There are probably only three reasons for investing in commercial property, of which one does not apply to most landlords. The exception is a non-arm's length transaction, where the tenant is connected to the landlord; for example, a group company subsidiary leases premises from the parent company, or the landlord's business occupies the premises and rent is for tax accounting. Otherwise, the other two reasons are for income and/or capital growth. In the next article, I'll write about investing for capital growth, but here I focus on income.
With commercial property (shops, offices, industrial, leisure, anything involving a business tenancy), income comes from two sources. Primary income is rent. Secondary income from opportunities that might arise during the management of the tenancy.
Primary income, or rent, comprises the rent for the premises and any additional items that are defined as rent in the lease, such as the building insurance premium, and the service charge.
With additional items, generally, the scope for making a profit out of the difference between the insurance premium payable by the tenant and the premium payable by the landlord to the insurer comes from block policy discounts, insurance policy commission, and blatant fiddles such as overcharging the tenant on proportionate share. With a service charge, profit possibility stems from being able to charge a percentage for managing the property, and carrying out any work that the charge covers without needing to use third-party contractors.
Secondary income can arise during the management of the tenancy. Depending upon the wording in the lease, and whether the tenant requests something of the landlord (for example, change of use, assignment, underletting, alterations, use of elevations for advertising hoardings, roofs for satellite dishes and such like, variation to the lease), it may be possible for the landlord to charge for consent, either for the consent itself and/or for administering consent. Even when the lease or overriding legislation states the landlord's consent cannot be unreasonably withheld, that does not rule out the possibility of being able to charge costs for that consent. The "extras" can mount up.
The (main) rent for the premises starts as a matter of agreement between the parties on grant of a new lease. Thereafter, unless the renewal of the tenancy is outside LTA54, on grant is the only time rent is solely a matter a matter of agreement (take-it-or-leave-it), otherwise it might be ascertained by an impartial third party in a dispute. Only when the tenancy is outside LTA54 would the new lease again be a matter of agreement, take-it-or-leave-it.
Depending upon the duration of the tenancy and/or what was agreed by the parties, the rent may be subject to rent review. Whether the rent increases at each review depends upon the type of review clause. In most leases, rent reviews are to market rent, subject to a cushion (known as an 'upward-only' review) whereby the rent payable after the review is agreed or ascertained would not be less than the rent previously payable. Other types of rent review include preset increases, index-linked,...
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