Letting business premises
A brief guide for landlords on getting ready to let
This guidance is aimed at property owners, individuals and businesses, who are not full time professional landlords but who have one or more business properties amongst their assets.
Whether you have negotiated a business letting yourself or through agents, you will have concluded some heads of terms with the proposed tenant. The key to getting from heads of terms to a concluded deal promptly and effectively is preparation. Someone selling residential premises, or their agent, is required to produce a Home Information Pack (“HIP”). At present, there is no legal requirement for someone selling or letting business premises to produce a commercial HIP (what you might call a CHIP). However, that does not mean that it is not worth considering how you can prepare your property information so that the tenant and its advisers has as many answers to likely questions as soon as possible.
One thing you do need by law to produce to the tenant before completing a letting, in all but a few exceptional cases, is an Energy Performance Certificate. At present, it seems a lot of business premises are being let without them, as Trading Standards have not been enforcing this duty. However, this is likely to change, possibly by making agents responsible for obtaining them, and failing to provide one when required does mean facing the risk of significant fines. We have access to competitively priced energy assessors and can advise you further on this topic.
Your agent will market your property on the assumption you have good title to grant the letting. However, it is worth checking there are in fact no obstacles that will cause delay or even prevent the proposed deal going ahead. For example, your building might be mortgaged. If so, you would not be entitled to let without your lender’s written consent. A tenant’s solicitor is going to want to see that consent because without it the tenant is at risk of being thrown out if there is default under the mortgage and the lender seeks possession in order to sell. Furthermore, the requirement, which applies to many business leases, of registration of the lease at the Land Registry, makes production of the consent essential, as the Land Registry will not register the lease without it. Generally, if the account is in order and the letting is on commercial terms at a market rent, getting lender consent is not a matter of if, but rather a matter of when. Lenders have widely varying procedures, which can take more or less time to complete. Basically, the solicitor makes the formal application for consent once the main terns of the lease are settled, though sometimes the application will not be dealt with by the lender until it sees a final draft of the lease. What the landlord can do to help is to discuss the proposed letting with the lender once the property is put on the market.
Another reason to contact the lender at an early stage is to request that the deeds be sent to the solicitor dealing with the letting. Although in many cases there are nowadays no deeds as such – your title is simply the record the Land Registry holds on its register – sometimes there are actual deeds not recorded on the title register, such as party wall documents, or licences to use pathways, which might be relevant to the letting.
Also, your deeds may include copies of planning consents, building regulations approvals and the like. Although the tenant’s solicitor will be doing a local search and although many of these types of document can be obtained these days from on line registers maintained by local authorities, it will speed up the process if this documentation is already to hand.
Other possible title issues that might arise would be, for example, a covenant affecting your title that might prevent the business premises being used for the purpose intended by the tenant, or the tenant might be expecting a dedicated parking space but, technically, the only right to park you can give is a right to use a space on a first come first served basis. Issues such as these will be checked by your solicitor once the transaction is under way, but it if they are addressed earlier the heads of terms can be formed with them in mind.
As part of the conveyancing process, the tenant’s solicitor is likely to want answers to what have become known to solicitors as an industry standard set of enquiries. They include general enquiries about matters such as boundary features, party wall matters, rights enjoyed by the premises over other property and vice versa, planning consents, compliance with other statutory and regulatory requirements, building problems, environmental matters, disputes, notices given or received, details of buildings insurance, management, service charge collection and anticipated major works. The forms were designed originally for large developments in the City, but have percolated throughout the market because unfortunately the issues they raise generally apply as much to smaller buildings as they do to a large office block, albeit involving much less detail. Getting the answers prepared is one of the most time-consuming aspects of any commercial property deal, and requires a collaborative effort of landlord, solicitor and, often, the agent. Apart from helping with the answers, landlords are likely to have to hand, or be able to obtain, documentation such as insurance details, service charge information, any asbestos reports, damp guarantees, etc. Again, putting together this information need not await the forming of the heads of terms and the solicitor being instructed to produce the draft lease.
If you want to be fully prepared to let, you can commission the searches the tenant would otherwise have to obtain once the deal is under way. These would include a local search and enquiries of the local authority, a search of the drainage and water supply records and possibly a desktop environmental study. The problems with commissioning these early are that if the marketing of the premises proves difficult, they may go out of date (3-6 months is about as old as they can get before they cease to be of use to the tenant) and they are going to cost up to a few hundred pounds.
It is understandable that a landlord does not want to incur costs before knowing he has a deal in hand and the costs involved in preparation need to be weighed against the income expected from the letting, which may have to include an initial rent free period. However, partly for legal reasons but more so due to the market and tenants becoming more sophisticated and better advised, we have moved away from the days when the landlord gave up information only if he really had to, leaving the tenant to rely entirely on his own searches and investigations. As agents find when negotiating with possible tenants, “take it or leave it” does not get premises let and that theme continues once the legal part of the process is reached. Your interests as landlord must be protected of course but, not unreasonably, the tenant will want to try to protect his. The tenant will need and expect information and the sooner he gets it the sooner you can expect him to complete the deal. A surprise that crops up late in the day risks delaying completion, or even losing the tenant.
If you want to take some or all of the steps mentioned above, we would need to charge for the work we are required to do but, if a deal went ahead, it would mean less work needing to be done then and hopefully a smoother process. Overall, the fees and costs for a completed transaction with no or few problems would be similar whether or not you opt for preliminary preparation. However, ironing out any problems at an early stage might avoid a greater cost later.
If you would like further information, please contact Roger Wilkinson or Richard Hemingway.