Now that the Bank of England Base Rate is at 0.25%, any prospect in the foreseeable future of a rise in interest rates for savers is remote. It therefore pays to look at other interest-producing investments in case the rate on offer is attractive. At current prices, presupposing you want to at least be certain of getting your money back, I wouldn’t recommend buying commercial property simply for the yield. The prices don’t allow much if any room for falls in capital value. That’s not to say that all commercial property investment should be avoided: what matters is that you have your wits about you and are adept at judicious choice.
If you already own commercial property investment then when you bought the property determines the yield you are getting. Arguably, the property should be revalued periodically so that the yield is not calculated upon historic purchase price, but on how much the property would cost you to buy at the revaluation date. If you borrow on the asset then the lender would require current value and in future no breach of the loan-to-value covenant. If you’ve no borrowings then whether there is any point revaluing every so often is a matter of opinion. Regardless of whether there is any need, I reckon it does pay to get a rough idea of capital value every so often to ensure your investments are stable. For investors stuck with empty shops in unwanted ‘high streets’ to have not realised what would befall those locations is a good example of investment shortsightedness.
Expressed as a percentage on the capital value of investment, yield based on prevailing and reversionary rent is overt. A source of covert yield comes from interest payable by the tenant. All leases are different but there are generally two contractual occasions when interest might be or is payable.
One occasion is on late payment of the rent(s) reserved, including any other money payable under the lease. The other is on the back rent following any increase at rent review.
A typical definition of ‘Interest Rate’ is the base rate from time to time of ‘x’ bank, or if that base rate stops being used or published then a comparable commercial rate reasonably determined by the landlord. Having defined the source of the base rate, the next definition is the ‘Default Interest’: for example 4% per annum above the Interest Rate.
Preambles defining the terminology in the lease make it easy to spot where the best returns could be had. For example, for late payment of rent(s):“if any Annual Rent or any other money payable under this lease has not been paid within 21 days of the date it is due, whether it has been formally demanded or not, the Tenant shall pay the Landlord interest on that amount at the Default Interest Rate (both before and after any judgment). Such interest shall accrue on a daily basis for the period beginning on the due date and ending on the date of payment. If the Landlord does not demand or accept any Annual Rent or other money due or tendered under this lease because the Landlord reasonably believes that the Tenant is in breach of any of the tenant covenants of this lease, then the Tenant shall, when that amount is accepted by the Landlord, also pay interest at the Interest Rate on that amount for the period beginning on the date the amount (or each part of it) became due and ending on the date it is accepted by the Landlord.”
Even if the lease does not say rent is payable whether formally demanded or not, the payment of rent is a contractual obligation. As a courtesy, most landlords issue rent demands, but it is not compulsory. Also, where the rent can be calculated by the tenant without input from the landlord, for example a rising rent of pre-fixed increments, the tenant cannot excuse delay in paying by reason that the tenant did not know how much was due. The same principle applies to rent reviews that are based on some arithmetical formula, such as inflation-linked. To avail of the higher interest rate, the landlord should not issue rent demand or send a reminder, but wait until the grace period has elapsed, then demand the rent(s) plus the interest.
At rent review, it is common for the revised rent (assuming some increase) not to be agreed or ascertained until some time after the review date. Normally, the shortfall (back rent) is back-dated to the review date, unless otherwise stated in the lease. When back rent is payable depends upon the particular lease. It might be payable immediately on agreement or ascertainment of the rent, or within 7-14 days thereafter. Or it might not be payable until the next quarter or rent day following the agreement or ascertainment. Over ascertainment date, the landlord has no control, but the agreement (date on the Memorandum) can be delayed to take advantage. Also, whether the interest in calculated on the whole of the back rent or on each periodic instalment depends upon the lease. Generally, nowadays, interest on the back rent is at Base Rate so might not amount to much, but in older leases the interest rate might be higher or subject to a minimum rate, for example 5-10% is not uncommon. Whether the landlord should issue a demand for back rent depends: the tenant is capable of calculating the interest payable without the landlord’s input.
Whether you’d want to charge interest, let alone deliberately manage your investments accordingly is your prerogative: in my opinion, there doesn’t seem to be much point in having a lease and not sticking to it, but many investors are benign. I’m not trying to encourage anyone to take advantage of tenant-preconceptions, but simply to draw the possibility of opportunity to your attention.
The Rent Review Specialist