landlord looking to move into commercial property due to tougher tax regimes being implemented. What legal issues should I be aware of when moving from residential to commercial property?

A – Tax relief on buy-to-let mortgage interest payments for residential property has been significantly reduced, resulting in all buy-to-let residential properties (and second homes) now incurring an extra 3% stamp duty. Residential property investors are therefore left wondering whether they should focus their attention on investing in commercial property, and how they can protect themselves from paying higher tax bills.

Below are some of the common problems landlords in this area experience and how to best mitigate against them:

Insolvent tenants

If a tenant becomes insolvent their lease will most likely be disclaimed, which leaves the landlord with an empty property and, once the premises have been repossessed, a business rates liability (after using up any relevant business rates relief). Not only will this leave a hole in the owner’s income, it will also seriously impact upon the overall value of their investment.

Landlords must therefore carefully assess the commercial viability of any proposed tenant, to determine their ability to pay the sums due under the lease. This can be done by considering their accounts (downloaded from Companies House), requesting current management accounts if possible and visiting any other premises they may be occupying to determine how busy they are. Overall, landlords need to gain a solid idea of the health of a tenant’s business before agreeing to lease their property to them.

Rent arrears action plan

Carrying out thorough due diligence before agreeing any leases can minimise the risk of tenants not being able to keep up on their payments. Owners can agree that a rent deposit is taken and the terms for when they can use that (which should then be topped up by the tenant). Asking the tenant to provide guarantors and, if it is a corporate tenant, asking the directors to guarantee the company’s payment of the rent and performance of the other covenants in the lease is widely advised. Due diligence should be carried out on the ability of those directors to pay the rent and other outgoings due in the lease in the event that the company defaults.

Lasting damage

Dilapidations, whether during or after the term, can significantly dent a landlord’s return. If owners have let the property on an FRI lease, then in theory they should be able to recover the cost of the repairs from their tenant. However, depending on the terms of the lease and when the Dilapidations Schedule is served, recoverability can be affected. For instance, there is a statutory cap pursuant to section 18 of the Law of Property Act 1927 which limits recoverability to the diminution in the value of the property consequent on the disrepair, if the Schedule is served at or towards the end of the term. This Act also raises supersession arguments, meaning that the value of the repairs can be superseded by the landlord’s own redevelopment plans.

Carrying out regular spot checks on the property and acting swiftly can help reduce any lasting damage, as well as appointing a robust and experienced solicitor and surveyor who are familiar with the law and the arguments raised by tenants seeking to minimise or extinguish their repair liability.

Sub-letting

Tenants sub-letting or assigning premises without consent can present a number of complicated legal issues which vary depending on the circumstances of the case. Landlords can best protect themselves against this occurring by keeping a careful watch on who pays the rent and by frequently visiting the premises to determine who is in actual occupation (providing that this is done in accordance with the lease terms). As soon as the landlord becomes aware of a third party being in occupation a rent stop should be put in place, the tenant should be notified of their breach, what needs to be done to remedy it (if anything) and the action that will otherwise be taken. A well drafted lease is a first line of defence because this will enable the necessary steps to be taken to remedy any occupation issues.

Squatters, vandalism, theft

Advertising vacant premises as “to let” can cause issues as those targeting vacant premises for occupation become aware of the premises. Landlords should ensure that any vacant premises are properly secured (making this the tenant’s responsibility if the lease is still in existence) and regularly visiting the premises (or appointing an agent to do so) to inspect it and manage it whilst it is vacant.

In the unfortunate event that squatters do find a way to move into the property, then it’s essential to follow the correct legal procedures to evict them. It may be possible to gain entry to the property when the people squatting are not present in order to change the locks. However, a landlord may not use violent force if their entry is opposed by a squatter. In this case, the landlord is compelled to follow the special court process to confirm their ownership of the property and legally remove the people from the property.