You may be looking at commercial property investment for the first time. You’ve got your finance agreed in principle and you’ve narrowed down your choices in terms of what sort of unit you are going for, but before launching into that exciting new investment opportunity, it’s time to think about what you’ll need to take responsibility for on an ongoing basis.
Many investors in commercial property are looking to diversify their portfolios and will already have experience in residential investment, and with that, the experience of being a landlord. Many residential landlords live within 10 miles of the properties that they rent out, and if their portfolio is of a size that can be self managed, they’ll take care of the responsibilities themselves.
These responsibilities include collection of rent, annual rent reviews, property maintenance and, in some cases, redecoration for long standing tenants who start to feel that their home could use some updating. They’ll also be responsible for simple health and safety issues such as insuring that the carpets are not a trip hazard and that gas, plumbing and electricals all adhere to the latest government mandated standards.
Other landlords may live further away from the property or simply don’t have the time to take care of the minutiae of managing property, hence they contract that work out to a management agent. Granted, those management agents fees do eat into the profits being made by the rent, but many landlords feel that this is a small price to pay for the removal of what can be an enormous headache.
This may come as a surprise to some, but your responsibilities as the owner of a commercial property investment are not the same to that of being a residential landlord. In fact, whilst few residential landlords see the benefits beyond rental income and the appreciation of their asset, there are actually more benefits when it comes to being a commercial landlord. For example, in residential disputes over non payment of rent, the law tends to fall squarely on the side of the tenants. Eviction is costly, messy, and sometimes illegal. Conversely, when it comes to commercial property, the law often favours the landlord in cases of a tenant not paying rent. Of course, this is not a hard and fast rule and there are always mitigating circumstances to be taken into consideration.
One other benefit over being a residential landlord relate to the maintenance of the commercial property. In general, a lot of the major responsibilities are actually shared between the tenant and landlord. Blue chip commercial property tends to grant even more autonomy to the tenants. If, for example, a supermarket chain is renting the property and are instructed by their own head office to rebrand, then the responsibility for all of that work will fall to them. As a commercial property landlord, you will need to grant the necessary permissions, but you certainly should not have to incur any expense.
Now of course, there are some obligations that do rest on your shoulders, the most important being health and safety. Briefly touched upon when we spoke about residential letting, the rules are a lot more stringent here.
Let’s take the example used above of the carpets not being a trip hazard. From a legal perspective, the landlord is not obligated to do anything about it. However, should an incident occur, it is more likely that the tenant will want to take legal action, and as we grow ever more litigious as a society, it makes sense for landlords to work on prevention rather than cure.
However, when it comes to commercial property investment, there’s a lot more to be taken into consideration. While it’s true that both parties have equal duty to ensure the property is safe and well maintained so that people are able to work there, you will need to perform risk assessments regularly. The remainder of the maintenance, and whose duty it is, is outlined both in law and in the lease agreement.
There are a number of third party inspection companies who will run a health and safety check on a property. If a tenant is applying for, for example, ISO9001 status, then their health and safety practices will be called into scrutiny as part of their annual audit. However, these apply to their operation as a business, and not the property itself. Should their audit reveal issues within the property, it is generally considered the responsibility of the landlord to put them right.
Naturally, there are exceptions. New tenants could be utilising new working practices for which the building is not considered appropriately safe, hence an agreement will be drawn up between landlord and tenant where responsibility is either shared or assumed by the tenant. Again, these are exceptions rather than rules and appropriate legal advice should be taken where necessary.
Something less ambiguous is that, as a landlord, you will be responsible for gas and electrical safety (and you will also need to conduct regular checks by a registered gas safe engineer); Asbestos management and/or removal; the proper installation of any fixtures, fittings and electrical equipment; and also fire safety. In addition, it is also your duty to perform general maintenance, upkeep and repair of the building (provided it’s structural or related to a fault in the building itself). The tenant will generally be responsible for providing toilets and washing facilities, drinking water, adequate space, lighting and ventilation, a reasonable temperature and safe equipment.
The safest bet when it comes to health and safety is to outline these responsibilities (and who they fall upon) in your lease agreement, as this will safeguard you later down the track should any issues arise.
Insurance – do you really need it?
Insurance and the expense it carries are viewed as a necessary evil, but the keyword here is that it is necessary. It’s more than likely that, as someone who will have made a sizeable investment in a commercial property, that you’ll want to protect that asset should the worst happen. Homeowners have buildings insurance usually tied into the mortgage and many will elect to take out contents insurance as well.
What this all leads to is that the question really should not be whether or not you need insurance (if we’ve not been clear, you absolutely do), but exactly what type of insurance it is that you need for your commercial investment property. It may be tempting to go for the cheapest options, and it’s certainly not unheard of to be a little elastic about some of the property’s details in order to get the best deal – something which we officially cannot condone, but there is something very important to keep in mind here.
This is your investment safety net. If something does go wrong, you want to make sure you and your money are looked after, and the only way of guaranteeing this is with the right kind of insurance cover.
The cheapest policy may not be the best one – in fact it invariably will leave you under insured and tied up in small print should you find yourself needing to make a claim. There are some wonderful insurance brokers available to help you make the best decision and we here at Prideview would be more than happy to help you cut through a lot of that red tape.
To illustrate our point – if you needed any more convincing of the importance of high quality insurance, you only need look to the news. Take the fire of a Poundland discount store in Chingford that recently made headlines, for example. The blaze devastated the property with both the roof and the floor being completely destroyed in a fire that took over 90 firefighters to control.
This is precisely the kind of risk that good quality insurance covers you against, and without it, your investment will be completely exposed. It’s stressful enough recovering from the psychological damage of a fire which destroys everything you’ve worked so hard to create, and whilst working doubly hard to rebuild, the last thing you want is to have to add in the worry of whether or not you’re adequately insured.
In the UK, it is the responsibility of the commercial property landlord to take out the insurance policy and handle claims for the property; however, it is most often the case that the commercial tenant will be recharged the cost. This means that the tenant must pay for the insurance premium as part of the “Fully Repairing and Insuring” obligation in their lease agreement.
There are many types of commercial building insurance covers, but generally they will cover permanent fixtures (walls, flooring etc), fire damage, vandalism, and storm or flood damage (or other natural causes related damage). However, no two policies are created equal, so when it comes to insurance, once again, it’s best to speak to an expert, like our team here at Prideview, about your needs and what level of cover you want.
The team at Prideview Properties have over 30 years experience specialising in acquiring blue chip property with solid return for our clients. If you’re looking at commercial property investment, or have any questions regarding insurance, contact us today.