Evaluating a lease agreement can be a complex and challenging process. There are many variations in property leases, either due to the type of property, location, features, how it’s used, and many other factors. In this article, we’ll be specifically looking at lease agreements for tenanted properties. This kind of commercial property has the potential to be valuable investments, although benefits can only be maximised through an evaluation of the lease agreement.
How to evaluate a lease agreement
There are often many clauses in a property lease, which must be carefully examined before signing. This is because the contents of a lease are directly responsible for indicating how a property will be used for a set amount of time. Learn more about ‘What terms are commonly used in a commercial property lease?’. Lease agreements are legally binding, so the first step is to check that both the buyer and seller understand the terms included so they can make a proper evaluation. These will fall into the following broad areas:
- Rent.
- Duration of the lease.
- Parties involved.
- Deposits.
- Property features.
- Lease type.
- Occupancy rules and tenant responsibilities.
- Termination of the lease.
In evaluating a property lease, buyers need to examine every part of the agreement to determine financial risk. For instance, this will vary depending on if the rent is collected on a monthly or annual basis. Commercial property leases often need to be checked extremely carefully, as they can contain several clauses that aren’t present in leases for residential property. This complexity is why it is recommended that buyers get an expert property solicitor to assist with evaluating lease agreements.
Considerations when buying a tenanted property
Tenanted properties are classed as a form of commercial property and the associated lease agreements therefore come with some unique considerations. First, as the new future owner of the property, you should check the extent of your responsibilities as a commercial landlord. This can include utilities, maintenance work, repairs, and insurance. On the other hand, buyers should also consider how the tenant relationship is outlined in the lease and what privileges are given. For example, increased freedom to make alterations to the building can be an effective strategy to attract valuable tenants but drastic changes could reduce the value of the property over time.
Safety compliance
Any buy-to-let property must be compliant with safety standards. If this isn’t checked before the purchase of the building, it could lead to the buyer getting burnt by fines later down the line. A conveyancing solicitor will ensure all relevant documentation is transferred from the previous owner as it relates to safety legislation.
Transfer of tenancy
While this might seem like an ordeal, transferring a tenancy agreement from one landlord to another is a relatively simple process. However, as you will be inheriting the tenancy, it’s important to examine the agreement to understand what’s in place. This also helps maintain continuity and cause as little disruption to tenants as possible.
Rent apportionment
This concerns the number of days rent that is due to the new owner compared to the old landlord. The apportionment of the rent can occur during the conveyancing process once a completion date has been agreed. This is a beneficial aspect of tenanted property for buyers, as it helps makes sure they receive rental income at the earliest opportunity.
Additional considerations
While the commercial lease agreement covers much of what should be considered when buying tenanted property, there are other areas which warrant action on the part of the buyer. This includes:
- Communicating with tenants.
- Examine rent collection history.
- Rental income relative to property value.
- If a property management company has been involved in overseeing the property previously, and whether or not you will continue using them.
Work with conveyancing specialists
If you’re thinking of buying a property with tenants, for the reasons discussed in this blog, it’s important to get support from property experts. Toomey Legal have been helping those in the North East buy and sell property of all types for decades. With the help of our expert solicitors, you’ll be able to complete the commercial property purchase that’s right for you. Contact us to get started.