Investing in commercial property to let out to a business can be a rewarding venture: the yields are often higher, and the tenant will often sign a full repairing and insuring lease.
However, there are several pitfalls that investors may fall foul of, some of which can threaten expensive penalties and the potential demise of the business altogether. Here we have outlined the key mistakes all investors should be familiar with when buying commercial property.
Failing To Plan
“If you fail to plan, you are planning to fail!”. So said Benjamin Franklin, one of the Founding Fathers of the United States, and he was right. Having a plan or a long-term vision is one of the most fundamental factors to success when investing in a commercial property.
Buying a property on a whim is not recommended. This is especially important if you’re going to be using a loan, as lenders don’t want to see you without a concrete plan in place.
Not Having Enough Cash
Relying upon a loan to kickstart a career in commercial property investment can be a risky move.
Most lenders will only offer you their support if you have a substantial amount of cash to inject into a commercial property project yourself.
There’s no need to avoid loans entirely, but it’s prudent not to rely on them completely when starting off a property investment bid.
Potential Tenants Are Not Interested
If the price is too high or the building is not desirable for the targeted demographic, then you may find you have little tenant interest and your investment could sit empty for a long time.
Try to see the property through the lens of the tenant before buying a property. Location is key here. Will they need onsite parking or access to public transport? Are there other competitive commercial properties nearby or limiting factors such as zoning to consider?
An important factor is whether the property has good footfall. The better the passing trade, the higher your the rent can be and the lost downtime of letting and reletting the premises.
A good way you can find this out before investing is to talk to the storefront business if it’s occupied, and ask if they are planning on renewing their lease and whether there any signs that more businesses are relocating or popping up in the area.
Failing To Have A Schedule Of Condition When Taking A Dilapidated Space?
A commercial lease will typically contain a provision for the tenant to keep the property in good repair and condition throughout the lease term, stating how it is to be left at the end.
If a property is severely dilapidated, the tenant may have a good vision of how they want the space to look and begin work to correct it in line with their company image.
However, what a tenant often fails to consider, is what the repairing responsibilities of the lease spell out and whether this means that they will need to put the property back to a similar condition or often in better condition than they have installed.
If this doesn’t happen then failing to manage dilapidation correctly can be an expensive mistake to make.
If you are taking on space that needs a lot of work, ensure that you have a good quality schedule of condition drawn up and have it attached and referenced to the lease that both parties will sign.
Business tenants often carry out improvement works to their property either at the beginning or during the lease term itself. This could include fitting out, adding physical space, structural alterations and adding air-conditioning.
A frequent mistake here is failing to seek the necessary formal authorisation from their landlord in line with the terms of their lease.
The consequence of this could be the tenant is asked to reinstate to the original condition, which is often impractical and too costly. Or they can end up paying additional rent and have to pay a hefty premium for the benefit of the works.
It is wise to always obtain formal landlord’s consent for any proposed changes prior to spending any money or at least consult a surveyor to advise on what is necessary. The only exception to this rule is in the case of minor alterations that do not require the landlord’s consent and that do not add rentable value.
A Lease Is A Fixed Contract That Cannot Be Changed
Be aware that while a lease is a fixed contractual agreement between two parties, the contract can be torn up at any time, provided both parties are agreeable.
In fact, many contracts are often renegotiated to suit both parties’ changing needs. It’s not possible in every situation, but if you can find a mutual benefit then it can work very well.
Never assume you are tied to a contract. It is always worth exploring a more viable solution before writing off liability and committing resources unnecessarily.
An Undocumented Rent Review
Most leases of longer than five years will contain a provision to regularly review the rent on a fixed date.
This helps safeguard the landlord against inflation and ensure that rents are kept in line with market trends over time. In most commercial leases, there is a clause that states that the rent cannot be reduced.
However, as a tenant, you must be extremely careful that all rent reviews are formally documented. If not you could be in for a nasty surprise, such as a sudden increase in rent or a backdated rent payment of tens of thousands of pounds.
Make sure that all rent reviews are properly recorded, usually by way of a signed Rent Review Memoranda.
Missed Break Clause Dates
One or more break clauses can be inserted into a lease agreement, in favour of the tenant, or the landlord or both and are conditional on certain factors being met.
For instance, a landlord’s break can be subject to proof of intended redevelopment. For tenants, a break clause is used to provide flexibility if their business circumstances change.
However, it is critical that you plan at least 12 months before the break date and at least 6 months before the break ‘trigger notice date’.
Otherwise, you could be left with a property that’s a drain on your finances for another five years with all the associated liabilities.
Always take professional advice and never try and trigger the break yourself.
Under business tenancy law, all business tenancies have renewal rights. But both parties can, and often do, ‘contract out’ of this protection meaning there are no rights to remain in occupation beyond the lease expiry date.
It is always advisable to ensure that you have renewal rights where possible and where not, at least to understand the risks and mitigate accordingly, otherwise you may find that your business has effectively become worthless through ineffective planning and negotiation.
Taking Too Long
The commercial property market is in constant flux; prices are shifting and changing on a continuous basis.
It can be very easy to hold out on making a purchase in the hope that ‘a better deal’ will be just around the corner, but while you don’t want to jump in without planning, you also don’t want to hold off for too long.
You may well get a better deal in some cases, but in many more, you’ll let golden opportunities pass you by.
Here To Help You With Expert Advice
There’s a lot more that could be said in this area, and if you’re in need of advice then don’t hesitate to get in touch with the experts at Prideview.
Our commercial property consultants in London have many years of experience, so you can rely on us to find you the very best deals.
To find out more, contact us here