Commercial Property FAQ

Should I contact a specialist solicitor for advice?

The lease is a legal contract between you and the landlord and failure to abide by the terms of your lease could lead to court action. It is therefore highly advisable that you employ specialist commercial property solicitors from the outset.

I have found new premises – what are the next steps?

Once you have found new premises for your business, you will need to negotiate the terms of a commercial lease with your landlord.

This lease is a legal contract and failure to abide by its terms could lead to court action. It is therefore highly advisable that you employ commercial property solicitors from the outset so that they can:

-prepare the Heads of Terms which summarise the terms for a new lease agreed between you and your landlord which is used in the preparation of the lease -review and make any necessary amendments to the lease to ensure it does not contain any detrimental terms – the first draft of the lease is generally prepared by the landlord’s solicitor and is consequently weighted in their favour

How long should I rent for?

Commercial leases are rarely granted for longer than 10 or 15 years and there is typically a tenant break clause option from the beginning of year five, enabling you to terminate the lease. Try and negotiate a break clause if there is not one and also check the small print as tenants often have to comply with all lease obligations before they can exercise a break clause and your landlord could refuse simply on the basis of failing to redecorate or carry out minor repairs to the property, for example. When the lease does expire, you will almost certainly have an automatic right to renew unless your landlord needs to occupy the premises for his own business purposes or has plans to demolish or redevelop the property.

How much rent can I expect to pay?

Find out the average rent for similar properties in the area something a solicitor can assist you with. Most landlords expect tenants to pay rent for the next three months in advance so ask them if they will allow you to pay rent monthly in advance. You should also check if the rent will be vat able and whether you can claim it back. If you wish to make changes to the premises most landlords will agree to a rent-free period to compensate for this cost.

Should I seek advice from commercial property solicitors?

The lease is a legal contract between you and the landlord and failure to abide by the terms of your lease could lead to court action. It is therefore highly advisable that you employ specialist commercial property solicitors from the outset.

Are there any other charges and costs to consider?

Yes. These include annual insurance costs for the premises, local authority commercial rates, property taxes on the lease and utility charges (electricity, telephone, gas, water, etc.). If the premises form part of a larger building such as a shop in a retail outlet or office in a block, you will also be liable for an annual service charge which covers the cost of maintaining and repairing shared areas of the building such as visitor areas, driveways, landscaping, kitchen facilities, etc., Ask the landlord for the average year’s service charge and how this is calculated, as well as the last three years’ service charge accounts so that you can negotiate a cap on the amount.

What about repairs to the premises?

Ask the landlord to carry out any immediate repairs before you take on the lease but establish who is paying for them. You may also need a surveyor to check out the condition of the premises. Most landlords will pass responsibility for their repairs, maintenance and replacement to their tenants.

What is a Service Charge?

This covers the cost of maintaining and repairing shared areas of the building such as visitor areas, driveways, landscaping, kitchen facilities, etc. if the premises form part of a larger building such as a shop in a retail outlet or office in a block. Ask the landlord for the average year’s service charge and how this is calculated and the last three years’ sets of service charge accounts so you can agree a cap on the amount. Commercial Property is a highly complex area of the law and there are many other terms of the lease including restrictions on transfers of the tenants’ interest in the lease, sub-letting, use, alterations, signage, etc. Contact specialist commercial property solicitors to ensure professional legal and valuation advice is sought from the outset.

Steps to Take to Find a Commercial Lendor

When you are looking to finance your next commercial real estate project, you need to find a commercial lender. Why, you might ask? You need someone on your side who is an expert in the nuances of the kinds of loans that are a part of commercial real estate. But finding one can be kind of tricky. Here are a few tips to help you find a great commercial lender.

Commercial banks and lenders often specialize in the larger companies, so finding ones that specialize in small businesses is often harder. The good news is, especially since 2012, small business lending has been on the rise.

One way to find a small business friendly lender is to look for a smaller lender. Community-based banks and credit unions are often much more likely to loan to a local business. Why? It’s partly based on their ability to know you and your business better than the big guys can. It’s also based on their willingness to support their local economy by investing in it. Some local banks are also participants in the Small Business Credit Initiative which is a federal program to help give small businesses a boost.

Another way to get a commercial loan is to find a lender who offers loans backed by the Small Business Administration. These loans are perfect when you don’t have the criteria that other loans would require for evaluating your creditworthiness. The SBA backs the loans, giving lenders the ability to loan to you without fear. You can either check to see if the lender lists that it is a Preferred SBA Lender or you can consult the SBA for a list of local lenders who are a part of the program.

If you can, find out who will actually be doing the loan evaluation and making the final decision, whether it is the bank itself or if they send off your loan to an outside company. This can change who you want to work with if you intend to work locally.

Once you do find a lender you like and are willing to work with, do your research on the company. You will be with them for several years while you pay off the loan, so you want to be sure you can have a good relationship with them. Check the company track record and make sure that they are likely to be around in 10 -15 years when your loan matures. You can also check to see if the company offers annual financial reviews to see if there are other financial products that it might offer you that can be of benefit.

The Commercial Finance Association also offers you some advice and help finding a commercial lender. Their service is free and you can do your search by what kind of loan you are seeking, the amount you want to finance, and where you are. The CFA will then give you options for a lender who will match what you are looking for.

If you can, think about all of this and create your strategy before you actually need the loan. It will make things go more smoothly and faster when the time comes.

