Commercial Property Leases: Letting Out Empty Business Premises

by Vengardesh Sivapatham LLB (Hons), LLM, Solicitor

20 January 2023

An unoccupied commercial property results in no rental return on investment for a landlord, but also means higher probability of disrepair, loss of market value and a general lack of attractiveness of the property to other investors.

No Return on Investment

Commercial properties are generally known in the market to provide a greater return than residential properties but less capital return. Therefore the value of the commercial property investment is more weighted towards the rent specified in the lease compared with residential property investments. The longer a property remains unoccupied and unlet to a business, the more value is lost in potential return compared to that of a residential property which have, in the recent past, benefited from higher capital return.

In addition to the above, many commercial property investments are obtained with the assistance of a commercial mortgage or loan, and commercial property landlords usually rely on the rental income to pay the interest and capital on the commercial property mortgage or loan. No rental income on a leveraged property may lead to the commercial property investor having to resort to paying out of his or her own pocket.

Disrepair

A lack of heating and general day-to-day maintenance of the property leads to mould, damp, dust, unclean walls, deteriorating floors and ceiling, as well as a general deterioration of the fixtures and the structure of the building. Bringing a commercial property from a state of disrepair back to a lettable condition may require considerable costs and expenses. Potential tenants and buyers may be driven away, and the cost of repair may ultimately fall on the landlord. Disrepair usually has a tendency of spiralling out of control if left unattended, leading to the erosion of the landlord's capital value in the commercial property.



Squatters

Empty unoccupied commercial properties are attractive to potential squatters, who may occupy the site for purposes of shelter. This would be very problematic since it can be very difficult to evict such squatters from the property. Another problem entirely if keeping the squatters out, since once they are familiar with a locality and once established the squatters may persistently attempt to gain access and occupy the property. Squatter occupation can lead to significant deterioration of the commercial property's state of repair and the capital value of the commercial property, and may drive away potential tenants.

Loss of Market Value

It is usually more difficult to sell an empty commercial property investment producing no income. Potential investors and lenders will be disincentivised from engaging with such properties for reasons stated above.

In addition to the concern stated above, potential tenants will be concern that an empty commercial property is an indicator that it is not a suitable place of business and reduces their confidence that a profitable business can be established in their chosen location.

Possible Solutions

There are a variety of options available for a landlord with an empty commercial property, some of which are sensitive to the particular circumstance of the commercial property landlord. For example, the landlord may consider selling the commercial property and place it in another return instrument which may make a more stable return. However this may not be the first option to consider due to transaction costs, tax implications and other reasons.

Most commercial property landlords attempt to let the property as soon as possible so that it starts making a returning as soon as possible, to ensure that it is properly repaired and maintained and to preserve the value of the commercial investment, however caution should always be exercised when letting the property out.

A Word of Caution

A landlord should always be cautious as to not make the problem any worse. For example letting it to a problem tenant:
(a) Who makes it very difficult for a landlord to collect rent or pay rent late. In other words, the teant is given an interest free loan by the landlord.
(b) Who does not keep the property in state of disrepair and causes the property to fall into disrepair.
(c) Who does not comply with the laws and leads penalities being impose on the property. An example of this situation would be the tenant not obtaining planning permission or building regulations for potential works at the property.
(d) Who damages the structure property, but doing any alteration to the property they wish causing value loss to the property. An example of these types of scenarios would involve unauthorised door opening or unauthorised extensions without putting in place proper structural beams to support the building, which may result is structural damage and cracks.
(e) Who do not pay rates and taxes and leaves these issue to be resolved by the landlord.
(f) Who do not pay insurance rent and service charge for common parts.
(g) Who keeps the property closed for long periods of time driving business away from the property.
(h) Who causes nuisance and disrupts the use of neighbouring property resulting in claims being made against the property.


A hasty letting to an unvetted tenant is likely to lead to unnecessary time spent, loss of money and stress. Regaining possession of the property so that it can be let to someone else can be an option, however problem tenants can make this very difficult, expensive, time-consuming and stressful.

Another option available to a landlord is to sell the commercial property. While this sounds good on paper, diligent potential buyer will, in reality, enquire about lease compliance and rent payments, and may withdrawn from the transaction or lower their offer once they realise that the property is being sold out of a lack of proper lease management. A property which is well-managed with good tenants will always be more valuable for potential buyers.

Mitigation

In order to avoid the negative outcomes detailed above, a landlord needs to ensure that good and financially viable tenants are given leases; it is important not to scrape the barrel and let to whoever comes the landlord’s way. The landlord must always exercise caution as lease incentives will need to be properly drafted so that the tenant cannot use loopholes to effectively reduce the yield.

Further, the landlord should always ensure that any potential tenants are properly vetted, so that lease compliance and timely payment can be assured. However, the landlord should be careful not to accept a general and blasé assurance from its advisors that a tenant is financially viable; the landlord should always ask its advisors why they think that a tenant is financially viable.

Contact Us

If you are a commercial property landlord with an empty or vacant property, get is touch with us on 020 88 666 333. We provide a wide range of services for landlord’s including vetting tenants, granting leases on specifically negotiated terms, as well as negotiating variations, incentives and other options. With us, you can always assure yourself that your instructions will carry through into the documents and legally binding correspondence.

The opinions expressed in this article should not be construed as legal or financial advice, and should not be relied upon. If you require legal or financial advice, you should seek the assistance from a professional.

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