In our first blog post about the responsibilities of commercial landlords, we talked about your health and safety obligations towards your tenant. Here we share your other legal responsibilities and essential information you need to know if you want to become a commercial buy-to-let landlord for the first time.
What are my legal responsibilities as a commercial buy-to-let landlord?
Commercial landlords must comply with over 150 pieces of legislation, and new legislation is introduced often. There can be huge penalties for non-compliance, so specialist legal advice from a commercial property solicitor is essential for both new and experienced landlords.
Responsibilities under the lease/tenancy agreement
Some responsibilities of commercial landlords are set out in law, but most are set out in the lease.
Our specialist commercial property solicitors draft and negotiate leases that are clear and fair. Whether you are a new buy-to-let landlord starting out on the property ladder or an experienced investor, our conveyancing team can help make sure you and your business are protected in the long-term.
A thoroughly drafted lease agreement sets out both parties’ rights and responsibilities in unambiguous detail. This is important to avoid any confusion and disagreements arising during the tenancy. The lease agreement sets out who is responsible for maintaining which parts of the property, timescales for rent reviews, services charges, the length of the lease, whether the tenant can sublet and more.
Commercial property can be let out in the short-term without a lease or tenancy agreement, but it is inadvisable. Under the Law of Property (Miscellaneous Provisions) Act 1989 a lease that lasts for over 3 years must be committed to writing in the form of a deed.[1]
Protecting your tenant from eviction
The Landlord and Tenant Act 1954 (LTA) makes buy-to-let landlords responsible for protecting their tenants from eviction as far as possible.
Under the Act landlords cannot take possession of their property once a lease has expired. The lease renews automatically as long as the tenant is still paying rent or unless they are otherwise breaching the terms of their lease. When a landlord wants to terminate a lease, they must do so by a method specified by the Act and with legal reason.
During the coronavirus the government introduced emergency legislation to protect tenants from eviction if they were unable to pay their rent due to forced closure. At the same time the government made clear that businesses who could pay rent must continue to do so. Many landlords applied to their mortgage providers for payment holidays or to restructure their finances as a result.
The government’s emergency coronavirus measures are in place until 25th March 2022.[2]
Obtaining an energy performance certificate (EPC)
An EPC is a certificate that shows a building’s energy performance rating on a grade from A to G, with ‘A’ being the most efficient.
Under the law commercial buy-to-let landlords cannot let out a property with a rating below E. Tenants must be given a copy of the EPC before they sign a lease, so they know how much their energy bills are likely to be. In some cases, such as when a building is frequently visited by the public, an EPC must also be visibly displayed. Fines for non-compliance are up to £5,000.
If a building is a temporary structure or it is listed an EPC might not be required. Our property solicitors can advise you.
Taking out the right mortgage
If you need finance to buy a commercial property you must apply for a specialist commercial mortgage rather than a buy-to-let mortgage. It is essential to take out the correct mortgage as not doing so is mortgage fraud and the penalty could be imprisonment.
Borrowing rates tend to be higher than with buy-to-let mortgages for residential properties. Unlike buy-to-let mortgages borrowing is usually on a capital repayment basis rather than interest-only.
Taking out commercial landlord property insurance
Commercial landlord property insurance is not required by law, but it may be a condition of your mortgage. Some mortgage lenders will only lend on the condition that buildings insurance is in place, and it may be a clause in the mortgage agreement.
There are different types of insurance: buildings insurance, landlord’s liability insurance, public liability insurance and more. Insurance can help protect you from financial losses as a result of damage to the property, compensation claims being made against you, or periods that your property is unoccupied.
Paying taxes
Commercial landlords are liable for Income Tax, National Insurance, business rates, Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT).
SDLT applies if you buy land or property for over £150,000. For properties between £150,001 and £250,000 you pay 2% tax, and 5% for properties over that amount. CGT is payable when you sell a property that has increased in value.
Taxes for commercial landlords can be confusing, but our commercial property solicitors can help you.
Managing the rent deposit
It is common for commercial landlords to ask tenants for a significant rent deposit, so they have money to draw upon if necessary. Drawing up a rent deposit deed is not a legal requirement, but it protects the interests of both landlord and tenant.
