As part of a strategy to increase wealth, many mum and dad investors look at buying commercial properties to provide a steady income stream. The problem is that many people aren’t experienced enough in negotiating these types of leases on their own. Below is a list of issues that investors should be made aware of when dealing with a tenant and negotiating the lease of a commercial property.
Make sure you know who you are dealing with
One of the main issues faced by many landlords is that they don’t spend the time up front looking into the appropriateness of the tenant. Where possible company searches, credit checks, bankruptcy searches and possible referrals from previous landlords should be undertaken. These should be used to make sure that the tenant has the ability to pay their rent.
It may be appropriate to have the individuals associated with the leasing of the premises to provide a bank guarantee or security deposit. This will provide a safeguard to the landlord in the event that a tenant defaults on the lease agreement. The bank guarantee/security deposit should be sought prior to the tenant taking possession of the premises.
Most leases prepared by solicitors have standard clauses, however a landlord needs to ensure that there are certain clauses which won’t affect their cash flow, which is especially important if there is a borrowing on a property. For example:
- How does the agreement deal with outgoings? Are the outgoings received monthly and is a reconciliation done as year-end to actual amounts or are they paid when the invoices are issued?
- Does interest for late payment of rent exist?
- When will the rent begin? This is especially important as repayments are required on a loan facility.
- Is there adequate insurance within the agreement? Is there public liability insurance – if so is it enough?
- Who pays for any repairs and maintenance to ensure that the property is kept in good condition?
- If a tenant defaults or breaches the lease, is there an exit clause?
These are just a few of the issues around leasing commercial premises. As with all financial transactions, it is important that you seek professional advice from both solicitors and accountants.