Commercial Buy-To-Let: The Benefits
Adam Bromley, partner at Forbes Solicitors looks at the benefits of commercial buy-to-lets
Residential buy-to-let has been criticised in recent years due to the three per cent Stamp Duty Land Tax (SDLT) surcharge, changes to mortgage underwriting standards and the reducing mortgage interest tax-relief combined with Brexit and Covid-19.
Investors are now looking towards commercial buy-to-let as an alternative. This means purchasing a property with the goal of renting it out to another business.
The benefits of a commercial buy-to-let include longer leases as commercial leases last years or even decades, which offers security for investors. Additionally, tenants are usually liable for any maintenance costs and landlords have very little to do with anything that goes wrong. Furthermore, there has been a slow discontinuation of the mortgage tax relief and SDLT rates are capped at five per cent over £250,000 for commercial property, whereas residential SDLT rates can reach 12 per cent over £1,500,00.
As with any property purchase, some risks need to be considered. For instance, commercial leases can often be terminated if it contains a ‘break clause’. This gives flexibility to tenants to deal with an uncertain future. Moreover, tenants can also be lost in times of recession and replacing them could take a while as evidenced by Covid-19. A valuation of a property is difficult to obtain because of the greater range of factors that can affect the value, such as the economic outlook and the location.
The first step to the process of a commercial buy-to-let is finding a tenant to occupy the property. The Heads of Terms, which set out the main points of a transaction (subject to contract) are agreed between the landlord and tenant. Once the Heads of Terms are agreed, they are sent to the appointed solicitors, who then prepare a draft lease. Thereafter, the solicitor forwards the lease to the tenant or the tenant’s solicitors and a process of due diligence will be carried out whereby the clauses of the lease are negotiated in accordance with the parties’ requirements and enquiries are raised. As soon as the lease is completed, the tenant takes possession of the property.
For prospective investors, a commercial buy-to-let may seem daunting. But our experienced buy-to-let solicitors can offer advice on the drafting of all forms of leases. We will ensure that the lease reflects our client’s needs, while also keeping a balancing act, whereby the tenant’s obligations are kept in mind.
Adam Bromley is a partner at Forbes Solicitors’ Commercial Property