Commercial property investment isn’t just for those with millions of pounds to spend on office blocks, factories, and shopping malls.
There are plenty of opportunities for those with lower budgets too, like smaller shops, offices, and industrial units.
But, all commercial landlords have legal responsibilities to their tenants, as well as to those working in the building, and to the public.
In this guide to being a commercial landlord, we’ll explore the pros and cons, the rights and responsibilities, and the key legislation you need to know about.
What’s covered in our commercial landlord guide?
- Benefits of becoming a commercial landlord
- The downsides and risks of letting commercial property
- Research: location, industry and market
- Commercial tenancy agreement
- Setting rent and fees
- Commercial landlord responsibilities
- What is a landlord responsible for in a commercial lease?
- What taxes are commercial landlords liable for?
- What other costs can commercial landlords incur?
- What is a commercial tenant responsible for?
- What rights do commercial tenants have?
- How do you evict a commercial tenant?
- Commercial landlord insurance
- Additional support for landlords
- Frequently asked questions by commercial landlords
The main purpose of investing in commercial property is to maximise rental income while maintaining the property in a condition that will realise capital appreciation for any future sale.
There are four main benefits of being a commercial landlord:
- diversify your investment portfolio;
- achieve long-term capital growth;
- receive a steady, long-term income;
- achieve comparatively high returns.
Spreading the risk
Diversifying is the key to spreading the risk of an investment portfolio. If all your money is in one area, whether it’s property or stocks and shares, you’re vulnerable to market volatility.
By spreading your investments around, including in commercial property, you’ll be in a stronger position if one market suffers a downturn.
If you’re able to rent your commercial property to more than one tenant, this further mitigates the risk of relying on one tenant’s rental payments.
As long as you’re prepared to hold on to your property for a decent period of time, you could make a good capital return on your investment – in addition to the rental income.
Steady, long-term income
Residential property landlords are only assured six months of rent with a tenant on a standard Assured Shorthold Tenancy. But, commercial premises are typically leased by tenants for much longer, typically for a minimum of three years, and often 10 years or more.
Yields on commercial rents are typically higher than for residential properties.
Between 2000 and 2018, returns on commercial property also outperformed the FTSE 100 index, by 308% to 209%, according to research by the Centre for Economics and Business Research.
It can also be tax efficient to invest your pension in commercial property.
Some downsides are common to all property investment, including:
- the need to hold on to the property long term to realise capital growth;
- void periods with no tenant, where you will still need to pay for certain costs, including insurance, maintenance, any mortgage you may have, and business rates for commercial premises;
- a short-term drop in the value of the property;
- ongoing maintenance costs;
- property management costs if you delegate this to another party.
Another thing to consider is that you cannot evict a commercial tenant once a contract has been signed without a very good reason.
Just like with residential property investment, there are a few key things to think about before buying a commercial property for rent.
Your research should focus on:
- Industry: there is a wide variety of sectors to choose from, such as retail, office, or industrial premises. Check out which sectors are doing well, and which are struggling, and drill down further within those sectors to spot thriving niches. However, it’s worth bearing in mind that past industry sector success will not necessarily dictate future performance; the location and potential rental yield are equally important.
- Location: if you’re attracted to a retail or hospitality property most landlords opt to buy in areas of high footfall, while industrial units with good transport links are often favoured.
- Yield: spend some time researching the potential yield of different sectors. Research by Statista shows a wide variation from 3.25% for industrial multi-lets to 4.75% for provincial offices and 6.5% for high street retail.
The commercial tenancy agreement signed by you and your tenant sets out the terms of the lease and details the rights and responsibilities of each party.
However, none of the terms in the contract can override the statutory legal obligations you have to the tenant and the public.
The commercial tenancy agreement should include:
- the length of the lease;
- the responsibility for different aspects of repair and maintenance;
- the landlord’s responsibilities towards the tenant;
- the rent and timescale for review;
- any service charges;
- arrangements for subletting.
Commercial rents can be calculated either by the square foot of the property or as a percentage of the tenants’ gross income.
When setting your rent, you need to make sure that it covers the costs of running the property and provides a profit on top, while also considering the going market rate in the area.
The flexibility that a break clause affords, which allows your tenant to end the lease without penalty part-way through the term, may help you achieve a longer-term lease in the first place.
Your responsibilities as a commercial landlord can be broken down into two parts: your statutory obligations in law, and responsibilities specified in the terms of the lease.
Your legal responsibilities will outweigh any terms or clauses you have inserted into the lease when it comes to protecting your tenants, their employees, and the public.
Your statutory obligations may include a legal responsibility for:
- Gas safety – including documented evidence of annual inspection from a Gas Safe engineer.
- Electrical safety – this will always be the responsibility of the commercial landlord. The Electrical Safety Council recommends that full testing is carried out every five years or when the tenancy changes.
- Fire safety – as set out in the Regulatory Reform (Fire Safety) Order 2005 this is the duty of the ‘responsible person’. In a workplace this would be the employer (often the tenant), in the case that the property isn’t a workplace, it would be the property owner’s responsibility.
- Energy performance – landlords are required to provide an Energy Performance Certificate (EPC) rating of no worse than E.
- Asbestos management – the responsibility of either the owner, or the person who has clearly defined responsibilities for maintenance and repair of the property (this could be the tenant if set out in the lease agreement). All reasonable steps must be taken to determine the location and management of any asbestos present in the building.
