The number of commercial landlords in the UK who are seeing the upsides of buying and selling properties with tenants in situ is growing. Simply put, tenants in situ is the term used when a property becomes available to purchase with a tenant already occupying the property.
Subject to the terms of the tenancy agreement, the tenant will be able to continue occupying the property even after it has been acquired by a new owner. It’s important to note that when a change of landlord takes place, it does not override the tenancy agreement previously signed and the tenant’s rights outlined in that agreement.
Read on to discover the pros and cons of having tenants in situ and get advice on buying commercial property in these circumstances.
Pros of purchasing a commercial property with tenants in situ
Receive rental income straight away
When you are buying a property with tenants in situ, you’ll automatically start to receive rental income.
The property should already meet health and safety standards
A key advantage to acquiring a property with tenants is that you shouldn’t have much to do in terms of meeting the required health and safety standards. In order for the property to be legally let, you should check the health and safety standards required for the property. These should include fire repellent measures, gas and electrical certificates and the general conditions that are required by the Housing Health and Safety rating system.
You won’t need to do any refurbishments
If the tenants in situ are happy to remain at the property as is, despite the change in landlord, odds are they’re happy with the standard of the space and are not going to be leaving in the near future. You can, therefore, hold off on any initial costs associated with furnishing or refurbishing the property.
When buying a commercial property which doesn’t have any tenants, you may not only be faced with having to pay for these initial renovations and furnishings, but you may also have to bring it up to the required health and safety standards.
Cons of purchasing a commercial property with tenants in situ
There’s plenty of risk involved
The greatest risk associated with buying a commercial property with existing tenants is that everything may not be up to scratch. On the off chance that the previous landlord was not legally letting the property, you may have to invest time and money into meeting the required standards. This is not the easiest of challenges, especially when there are tenants already occupying the property.
It is also worth considering that if the local council discovers that the property was not being legally let before you’ve even had the opportunity to correct these oversights upon completion, you could end up having to pay the fines.
Having to remove the occupying tenants
In the event that you choose to remove the tenants, be prepared for what could be a lengthy and difficult process. With assured shorthold tenancy agreements, you will need to give them sufficient notice, especially if the tenants are still within their initial six-month agreement. If this is the case then you won’t be able to give them notice until the fourth month.
You may not be able to remove the tenants at all if they have asked for repairs which haven’t been completed, or they didn’t receive the correct paperwork or documentation from the beginning, such as the How to Rent Guide.
Buying commercial property – Advice from specialist solicitors
If you decide to buy a commercial property with occupying tenants, contact your solicitor or licensed conveyancer with previous experience in handling properties with tenants in situ. They should know precisely what they need to ask from the seller and anticipate or flag any possible risks associated with this type of purchase.
If your solicitor or licensed conveyancer asks all the right questions and gets all the necessary information, such as confirming the dates of the last safety checks, then you should be able to avoid getting caught out by any of the cons associated with purchasing properties with tenants in situ.
5 things to consider when completing the purchase of a property with tenants in situ
1. Deciding whether to change service providers
If you’re thinking of changing the service providers in the property then it’s important to allow sufficient time to do so. Most suppliers require anywhere between two weeks and a month’s notice, so you should aim to arrange the transfer of services and utilities for the day you become the landlord.
Should you wish to continue with the current suppliers, you can arrange any changes to details with the service provider upon completion.
2. The perfect day to complete your purchase
Whether you’re buying or selling a property with occupying tenants, the best day to complete the sale for all parties involved is on the day that the rent is due. If, for any reason, this is not possible, you can arrange for apportionment where the seller will pay the buyer the remainder of that particular month’s rent.
Should the rental payment date change, make sure to give the tenants sufficient notice so that they have time to change any Standing Orders or other payment arrangements they may have.
3. Set up a rent deposit deed for the property
If there is not one already in place, you should set up a rent deposit deed with your solicitor to secure the commercial tenant’s deposit. The deed outlines that the deposit remains as the tenant’s property but should they default on the lease, then the landlord can use the funds from the deposit. A rent deposit deed also protects the landlord from losses and expenses.
4. How to handle the tenancy agreement
According to the law, a change of ownership of a commercial property doesn’t affect the original tenancy agreement signed by the tenants in situ and therefore their entitlement to continue occupying the property. Contact the tenant to see if they would be willing to sign a new assured shorthold tenancy agreement, which will lock both you and the tenant into a minimum six-month agreement.
If the tenant wants to continue with the current signed tenancy agreement then both you as the new landlord and the tenants are legally bound by its terms. You should, of course, do your due diligence to make sure that the tenancy agreement is legally accurate. If you want to terminate the previous tenancy agreement or aren’t satisfied with the current tenant, you can wait until you’re legally allowed to give the tenants notice to leave.
5. When the property is managed by managing agents
Purchasing a new commercial property with tenants in situ can be made simpler when there is already a managing agent involved in its management. They will more than likely manage the tenants for you as well as some of the other administration associated with rental properties.
When you complete the purchase of the buy to let property which has a managing agent, make sure to check their contract terms. You can then decide whether or not to continue with the current agent or compare their services to others. If you’ve decided that you don’t want to use the managing agent of the property, you should let the seller know before completion as some agents will charge the seller certain fees.
For an overall beneficial experience when investing in a business property with tenants in situ, make sure you have experienced legal experts at hand to help you navigate any issues you may encounter. At Abacus, our commercial property specialists and landlord solicitors have a wealth of experience to guide you through the commercial buy to let process and ensure you’re compliant with new laws and legislation. Contact our solicitors in Manchester or in our Warrington office to find out how we can help you.