Commercial rent rolls can be a profitable income stream but there is a difference between managing this type of property and managing residential property.
Australian investors are a savvy bunch, always on the lookout for new investment opportunities. For those who have already built a portfolio of residential and perhaps holiday properties, commercial retail properties are a natural next step. This can provide diversity and cash-flow positive returns.
As a real estate agent, you may receive a call from a landlord client who has put money into a retail outlet or office and wants you to manage it. This is an excellent chance to grow your rent roll, however there are different rules and regulations around the letting of this type of property which you must comply with.
Factors involved with managing commercial property:
Commercial property contracts
When you lease a commercial retail property to a client, it is similar to a residential property in terms of requiring a contract, setting up regular monthly payments and establishing responsibilities.
However, commercial property contracts tend to be more complicated than residential ones. For one thing, commercial tenants are more likely to negotiate over the price, the costs they are responsible for and their role in maintaining the premises.
Before setting up a contract for a commercial lease, you should determine if the mortgage provider has given the loan with the understanding the property will be leased by a commercial business client. From there, a commercial property contract should include terms covering:
The duration of the lease
The specific use of the premises, what’s allowed and what is forbidden
Who is responsible for paying land taxes, council and water rates
Who will take care of building and contents insurance
Which party is responsible for organising and paying for maintenance and repairs (the more specific these terms are, the better)
Who will cover the setup costs of the lease itself (as commercial leases can be more complicated, it is likely you will need to get specialist lawyers involved)
How often the rental cost will be revisited and revised
Early termination clauses should the tenant go out of business
Rights of Assignment e.g. is the tenant able to transfer the lease to someone else
Options for lease renewal on expiry
The other essential elements to check are permits and registrations. If your client is leasing a cafe, bar or alcohol vendor, you must ensure the tenant has all the necessary licences and permission to operate. The same goes for planning permits if there is a major fit-out required by the new tenant.
What’s also important is to verify the applying tenant’s suitability and business experience. Avoid rookie business owners with wild ideas but not a lot of capital as this is a recipe for missed payments and a broken lease.
Your responsibilities as the commercial property manager
There are some legal obligations for you as the commercial property manager. According to the Victorian Small Business Commission, you are required to give the tenant:
A written lease with matters agreed to and signed off by both parties
A copy of the proposed lease as soon as the lease negotiations start
A disclosure statement detailing terms, options, costs and other details
The VSBC Information Brochure, to be supplied as soon as the lease negotiations start.
The full list of your obligations as a landlord to a commercial tenant is covered in the Retail Leases Act of 2003. This extensive document covers specific lease requirements, rules about rent payments, fit-out and refurbishment restrictions. It also defines ‘unconscionable conduct’ and shares the formal process for dispute resolution.
Familiarising yourself with the Retail Leases Act and recruiting the services of a lawyer who lives and breathes commercial property law will help you avoid breach of contract.
Effectively mixing residential and commercial rent rolls
As the managing agent of a commercial property, the list of responsibilities is long. It is so important to sign a detailed, professional lease, with clauses specific to the use of the property. Failing to do so can lead to expensive claims from the tenant and also from the property owner themselves.
Should something go wrong with the property, if it has not been correctly managed you could find yourself liable for the loss of value as well as the cost of repairs.
Because managing a commercial rent roll is different from a residential one, it may make sense to bring a dedicated commercial property manager on board. This expert will strengthen your reputation as a well-rounded service provider and add to the value of your business.
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