- Health and safety requirements in communal areas – including ventilation, temperature, lighting, hygiene, and the safety of the water supply.
Obligations for repair and maintenance may vary depending on the exact terms of the lease, but in general, landlords will be responsible for the upkeep and maintenance of the structure of the property, any communal areas, and any fixtures and fittings in those areas.
Like any other business, you will be liable to pay tax. Our landlord tax guide sets this out in detail, but in summary you’ll need to be aware of these taxes.
- Income tax, if you are operating as a private individual, or corporation tax if you are operating as a limited company.
- National insurance if your annual profits exceed £6,515.
- Stamp Duty, a lump sum tax paid on buying land or property.
- Capital Gains Tax, if you sell a property that has increased in value.
As well as covering the costs of your statutory obligations, other costs involved in becoming a commercial landlord can include:
- mortgage payments;
- letting agent fees, if you choose to delegate your property management;
- other legal and professional fees like accountants and solicitors.
The tenant’s responsibilities for maintenance and repair should be fully detailed in the tenancy agreement, but they are usually expected to look after the interior of the part of the property they wholly occupy.
They are also responsible for the safety of any gas or electrical installations that they own.
Their responsibilities under the Health and Safety at Work Act 1974 include providing:
- heating and lighting;
- toilets and washing facilities;
- safe drinking water;
- sufficient space.
The Landlord and Tenant Act 1954 (LTA) gives commercial tenants significant rights of occupancy and outlines strict rules on how they can be evicted.
Tenants have two important rights under the Act.
- They are entitled to renew the lease and stay in the property after the end of the lease term, as long as they continue to pay rent and have not breached any terms of their tenancy agreement.
- At the end of the lease term, the Act gives the tenant a legal right to apply to a court to begin a new lease term.
Essentially, a tenant can continue to occupy the property unless the landlord has a valid legal right to evict them.
Landlords can only terminate a commercial lease and evict a tenant for very specific reasons.
Commercial tenants can only be evicted during the term of the tenancy if they fail to pay rent or meet other terms of the lease, such as repair and maintenance, anti-social behaviour, or subletting without permission.
If a landlord wants to end the tenancy when the lease term expires, they can only do so for one of a few specific reasons, after serving a Section 25 notice between six and 12 months before the proposed date of termination.
The grounds for terminating a tenancy, found in Section 30-1 of the LTA, include:
- the tenant’s failure to keep the premises in a good state of repair;
- persistent late payment of rent;
- other substantial breaches of the tenancy agreement;
- provision of alternative premises on reasonable terms;
- demolition, reconstruction or sale of the property;
- the landlord intends to occupy the premises for their own business.
You should always take legal advice before instigating eviction or termination proceedings.
It’s vital to protect your investment with specialist commercial landlord insurance to cover risks to the property itself, your rental income, and to your tenant and the public.
The type of cover you will need includes:
- buildings insurance, and cover for your fixtures and fittings;
- property owners’ liability insurance, which protects your legal liability to third parties on your property;
- legal expenses insurance;
- business interruption insurance – to cover loss of rent due to an insured event at the property;
- employers’ liability insurance – if you employ someone to maintain the property.
- Terrorism cover – an optional add-on.
It’s important to note that most commercial landlord insurance policies stipulate that you must fulfil your legal obligations in order for the policy to be valid. Failure to do so could result in claims being declined.
Read more about commercial property insurance.
There is plenty of support and advice available for commercial landlords.
Landlord associations, which can provide a huge library of information as well as legal advice and a community of other landlords to connect with. The British Landlords Association caters for both commercial and residential landlords.
Letting agencies, which can handle as much or as little of your property management needs depending on how much time or expertise you have.
Alan Boswell Group’s landlord advice hub holds a large knowledge bank of useful information to help you on your journey.
Do I need commercial property insurance?
There is no legal requirement to have commercial property insurance, but your mortgage lender is likely to make it a requirement. However, you would be taking a significant risk by not adequately covering your investment and could take a big financial hit if the property was damaged, or a tenant or member of the public suffered an injury on your property.
How much commercial property insurance do I need?
Insuring for too little, known as underinsurance, can leave you out of pocket in the event of a claim.
Do I need to inform my insurer if my commercial premises are let?
Yes. Insurers need to know the nature of business undertaken at the premises to correctly calculate the risk of a claim. For the same reason, you need to make sure you inform your insurer of a change of tenant.
Do I need to inform my insurer if my commercial premises are unoccupied?
If your commercial property is going to be unoccupied you need to inform your insurer straight away. Many insurers severely restrict cover for unoccupied properties or refuse cover entirely. Specialist unoccupied commercial property insurance can provide wider cover for as long or as little time as the property remains empty.
Do I need employers’ liability insurance?
If you employ anyone in relation to your property rental business, you must have employers’ liability insurance with a minimum liability limit of £5m.
Do I need property owner’s liability insurance?
Property owners’ liability insurance is not a legal requirement, but if a tenant, one of their employees, or a member of the public is injured on your property, and you are held liable, you may be faced with substantial claims for damages. Find out more about liability insurance for landlords.
Legislation and guidance included in this article is correct as of April 2022. Please note that legislation does change, it is always best to check the most up to date guidance on gov.uk.