A rent deposit deed sets out the circumstances in which landlords can draw from the deposit and what conditions must be satisfied by the tenant before the money is repaid. The deed can also protect the landlord if the tenant becomes insolvent and vice versa, depending on how it is structured.
Our commercial property solicitors can assist with rent deposit deed negotiations and draft a fair agreement that protects your investment.
What are the steps to becoming a landlord?
Commercial property is an attractive proposition. Rental yields are generally higher than residential buy-to-let. Leases are longer than with residential property which reduces the possibility that a property may lie vacant, plus the tenant is usually liable for maintaining the property.[3]
However, before investing in commercial property there are a number of steps to take to help ensure a profitable investment.
- Set your budget
Make sure all costs are covered in your budget plan, including:
- Mortgage deposit. This is usually 20% of the value of the commercial property but it can be more.
- Taxes including Stamp Duty Land Tax (SDLT).
- Professional fees such as surveyors, estate agents and conveyancing costs.
- Insurance.
- Energy costs and the initial the cost of obtaining an EPC certificate.
- Construction and set-up costs such as decorating, equipment and furniture.
- Service charges for cleaning, security, waste collection etc.
- Ongoing maintenance and repair costs.
- Choose the right location
Consider how your property will suit your prospective tenant’s business needs. Are transport links, parking facilities, delivery facilities and congestion charges important? This will vary depending upon the business type. Are there enough potential employees or customers in the area? Is the property close to suppliers and other linked businesses?
Research whether there is demand for your chosen property type (industrial unit, office, retail, warehouse etc.) in a particular area. Manchester, Nottingham and Edinburgh are particularly attractive for commercial investment at the moment according to Savills.[4] Expanding transport links, large companies moving in, new business growth and increased investment have made areas like these particular hotspots.
Properties in areas that are anticipated to thrive economically in the long-term are more likely to bring you a greater capital return on your investment. In some areas government grants are available to support businesses to rebuild communities. The Business Premises Renovation Allowance (BPRA) and Land Remediation Relief are tax allowances available to eligible landlords.
- Know the condition of the building
A full structural survey conducted by a recommended, RICS qualified structural surveyor is vital. Costly repairs can break a commercial property investment.
- Consider change of use
Various factors and changes in the local economy can mean that you might need to change the use of a building.
The use of a commercial premises is set out under planning law. Permitted uses are defined under the Use Classes Order 2017. For example, shops, travel agents and post offices are Class A1 whereas restaurants and cafes are Class A3.
Planning permission is not usually needed to change the use of a property within the same use class, but it will be needed if the change means the building will fall within a different class. Your property solicitor can discuss this with you.
- Check your tenants
Carefully research your tenants. Consider obtaining references from the tenant’s bank, previous landlords and trade partners. Is the tenant likely to be financially secure for the duration of the lease?
Choose tenants with outstanding references and reliable finances to lessen the risk of them defaulting on their rent and other obligations over the term of the lease.
Why choose Insight Law for commercial conveyancing?
Our commercial conveyancing solicitors act for national and international enterprises, owner manager businesses and corporations of all sizes. We have expertise in every type of commercial property transaction giving you the confidence that our advice will help you to reach your business objectives.
Whether you are a starting out on the commercial property ladder or are an experienced investor, our solicitors offer legal advice tailored to your requirements. Our advice is realistic and clear, and we act swiftly providing you with strategic support at every stage.
To discuss your business needs, contact our commercial property solicitors on 02920 093600 for a free initial consultation.
[1] Legislation.gov.uk, Law of Property (Miscalleneous Provisions) Act 1989, https://www.legislation.gov.uk/ukpga/1989/34/section/2
[2] Gov.uk, Eviction protection extended for businesses most in need, https://www.gov.uk/government/news/eviction-protection-extended-for-businesses-most-in-need
[3] Real Business, Should I invest in property in 2021? https://realbusiness.co.uk/commercial-property-investment
[4] Savills, Manchester is booming , but needs more property development across all sectors to meet demand, according to Savills, https://www.savills.co.uk/insight-and-opinion/savills-news/225417-0/manchester-is-booming–but-needs-more-property-development-across-all-sectors-to-meet-demand–says-savills