Investors want to ensure that their investments yield stable profits. But owning commercial property is not a passive investment. An investor cannot purely rely on the movement of the market, no matter how large or varied their portfolio.
This article sets out some ways that commercial landlords can pro-actively manage their occupational leases to maximise value and make the most of opportunities in unpredictable times.
Managing the asset
Once a tenancy is granted and the rent is being paid, the underlying lease may often be put to one side, perhaps only to be seen again at the end of the term or where there is a dispute. However there are obligations that apply on a day-to-day basis and a well advised landlord (and indeed tenant) should be aware of these. A typical lease will cover all aspects of the occupation - from repair and decoration to alterations, dealings, regulations of use, terms of payments, etc. You should be alive to whether the tenant is behaving as they should and take appropriate action if they are not; particularly as in certain circumstances, a landlord may inadvertently waive potential remedies where it is aware of a tenant breach but does not properly address it.
Well operated buildings will attract tenants, so the landlord should take their responsibilities seriously too. The operation of the service charge, particularly on multi-tenanted buildings, can become a thorny issue if services and cost recovery is not properly budgeted and accounted for in accordance with the requirements of the lease. Tenants will scrutinize any hefty service charge invoices and a successful challenge of illegitimate service charge expenses can become a significant direct cost for a landlord.
Bear in mind that, when you come to sell the asset a purchaser and its funder will want to be provided with the full suite of documentation for the property. This will include both the legal and all the practical information (such as licences to alter or assign, rent review memoranda and service charge records). Having actively managed the property such that all that documentation is correct and accessible will enable you to proceed far more smoothly and quickly. A regular, on-going, dialogue with your solicitor and agents to ensure that all activities at the property are properly accounted for is therefore, invaluable.
Be aware of market and legal developments
Whether via agents or directly, keeping your ear to the ground as to what is happening in the vicinity of your property is important. Trends in rental levels is one thing, but do you know what the local planning priorities are, or whether your property sits within a wider master plan for the area? Shifts in the type of occupier or use of properties in an area will be gradual – being able to recognise those subtle changes and absorb the benefit ahead of competing buildings is an important step in enhancing value.
In a broader sense, over the course of a typical lease term, legislation and case law will develop and have an impact on your asset. When granting or renewing leases the temptation is invariably to roll out the existing templates. However, you should liaise with your solicitors to check whether any updating is needed given current and anticipated legal developments. For example, we have seen an increased focus on energy performance, with the Minimum Energy Efficiency Standard applying to new lettings of commercial buildings from April 2018 and which will apply to all let commercial buildings from April 2023. For on-going tenancies, there may or may not be sufficient scope for the landlord to carry out necessary upgrades, and ideally recover the cost from its tenant. There may also be an opportunity to engage with your tenant who may well have their own ideas for efficiencies at the building.
Keep an eye on your tenant
You should always be mindful of how your tenant is performing. Not just whether they are paying their rent in full and on time, but how their wider business is doing. They may have offered a good covenant at the commencement of the term, but have their circumstances changed? Does their head office support their business operations in this location, or might they be gravitating elsewhere? Is there demand for the premises from other parties?
This can be considered within the legal framework and timescales of the lease; for example a thriving tenant may well be keen to discuss a renewal or reversionary lease which can actually be granted at any time. If a break option is on the horizon, there may be commercial scope to vary the lease to remove the uncertainty of the break and offer some other incentive to the parties.
Appoint good advisers
A good solicitor and managing agent will work in tandem to advise on all of this in line with your strategy for the property. Best advice is to involve your solicitor throughout the cycle of your investment as a pro-active asset management team will help you realise the value that commercial property can bring.
This article is from the autumn 2019 issue of Room with a View, our newsletter aimed at professionals within the property industry.