Pain Points in Managing Commercial Property

In this current property market, the management of commercial property is becoming more significant and important than ever before. When a property is well managed, the impact of property pain on the landlord becomes less.

In most circumstances a well selected real estate agent that is experienced in the type of commercial property to be managed, is best placed to balance the trends of the local property market into the management and leasing requirements of the property.

Landlords should choose their managing agents well based on the agents experience and skill; not low management fees. A poorly chosen property manager can destroy the financial and physical performance of a property in a very short period of time.

The pain points in managing commercial property today are also the points that need to be closely monitored by both the landlord and the real estate agent:

  1. The vacancy factor within the property
  2. Well controlled building outgoings
  3. Stability of tenancy base
  4. Well balanced tenancy mix
  5. Refurbishment and renovation plans to optimise the property

In dealing with these issues, the following should be said.

The vacancy factor in a commercial property has to be minimised based on the future plans of the landlord. The only time you would want a vacancy, is when their property is due for renovation or redevelopment.

Vacancy Factors

The best way to work with potential vacancies within the property is to closely monitor the existing tenant mix and the existing leases. There is nothing wrong with renegotiating leases 12 months or two years out from the expiry or option capability. Both the tenant and the landlord will benefit in the process. A stable and well performing tenant should be encouraged to remain in occupancy at a fair and reasonable rental. You can then remove the volatility of the vacancy on the property cash flow.

Well controlled building outgoings are demanded by tenants today as part of their occupancy cost. Tenants expect the landlord to maintain sensible levels of building performance yet not exceeding the averages of building operational expenditure. High building outgoings will drive tenants away from the property.

To achieve well controlled building outgoings, it pays to have a building budget and business plan that is approved and locked in by the landlord prior to the commencement of a financial year. After the commencement of financial year, the budget is checked each month for accuracy against the actual costs being incurred.

Importantly the expenditure budget is not excessive and is appropriately timed to the seasonal pressures on building performance. Well controlled building outgoings attract tenants to your property and provide stability with existing tenants in tenancy mix and occupancy.

Property Managers Role

In this current property market, the property manager has to be very mindful of maintaining a strong and stable tenancy base. Well performing existing tenants are like gold in this market. As part of the process of working with existing tenants, the landlord should be mindful of sensible levels of rental that maintain occupancy and reduce the threat of vacancy.

Retail Property

Every property with multiple tenants will have a tenancy mix that should be carefully considered. This is absolutely critical when it comes to retail property. The placement of tenants within the tenancy mix and in proximity to each other should be carefully based on the requirements of the area, existing customer base, and functionality of the building.

Refurbishment and Renovation

At some stage in the lifecycle of the property, refurbishment and renovation will become an issue. This requires planning and integration into the existing tenancy mix, lease expires, and landlord investment plans. It is not unusual for renovation and refurbishment strategies to be planned over four or five years leading to the critical window of time. This is where the experienced property manager acting on behalf of the landlord can add real value to the planning process.

Commercial Property Management – Checklist for Property Management Handovers

When you take over the management of a commercial or retail property today, the information that you gather from the outgoing property manager or landlord will be critical to the establishment and future success of your property management processes.

Information is Critical

Lack of information in the handover process means problems and potential errors in the future. On that basis you should have a specialised handover process that you can implement on and with the handover of every property type within your local area. A checklist will help your activities as you bring in the new property to the management portfolio.

Here are some ideas to incorporate into your handover checklist:

  1. Get complete and comprehensive details of all leases and licensed occupied areas within the property. You will need to check these against the tenants physically in occupancy and the rental invoices that are raised for tenancy payment. Everything has to cross relate accurately.
  2. Copies of lease documents should be checked against the original documentation. Also look for side agreements for any extension or variance documentation relating to the original lease.
  3. Copies of correspondence relating to existing tenancy matters should be handed to you. Ask for this specifically and drill down on the details of each matter.
  4. Get copies of the current rental invoices and cross reference these to the tenancy schedules for the property. It is not unusual to come across in errors in the tenancy schedule or the rental invoices.
  5. The tenancy schedule should be checked against the actual leases and other occupancy papers and the signed documentation between the landlord and tenant.
  6. Check all outgoings charges and expenses that are applied to the tenancies within the managed property. The charging process should be shown on the rental invoices; you will need to check this amount and the process of recover that is adopted. It is not unusual to see errors in the outgoings recovery with tenants in managed properties. The process of checking will involve you getting copies of the current outgoings budget and the recent outgoings reconciliation.
  7. The arrears that apply to the property and any tenancies should be identified as part of the handover. They are sometimes discharged at the time of settlement, although the question should be raised in case you are taking over the ongoing pursuit of the arrears with any existing tenants. If that is the case you will need copies of all previous correspondence and claims.
  8. Current vacant tenancies within the premises may be the subject of lease negotiation. You will need copies of the lease offers that are or have been made and the status of the existing negotiations.
  9. Details of the maintenance issues within the building will be required. The essential services within the building will be critical maintenance contracts to identify early in the Handover. Any threats to the stability and function of essential services should be identified and addressed immediately. The maintenance contractors for the building will understand the function of the existing plant and machinery; get details of these contractors and then set up meetings as quickly as possible.
  10. Ask about any orders or notices that apply to the property or any part thereof. Check out any encumbrances, rights of way, or easements that apply to property usage.

So these are some of the main items that apply to the property management handover process. There will always be more issues and items to look at although these items listed above are the big ones to immediately get under control.