Commercial properties are an attractive investment option for private investors. While commercial properties typically yield high rental returns with long tenancies, there are several things landlords must know to ensure they make the most out of their investment.

1.Commercial lease differences

If you own a residential investment property you may be surprised to know there are some key differences between commercial and residential leases. Commercial leases:

• tend to be more involved and complex than residential leases
  
• are longer than residential tenancies; usually three to five years with one or two option terms of three to five years each depending on the space of the building
• have a minimum and maximum lease term which can be negotiated by both parties
• are harder to break than residential agreements
• include annual rent reviews and increases
• have the tenant pay for all outgoings, including rates, taxes, levies, water and utilities
• have the tenant pay for all outgoings, including rates, taxes, levies, water and utilities
• are negotiated between landlord and tenant to equally benefit both parties.

2. Lease Agreement

The lease agreement is a legal document clearly outlining the rights and responsibilities of the landlord and tenant. Everything should be spelled out in the terms of the lease agreement to avoid confusion during the tenancy and ensure maximum protection for both parties.

The lease agreement should include:

• rent amount and how it is calculated
• rent increases and when they will occur; increases are typically determined by a fixed price (expressed as a percentage), market review or Consumer Price Index (CPI)
• outgoings (rates, taxes, levies, water and utilities)
• lease start date and duration
• option rights for extension or renewal
• cost and responsibility repairs, maintenance and costs
• sign-on incentives
• fit-out responsibilities, approvals and expenses
• allowable improvements
• option to assign a lease (tenant transfers the lease to a new tenant)
• make good provisions at end of lease (return property to its original state)
• breaking the lease (ending an agreement early) and associated fees
• security bond, either bank guarantee or personal guarantee
• payment of landlord fees

Each state and territory have specific legislation on commercial and retail leases. You should seek advice from a commercial lawyer before drafting your commercial lease agreement.

3. Landlord responsibilities

As a commercial landlord, it’s essential you understand your main responsibilities before negotiating the terms of the lease agreement.

In most commercial leases the tenant is responsible for the interior of the rented premises, which includes the fit-out and repairs and maintenance of walls, floors, fixtures and inclusions throughout the lease term.

As the landlord, the exterior condition and structural integrity of the property is your responsibility, including repairs and maintenance of all structural aspects of the building. You must make sure the property is fit-for-purpose, meaning it suits the nature of the tenant’s intended business operations. And, you must ensure the tenant’s operations won’t impact the local area.

Additionally, your property must have adequate building insurance, comply with building codes and meet health and safety standards. Rates and body corporate fees must be current when the lease is signed and gas and electrical safety certified.

4. Ideal tenants

Like residential property investments, securing the right commercial tenant is key to maximising your rental return. Responsible and profitable tenants that pay on time and are a good, long-term fit for your premises are also key to your success as a commercial landlord. But finding potential tenants and appealing to their specific business needs can be challenging.

Local, experienced and well-networked commercial agents are best placed to introduce ideal tenants, identify any red flags, negotiate the terms of the agreement and help you fill your commercial space – allowing you to get on with building your property investment portfolio.

Need more information?

Stills Properties has been managing investment properties for Sydney landlords for over 30 years, contact us to discuss your investment property management needs.