Are you renting out your commercial property to someone you know? A good friend, a trusted business colleague – or even a family member? When solid personal relationships are in place it’s easy to think that lease formalities don’t need to apply, with many opting for a more casual approach – an informal letting.

Unfortunately, this often leads to trouble. And, at times it can be disastrous – even resulting in financial ruin.

However, putting a lease in place safeguards both yourself, as a commercial landlord, and your tenant. As a legal document, it is the backbone of the letting – and enforceable by law.

Without one, you risk exposing yourself to the following grey areas…

1.  What happens with the rent?

INFORMAL COMMERCIAL LETTINGS

At the end of the day, your property should generate a rental return. And you need to regularly collect that money from your tenant.

Having a formal lease in place defines the agreed rental amount; how often the rent will be collected; how it will be collected; and when it will be collected (i.e. every 28 days, monthly or quarterly etc.).

When renting to close relatives or friends it can be tempting to trust a verbal agreement – however, this may lead to confusion on both sides. Especially so, as a formal lease will define exactly what the rent covers – or equally important what it doesn’t cover! Business rates, building insurance and service charges etc. are all costs which should be outlined.

A good lease provides clarity to both parties and clearly identifies the responsibilities of both landlord and tenant. Well-drafted leases help to avoid needless arguments and disagreements.

Awkward rent conversations

Furthermore, formal lettings agree on processes for increasing rent and outline how to deal with awkward situations should they come up – like if your tenant doesn’t pay their rent.

The reality is that even those personally close to you aren’t immune to falling behind with rent – so you need adequate protection should this happen.

Tenant background check

When we negotiate or agree lease terms, we always advise our clients to have a professional background check or a company check on their tenant-to-be. Even if they feel they know them inside-out.

We are responsible to obtain details of any party making an offer. However, we often also undertake a credit check on the tenant to ensure that they’re financially able to meet the costs of the rent, service charge etc.

Remember – not everyone is completely transparent about their financial situation.

2.  Who carries out repairs?

INFORMAL COMMERCIAL LETTINGS

Without a formal lease in place, there are lots of unanswered questions – some that can cause a lot more trouble than necessary.

Simple things like, “who should repair a leaking tap?” can lead to confusion and bad feelings between two parties – as the tenant may feel its the landlord’s responsibility. Whereas the landlord may feel vice versa.

Not only can this lead to a breakdown in a landlord-tenant relationship – but it can lead to repairs being ignored – and your property falling into disrepair.

Having a formal lease in place outlines responsibilities clearly.

3.  What is the building’s use?

INFORMAL COMMERCIAL LETTINGS

It’s a common misconception that you can use a commercial building for whatever you like.

For example, if your tenant is a beautician and then they decide to use your property as an office (rather than a beauty salon) then you could be breaching planning permission.

Having a formal lease agreement will outline specifically what the building’s use is.

Additionally, it’ll confirm seemingly unimportant things like turning up at the property when you require. Or, if you have to seek permission as a landlord. Again – another grey area easily overlooked – that can grow into bigger problems.

4.  Who makes the building compliant for the law?

INFORMAL COMMERCIAL LETTINGS

Informal lease agreements usually fail to outline key regulations – such as whether it is the landlord or tenant who is responsible for ensuring that the building complies with legal requirements.

Having a formal agreement in place outlines these duties – even if you feel that you could verbally agree on them with a personal relation occupying your commercial property. Remember they may not always be on the same page as you!

5.  What happens at the end of the lease?

INFORMAL COMMERCIAL LETTINGS

If you’ve informally let your commercial property – have you even agreed on an end of lease date with your tenant?

Even if you’ve casually agreed to review after one year, your tenant (however close they are to you) may not feel the same as you after this time – especially if you’ve done your homework and the market demands you raise your rent.

This becomes even more complicated when the building needs to be repaired at the end of the lease (typically referred to as dilapidations) – again, are you going to expect your tenant to cover the costs? If it’s an informal agreement, they may have assumed you were responsible for repairs and decoration costs.

A formal lease may seem extreme on paper – especially if you’re renting to your children for example – but it will clearly outline the appropriate terms to agree at the end of the lease.

Why formal lease agreements are so important in commercial property

You may feel you know your stuff when it comes to commercial property – and also, you can easily explain this to your tenant.

However, the truth is that there are a lot of grey areas – sometimes due to presumptions born from residential lettings – which are very different.

well-drafted lease will clearly and concisely outline both landlord & tenant responsibilities such as the rent amount & schedulerepairing responsibilities and when & how the lease comes to an end.

Help with leasing your commercial property

At Mounseys, our property consultants are experts in commercial property and commercial leases – and can help you make things crystal clear for you, as a landlord, and your tenant.

The result? More financial security with your commercial property – but also it can actually help preserve your relationships – meaning a happier and more successful letting and much, much easier to manage.

Formal lease agreements

Formalising your letting agreement is a very important cog in the commercial property lease wheel.

Speak to us to see how we can help you negotiate a lease agreement – and the other services we provide to help you get the best from your commercial property.

To find out more get in touch