Selling a property with tenants can be beneficial for landlords, but there are key considerations to be made to ensure the sale goes smoothly and all parties are happy with the outcome. In this guide we’ll be exploring the considerations for landlords as well as why selling a commercial property with tenants is a good thing.
What happens when you sell a tenanted commercial property?
When a landlord sells a commercial property, the terms of the tenancy stay the same as it is a legally binding agreement. Therefore, when the property sells the new owner becomes the landlord and takes on the commercial lease. If you use a commercial estate agent, they might advise you to allow the tenancy to end before you put the property on the market.
However, this is really to only benefit their own interests as they can show the property to potential buyers without having to schedule appropriate times with existing tenants. In many cases, an empty commercial property can be less appealing due to the rates liability, insurance, and potential repairs and dilapidation costs.
What are the benefits of selling commercial property with tenants?
When looking to sell a commercial property, landlords are actually in a strong position. If they consider what motivated them to buy the real estate initially, it is quite likely that there will be other investors out there with a similar mindset and with this insight, they can ensure they prepare the property to attract the ideal buyer.
For many investors, having good tenants in place who have no intention of breaking their lease, are reliable at paying their rent, and have long-term plans to stay in the building, is the best possible investment. A commercial property with strong tenants in situ offers a lot more earning opportunity straight away, it’s not just a property, it’s a working business model.
It can easily be passed on to another investor to start increasing their earnings without the time and effort being needed in potential renovations and finding a good tenant to rent the space.
What do landlords need to consider when selling commercial property?
Documentation
There are several pieces of important documents you should have on hand to maximise interest from potential buyers. One example of this is the occupancy rate, which is especially beneficial if you’re selling an office space that has multiple different tenants. It could be that when it’s time to sell, the property won’t be at maximum occupancy, which can sometimes be seen as a drawback from a buyer’s perspective.
This is because if the building is only generating between 60 and 70% of its rental income potential for example, the buyer will question whether there are problems with the property and either walk away from the sale or offer an offer that’s too low for market value. However, it might simply be that some leases came to an end and tenants have moved on, which is why documentation of the occupancy rate throughout the lifetime of your ownership should be shown.
It will offer buyers more reassurance that the property can offer a good return on investment. Also, the appeal of a tenanted property can be further strengthened if you can provide a strong history of payments via bank statements and a clear history with no arrears.
Current income
It’s important that any landlord selling a commercial property can show the rental income that is being gathered at the point of sale. The forecasted income is all well and good but showing the concrete numbers verifies that the property is earning what you claim, honesty is always the best policy when selling property.
When a commercial property is sold with tenants in situ, the tenancy continues as the new owner takes over, so buyers cannot acquire a property then immediately increase the rent. Current rent figures provide a solid marketing campaign for the property, which should help it sell quicker and attract the right type of buyers.
Cooperation from the tenants
The best advocates for a property being sold are the tenants themselves. They can offer a useful perspective on the building and what the new owner can expect from it if they take it over. Therefore, it will be beneficial for the seller to seek cooperation from their tenants. If you have a good relationship with them and they’re a model tenant with no issues, they will probably be happy to help. However, this is not always the case and landlord’s might want to incentivise their tenant to encourage them and avoid any negative impacts on the sale.
Anyone looking to sell a commercial property with tenants should consider the needs of the tenants and ensuring they’re content and cooperative with the sale will ultimately benefit everyone. Tenants have the right to be given plenty of notice of proposed changes to the building including changing ownership.
Health and safety
Any commercial property with tenants operating a business is required to comply with health and safety regulations. The type of business will determine exactly what standards need to be in place as well as whether the landlord or tenant is responsible for keeping up with those standards. No matter who is responsible having standards in place is advantageous for the buyer, as there is more confidence that the property has been looked after during its tenancy. When buying an empty building there is extra surveys needed, plus potentially repairs to make sure it can meet current health and safety legislation, which can be expensive and time consuming. Whereas these standards are already being met with a tenant in situ and it can be beneficial for a seller to clarify this as a selling point to buyers.
Conclusion
If you have a tenanted commercial property for sale, you’ll need the support of reliable conveyancers to ensure the sale goes through as smoothly as possible. That’s where Toomey Legal can help. As experienced commercial conveyancing solicitors in Newcastle, our solicitors have the knowledge and expertise to help commercial landlords in the North East sell their properties quickly and efficiently. Get a quote online today and don’t hesitate to contact us if you have any questions or queries.