In commercial property, securing a good lease is just as important as finding the right property. A poorly structured lease can undermine the profitability of an investment, leading to unnecessary costs or even legal complications.
Here are seven common mistakes you need to avoid when negotiating a commercial property lease:
- Overlooking Maintenance Obligations
A key element of any commercial lease is how maintenance responsibilities are divided between the landlord and tenant. Failing to clarify this can lead to unexpected costs for the property owner.
Always ensure that the lease clearly defines who is responsible for maintenance and repair, and which areas of the property this applies to. A common pitfall is overlooking common areas or exterior maintenance.
- Ignoring Outgoings Allocation
Commercial leases typically involve tenants paying outgoings (operational expenses like council rates, water rates, insurance, and maintenance). However, if these outgoings aren’t clearly spelled out in the lease, disputes may arise over who is responsible for what.
Investors should ensure the lease specifically lists outgoings and how they are apportioned. Otherwise, the investor may end up covering costs they hadn’t anticipated.
- Failing to Secure Rent Review Clauses
Rent review clauses ensure that rent is adjusted at set intervals, usually every year or every few years. Failing to include such a clause can mean the property’s income doesn’t keep up with market conditions or inflation.
Investors should ensure the lease outlines how and when rent reviews will take place, whether through fixed increases, market reviews, or a CPI adjustment.
- Overlooking Lease Term and Renewal Options
Many investors fail to consider the length of the lease term and the importance of renewal options. A short lease without an option to renew may leave you scrambling to find new tenants sooner than anticipated, which can result in costly vacancies.
On the other hand, a long-term lease with no rent review or exit clauses may lock you into below-market rent. It’s essential to strike the right balance between lease length and flexibility.
- Neglecting to Verify the Tenant’s Business Viability
It’s not enough to rely solely on a tenant’s reputation when leasing commercial property. A business that appears successful now could fail in the future, leaving you with a vacant property. Investors should perform due diligence on the tenant’s business model and financial health.
- Ignoring Permitted Use Clauses
Permitted use clauses outline the specific activities the tenant is allowed to conduct on the premises. Failing to review this carefully could lead to issues if the tenant’s operations breach local zoning laws or put excessive wear and tear on the property. Investors should ensure the permitted use clause aligns with the intended purpose of the property and complies with all local regulations.
- Not Seeking Legal Advice
Perhaps the biggest mistake investors make is trying to handle the lease process without legal advice. Commercial leases are complex, and even small oversights can lead to significant financial or legal issues down the line. It is highly recommended that investors consult a solicitor to review all aspects of the lease to ensure it protects your interests as a landlord.
A well-structured lease can provide a stable income stream and protect your investment in commercial real estate. However, these common mistakes can jeopardise your returns if not addressed.
By thoroughly reviewing leases, conducting due diligence on tenants, and consulting with professionals, investors can avoid these pitfalls and set themselves up for long-term success.
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