Buying an investment property? A few tips...
Our legal experts Baines Wilson LLP give their advice for landlords.
An investment property is either a freehold or a long leasehold property which is rented out and subject to tenancies.
It could be, by way of examples, an office block let out to various businesses, an industrial estate occupied for industrial uses or a shopping centre tenanted by numerous retail outlets. Parties interested in investing in such properties do so as they want to hold an asset, but also want to obtain a rental income from such asset. Purchasing this type of property by its very nature comes with an additional level of complexity and this article looks to point out a few of the issues which should be considered.
As would be the case when acquiring a property with vacant possession, due diligence will need to be carried out in respect of the freehold or long leasehold interest. Of note, is there anything affecting the title which means that the property either cannot be used for its current purpose(s) or anything which may hinder any future development/change of plans? Is there anything revealed by enquiries of the local authority which may reveal planning constraints or any future intentions of the local authority?
Any property investor will of course be keen to maintain a strong return from its tenants, whilst ensuring its asset is fully protected.
what are the current rentals? Is there the ability to review and potentially increase such rentals at a later date? What is the basis of any such rent review? Is it an upwards only review, a review based on RPI increases, is the review with reference to a tenant’s turnover, are there fixed increases for the remainder of the lease term? What about the tenants? Have they been paying on time/what is their rental history? Are there any arrears?
the decision to invest in a particular property may have been based on a specific tenant (commonly termed an “anchor tenant”) remaining in situ. What if that tenant has the ability to break its lease in the future? What impact would that have on the investment? Is there a particular part of the property the purchaser would like to acquire back from a tenant? If so, is there an effective landlord break option in the lease for that part to enable this?
what are the obligations of the tenants in relation to repairing their premises? Are they fully responsible for internal repairs or are their repairing obligations limited by reference to a photographic schedule of condition? Is the property owner specifically obliged to repair certain elements? What would be the potential cost implications of these points?
is the strength/identity of any of the tenants of particular importance to the purchaser? If so, what ability, and what conditions are attached to such ability, does the tenant have to transfer its interest to a third party? Assuming the tenant has such ability, is the current tenant under an automatic obligation to guarantee the incoming tenant’s obligations (an “authorised guarantee agreement”) for the period the incoming tenant occupies and what happens if and when the incoming tenant wishes to further transfer its interest? What about underletting? Can a tenant do this and, given such undertenant could ultimately become the property owner’s direct tenant, what controls does the property owner have over the terms of such underletting?
is a tenant permitted to carry out alterations? If so, what type of alterations? Could they potentially be extensive and have a negative impact on the asset? Is the tenant automatically obliged to remove such alterations and reinstate its premises when its lease comes to an end? Has the tenant already carried out alterations and are there any licences for alterations documenting the details of the alterations and the terms relating to them? Again, is the tenant automatically obliged to remove such alterations and reinstate its premises when its lease comes to an end?
there will likely be common areas within the property which serve all tenants, such as stairwells, lifts, heating and cooling systems, bathrooms, and which the property owner is obliged to maintain. Can the property owner potentially change the services to these common areas? Is the cost associated with such services fully recoverable via service charges payable by the tenants? In addition, are any of the service charges payable capped/fixed at a certain sum?
has any tenant given security to the property owner, such as a rent deposit, a third party guarantee? Has such security been called against, for example, what is the current level of rent deposit held? Is any such security properly documented, effective and sufficient? Buying an investment property comes with a number of complex considerations including those of a legal nature and it is fundamental that appropriate specialist legal advice is taken in any such transaction.
For further information, please feel free to contact Laura Barnfield at Baines Wilson LLP on either (01524) 548494 or firstname.lastname@example.org.