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Commercial Property Pitfalls – and how to avoid them

Unless you have been living under a rock you will be aware that the Government announced that tax relief on buy-to-let mortgage interest payments for residential property would be slashed (phased in from April 2017) and that buy-to-let residential properties (and second homes) would incur an extra 3% stamp duty.

This has left many residential property investors scratching their heads and wondering whether they should shift their attention away from residential property to investing in commercial property.

However before you make the jump you need to be aware that commercial property has significant risks attached to it. Understanding those and the steps you can take to reduce your exposure to them must be key to your decision making.

Set out below are some of the common problems which landlords in this area experience and tips on how to avoid those (or minimise your risk):

  1. Your tenant’s goes insolvent – this will lead to the lease being disclaimed leaving you with an empty property and a business rates liability (after you have used up any relevant business rates relief). Not only will this leave a hole in your income it will also seriously impact upon the value of your investment.Whilst you cannot predict the future, to reduce your risk you should carefully assess the ability of the proposed tenant to pay the rent and the other outgoings due under the lease by considering their company accounts (these can be downloaded from Companies House), requesting more current management accounts if possible, visiting any other premises they may be occupying to determine how busy they are and getting a good idea of the health of their business.
  2. Tenant stops paying your rent – again you should carry out your due diligence before giving the tenant a lease. You can agree that a rent deposit is taken and the terms for when you can dip into that rent deposit (which should then be topped up by the tenant).  In addition ask the tenant to provide guarantors and, if it is a company tenant, ask for the directors to guarantee the company’s payment of the rent and the performance of the other covenants in the lease.   You should carry out your due diligence on the ability of those directors to pay the rent and other outgoings due in the lease in the event that the company defaults.
  3. Tenant vacates the unit (or you terminate the lease) and it is left in serious disrepair – this can be a serious issue if you do not know where the tenant has gone to (if it is an individual) or the tenant is an unprofitable company with little or no assets to recover your damages against. You can minimise your risk in this instance by carrying out your due diligence before you accept the tenant and by demanding that the tenant provide guarantors who guarantee the tenant’s performance of the covenants in the lease.
  4. Tenant sub-lets the premises or assigns it without your consent – this can present a number of complicated legal issues and depend on the facts of the case. You can best protect yourself against this occurring by keeping a careful watch on who pays the rent and by frequently visiting the premises (provided you do so in accordance with the terms of the lease) to determine who is in actual occupation.  A well drafted lease is your first line of defence as this will enable you to take the necessary steps to remedy any issues you have with the occupation of the premises.
  5. Squatters, vandalism, theft – these are all issues which vacant premises are particularly susceptible to. Advertising vacant premises as “to let” can be asking for trouble as those targeting vacant premises for occupation will then become aware of your premises availability.  The best way of preventing the issue occurring in the first instance is to ensure that any vacant premises are secured properly (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.