This article looks at a number of considerations to be had when buying an investment property. Translated into legal terms, it involves acquiring the freehold to (ordinarily) a larger property, which is sold subject to and with the benefit of occupational tenancies/having tenants in situ.

Rent

You will want your property to be a profitable venture, but what are the current rents being paid under the leases? Are they paid in advance or in arrears? Are they paid quarterly or on a monthly basis? Does that work for your cash flow?

What about the position in the future? Are the rents fixed, or is there provision for rent review(s) during the lease? If so, when are these reviews, and how is the reviewed rent calculated? Can the rent only ever go up or stay the same? Are rental payments with reference to turnover? Do the rents fluctuate with reference to inflation?

Tenant Breaks

Your investment may be reliant on the continued occupation of one particular anchor tenant who pays a substantial annual rent and attracts other tenants by its presence. However, it’s important to be mindful of any break options within that particular lease allowing the tenant to bring the lease to an end early and potentially devalue your asset. If so, how much notice does the landlord need to be given, and does this give sufficient time to find a replacement tenant?

Alienation/Dealings

While you may note that X Limited is the current tenant, this does not necessarily mean that X Limited will continue to be your tenant. Under the terms of the leases, are your tenants able to transfer on and/or sublet their premises? If so, what controls do you have over who your new tenant may be?

Use

Apart from any separate planning constraints there may be on the property, what are the permitted uses under the leases? Can the tenant seek to change these? Are you able to retain a good tenant mix? Are there any restrictions affecting parts of the property, and do these impact your future ability to let?

Rent Deposits and Guarantors

A not unreasonable concern at the time of due diligence may be regarding the covenant strength of the tenants and their abilities to pay the rent and comply with their lease obligations. Are there any rent deposit deeds already in place and/or any personal guarantees given which may provide some comfort? If so, is it possible that these arrangements could fall away, for example, after the tenant has been in occupation for a certain period of time without defaulting on its payments? How long is this “comfort” going to be available to you?

Repair and Decoration

There are a number of ways the repairing and decorating obligations of a tenant can be documented within a lease, but ordinarily a landlord would like a tenant to be entirely responsible for repair and decoration. Do the lease documents oblige the tenants to fully repair their premises? Are the repairing obligations maybe subject to schedules of condition? Will you, as the landlord, be responsible for repairing the property at the end of a tenancy to enable it to be readily let? How much is that likely to cost you?

Service Charge

Service charge usually comes with the territory when buying a multi-let property and indeed can be fundamental to ensuring the smooth running of your asset. There will likely be a number of communal areas, which all the tenants will want (and likely need) to use, but which it would not be practical for them to separately own. What happens with these? Usually, the landlord (or maybe a management company) will assume responsibility for these areas and recoup a proportion of the related costs from each tenant by way of the payment of a service charge. However, how extensive are these maintenance obligations of the landlord? Are there any tenants who may have been granted a capped service charge, and is there the potential for the service costs incurred to exceed the amount of service charge which can be recovered under the leases?

What’s Next?

Deciding to purchase an investment property invariably comes with a lot of technical paperwork and detail to be digested. It is fundamental that this is carefully checked and considered from a legal perspective to ensure your investment and asset is protected.

Our Specialist Commercial Property Team can be contacted on (01524) 846846.

Share This Post

Related News

  • Residential Property Conveyancer

    Residential Property Conveyancer

    17th April 2024

    Oglethorpe Sturton & Gillibrand are looking to recruit an experienced residential property conveyancer. The ideal candidate will have excellent organisational, technical and communication skills ... READ MORE

  • Pensions in Divorce

    Pensions in Divorce

    25th March 2024

    On 2 January 2024, the Pensions and Lifetime Savings Association (PLSA) updated guidance on pension sharing orders, prompting crucial discussions about pensions in divorce ... READ MORE

  • Buying a House Explained in 5 Simple Steps

    Buying a House Explained in 5 Simple Steps

    15th March 2024

    Navigating what is called the conveyancing process when buying a house can be a difficult, and possibly a complex and stressful journey, but our ... READ MORE

  • Residential Property Conveyancer

    Residential Property Conveyancer

    17th April 2024

    Oglethorpe Sturton & Gillibrand are looking to recruit an experienced residential property conveyancer. The ideal candidate will have excellent organisational, technical and communication skills ... READ MORE

  • Pensions in Divorce

    Pensions in Divorce

    25th March 2024

    On 2 January 2024, the Pensions and Lifetime Savings Association (PLSA) updated guidance on pension sharing orders, prompting crucial discussions about pensions in divorce ... READ MORE