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What do I need to consider as landlord of a practice?

Certain aspects of the landlord’s responsibilities can often be overlooked

01 May 2020, at 8:40am

Many owners begin their tenure as commercial landlords upon the sale of their practice. The most common arrangement where the seller owns the freehold or long leasehold title to the property is to retain ownership and lease it back to the acquirer. The lease back arrangement creates fixed long-term capital income (typically veterinary acquirers like 15 years or more) giving you as the “new landlord” future financial security.

Regulatory and compliance documents

The owner will need to provide an energy performance certificate and an asbestos report to the tenant, if the property was built before the year 2000. The former is a legal requirement to let: if the rating is lower than an E you will not be allowed to legally let the property. The latter is important because if there are asbestos containing materials in the property you will have to either provide a management plan for the tenant to follow or have it removed to prevent any risk or claim materialising.

Electrical, gas and fire risk certificates/assessments should all be in order and supplied to the tenant upon request.

Insurance

The landlord should always be in control of insuring the property: why? The reinstatement value needs to be correct in the event of a claim (this quite often dictates the premium, so if left to the tenant, it may be incorrect for the sake of a lower premium), having the correct insured risks (if the property floods, for example, and this is not covered, it would be problematic for the landlord). Lastly, in the event of a claim, the landlord should be in control of any insurance proceeds which are paid out against the property. It is worth noting insurance premiums can be charged back to the tenant through insurance rent or service charge and therefore are a recoverable expense of the landlord.

Schedules of condition

When you grant a lease of your property to the tenant having sold your business, you want to be sure that at the end of the term the property is returned to you in the same repair and condition it was let in. The best way to deal with this is by annexing to the lease, at the time of grant, a professionally prepared photographic schedule of condition which records the state and repair in written form. This can then be used as a reference point in the future if there is a dispute with the tenant.

Rent and rent reviews

It is good practice to have an independent rental valuation of the property undertaken as a landlord and to not rely on the acquirer’s figures. Rent reviews can come in different forms and intervals; the most popular and preferred is open market five-yearly rent reviews which are upward only. For example: 15-year lease, rent reviews would take place in years 5 and 10. If the market dictates a lower rent than the rent reserved in the lease the rent would stay the same; if the market demands a higher rent, the rent would increase accordingly. In short, the rent would only ever increase, not decrease.

Bank charges

Following the sale of your practice, it might be worth re-paying any monies owed to lenders and clearing your Land Registry title of any bank restrictions. The bank will often have a restriction on your title at Land Registry and this can become problematic when granting leases as you will need to obtain the bank's consent which can be time consuming and convoluted.

Common items

If you as the landlord have to undertake financially burdensome works to the property, like replacing the roof for example, you can ask for the tenant to contribute to a fair proportion of this (often up to 50 percent).

Inspection

Inspect the property annually or on a six-month basis (with prior written notice) to make sure the property is being maintained in accordance with the lease.

Unprecedented events, such as COVID-19

Ordinarily, the landlord is entitled to forfeit the lease if rent remains unpaid by the tenant for 21 days. However, in unprecedented events the landlord can choose to exercise discretion looking at the circumstances and provide a payment holiday to the tenant or choose to alter the amount the tenant should pay during any one month or quarter; this can be recorded in a letter/memorandum or other document as the parties see fit.

HARRISSON CLARK RICKERBYS

Qess Ali is part of the dedicated health and social care team. He specialises in supporting the corporate team in all property aspects, including guiding clients through the due diligence process, granting leases and acquiring and disposing of property.

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