As the landlord of a commercial property, a time may come when you wish to sell your property and move on. If you have tenants, you may wonder whether you can still realise your investment and how this will impact the sale. In this article, our commercial property solicitors explain how you can achieve this, explore the risks and benefits of selling a tenanted commercial property and highlight key legal and practical considerations you should be aware of.
Contents:
- Can I sell a commercial property with tenants in situ?
- What are the benefits of selling a commercial property with a tenant in situ?
- What are the risks associated with selling a property with a tenant in situ?
- How does having a tenant in situ affect the sale price of commercial property?
- Are there any legal requirements to notify the tenant before selling?
- Can the tenant's lease be transferred to the new owner?
- Can a landlord evict a tenant if they need to sell?
- What information about the tenant and lease should be disclosed to potential buyers?
- Summary
Can I sell a commercial property with tenants in situ?
Landlords can sell their properties while tenants remain in situ. That said, selling a tenanted property is not as straightforward as selling a vacant property. From checking and complying with the terms of any leases, providing notices and apportioning rental income, there are multiple factors that your solicitor will need to consider. The key point here is that the property will be sold subject to the buyer becoming the new landlord. The change in property ownership should not impact the tenant's occupation and use of the premises, and the tenant will not have any additional obligations to the new landlord.
What are the benefits of selling a commercial property with a tenant in situ?
A commercial property with tenants in situ is likely to be a more attractive option for investors, particularly those looking to generate a stable rental income from their purchase. With tenants already in situ, this means the new owner can start earning without the time and expense of locating tenants.
Attractive investment: With tenants already in place, there is a lower risk of the property being vacant, which can help maintain the property’s value and attractiveness to potential buyers. An empty or boarded-up property that does not have the buoyancy of commerce and active trade can have a negative impact.
Charging premiums: Depending on market conditions and the buyer’s appetite, buyers may be willing to pay a premium for a commercial property with stable tenants and a consistent rental income history as it potentially presents a working business model and seamless transition.
Ease of financing: Lenders may be more willing to provide financing for a commercial property with tenants in situ, as the rental income can help cover mortgage payments and reduce the risk to the lender. For you as a seller, this potentially means more buyers are willing and able to come forward.
Established tenant relationships: Having existing tenants in place means that there are already established relationships between the tenants and any property management. This can help streamline the transition for the new owner and reduce the need for extensive handovers or onboarding processes of new tenants.
Reduced operating costs: Often, an unoccupied commercial property may be less attractive due to the incurred rates liability, insurance expenses, and potential costs for repairs and dilapidations. Having tenants in situ usually means that the majority of the landlord’s expenses are covered, and can be passed onto the buyer.
What are the risks associated with selling a property with a tenant in situ?
Lease Obligations
The existing tenants will have lease agreements in place that the new owner will need to honour. If the tenants have long-term leases with unfavourable terms, this may affect the attractiveness of the property to potential investors who inherit the leases.
Tenant Management
Dealing with existing tenants during the sale process can be challenging. Tenants may be resistant to the sale, have concerns about changes in ownership, or may not cooperate with property viewings or inspections. This can create friction between the seller, tenants, and potential buyers.
Rent Arrears
There may be cases where tenants are in arrears with their rental payments or are not complying with the terms of their lease. This can impact the sale process, as potential buyers may be concerned about the financial stability of the property and the reliability of the rental income.
Tenant Vacancies
If tenants decide to vacate the property before or during the sale process, it can affect the property's income potential and valuation. Vacant units can be harder to sell and may require additional investment to attract new tenants.
Market Limitation
A property with tenants in occupation would essentially cut out a large chunk of the market for those who wish to buy with vacant possession and occupy the property themselves.
Valuation Challenges
If the tenant has not kept the property in a good condition, this may affect the valuation of the property.
How does having a tenant in situ affect the sale price of commercial property?
As with any property sale, overall market conditions will be a factor here. A local real estate agent will be best placed to advise on whether there is a notable difference between selling the property to an investor with tenants in situ or to an owner-occupier with vacant possession.
Having a tenant in situ can both positively and negatively impact the sale price of commercial property. On the positive side, a long-term, reliable tenant who makes timely rental payments can make the property more appealing to investors and lenders, potentially increasing its value. This is because it provides a steady income stream and reduces the risk of vacancy. A long-term tenant with a poor record of rental payment, who has not maintained the property well and or is in breach of other lease terms can negatively impact the sale price.
Are there any legal requirements to notify the tenant before selling?
This will depend on the terms of the lease, but it is good practice to inform your tenant of your intention to sell and you will of course need their cooperation when it comes to arranging inspections and viewings. The landlord typically provides the tenant with a notice of completion of the sale, which includes the buyer's name, contact information, and bank details for rent and other payments due under the lease.
It is important to note that if you are a landlord of a mixed-use commercial property, then tenants of those flats may have rights of first refusal. In such instances, there are strict requirements about giving these tenants notice/the opportunity to purchase the freehold. If you feel this may apply to you, it is crucial that you get in touch with a commercial property solicitor.
Can the tenant's lease be transferred to the new owner?
The purchaser of your commercial property is buying the freehold interest, which is subject to existing leases. As such, they will automatically inherit the leases, become the new landlord after the change of ownership and assume responsibility for the landlord obligations under the lease. There is no separate process to transfer the leases to the new owner or to amend the existing leases. If the new owner and the existing tenant so wish, they can mutually agree and enter into new lease terms, but this is rare in practice.
That said, if granted on or after 1 January 1996, an original outgoing landlord will remain liable for their obligations in existing contractual leases even after selling their interest in the property. This is until and unless they follow set statutory procedures to release their liability, personally negotiate a release from the tenant or there is an exclusion of liability following the sale set out in the lease.
Can a landlord evict a tenant if they need to sell?
You cannot simply evict a tenant during the contractual term of their lease because you wish to sell with vacant possession. If that is your intention, then you would need to allow the lease agreement to expire before selling, either naturally or by exercising a break clause if available to terminate the lease early. In some cases, the tenant may even be agreeable to vacating or surrendering the lease. If your tenant is in breach of the lease, then you could look into taking steps to lawfully take back possession of the premises or evict the tenant before marketing for sale.
What information about the tenant and lease should be disclosed to potential buyers?
During the sale and purchase process, the buyer’s solicitor will raise standard enquiries about the property (known as CPSE), to which a seller must give honest answers in reply. As part of this, there are supplemental pre-contract enquiries for property subject to tenancies for commercial use. These contain a variety of questions related to the lease including basic tenant information, rent payment terms, deposits held and rent review provisions as well as details surrounding service charges, insurance, and any disputes with the tenant.
Summary
It is possible to sell a commercial property with tenants in situ. It can present as a working business model for property investors looking to seamlessly acquire rental income streams. The terms of any existing leases and the quality of the tenant(s) are likely to impact the sale. Selling a commercial property with tenants can be more complex than selling a vacant property, but with the right approach and proper planning, it can still be a successful transaction. It is crucial to work with an experienced commercial property solicitor who specialises in commercial property transactions to ensure a smooth sale.
