Selling commercial property with sitting tenants29-01-2024 | Legal Issues
As a landlord in the UK, you might find yourself in a situation where you need to sell a property that currently holds tenants. This scenario can raise several questions and concerns, particularly regarding the impact on property value and the legalities involved. Here we aim to provide clarity and guidance for landlords selling commercial properties with sitting tenants.
Understanding your rights to sell
It’s important to know your rights as a landlord and to be sure of these before embarking on the selling journey. You may be wondering if you can actually sell your commercial property with sitting tenants.
The answer to this is, yes. You can sell a commercial property with sitting tenants and as a landlord, your right to sell is not hindered by the presence of tenants. However, you should approach this responsibly.
How to tell your tenants that you are selling your commercial property
Be careful and considerate in how you approach your tenants about your decision to sell the commercial property. There are a few things that you can do to make the process as smooth as possible.
The timing of your approach is important, and ideally, this should be done sooner rather than later. This will give your tenants ample time to adjust to the news and consider their options. Decide on the best way to communicate your decision – do you want to send a formal letter or do you want to have a face-to-face meeting followed by written confirmation?
Remember to have answers ready to any questions that your tenants may have and to prepare them beforehand. Equally, reassuring your tenants of their rights will help the process run smoother. This will also address any concerns and reassure them that you are being transparent, instilling more trust within the relationship.
For example, tenants have the right to:
- Remain in the property as long as they comply with the leasing terms
- Have the terms of their lease honoured and the new landlord needs to accept these terms
- Be informed of a sale
- Be protected from eviction due to the sale of the property
- The transfer of their deposits
- The right to quiet enjoyment (where the landlord cannot unreasonably disturb their use of the property)
- Be given the contact details of the new landlord
- Be able to renew their leasing agreement
- Challenge unfair rent increases
Remind your tenants that there may need to be viewings, but reassure them that their privacy and routines will be respected and that they will be contacted first before any viewing takes place. Also, make sure to let them know that you will keep them informed of any updates.
Following this, make sure that you allow your tenants to give you feedback after initially telling them that you want to sell so that you can address any concerns they may have.
Throughout the process, treat your tenants with respect and courtesy. This approach can make a real difference in how the news is received and handled.
Remember, effective communication is key. It not only helps in maintaining a good relationship with your tenants during the transition but also ensures a smoother sale process.
Your property’s value
The presence of sitting tenants can inevitably affect the value of your property. Generally, properties with sitting tenants are valued lower than vacant ones. This devaluation is primarily due to the limitations on immediate use by the buyer and potential legal obligations towards the tenants.
For properties with an assured shorthold tenancy, the value could decrease by at least 20% – 25% and equally, when trying to sell a property with a sitting tenant under a regulated tenancy could reduce the value of the property by as much as 30%-40%
Factors influencing the devaluation of your property
There are a few different factors that may cause the devaluation of your property when selling with sitting tenants, but the extent of the devaluation depends on several factors:
- Type of tenancy: usually, assured or regulated tenancies that offer more tenant protection, can lead to greater devaluation in the property.
- Location: high-demand areas might see less impact on the value of the property.
- Lease terms: the duration and terms of the existing lease agreement can influence buyer interest and, as a result, the valuation.
There are, however, certain benefits to selling your commercial property with sitting tenants, too.
- Reliable income: although they might do so initially, the new owner of the property shouldn’t have to worry about tenants not paying their monthly rent.
- Already vetted tenants: the new owner of the property will have peace knowing that your tenants have already been vetted, minimising the risks involved.
- No set-up costs: due to there already being tenants, the new owner won’t need to worry about having to conduct background checks and writing new leasing agreements.
- Avoid estate agents: new landlords won’t need to worry about hiring estate agents due to there already being tenants.
- Reduce financial loss: there is no risk of losing financially due to having an empty property.
The sales process
So, how does the sales process actually work when it comes to selling commercial property with sitting tenants? Let’s explain.
Finding someone to professionally evaluate your property is the first step in the process. This will help you understand the property market more thoroughly and will give you a ballpark figure of how much to list your property for.
Next, consult a property lawyer to better understand your obligations and rights as a seller. Legal advice is particularly important around topics such as the review of a leasing agreement, due diligence and disclosure requirements, transfer of tenants’ deposits, drawing up a leasing agreement, and tax implications.
This is not an exhaustive list, however, and it is important to ensure that you get all of the legal advice you need to ensure you are following the law and regulations.
Transparency with tenants
Make sure that you maintain transparency with your tenants by being open with your communication. This will help manage their expectations so that they are aware of the next steps.
As mentioned before, make tenants aware that you are planning to sell the property and that there will be a new owner. Offer your tenants an opportunity to ask you any questions they may have so that you can address any concerns.
Remember, tenants may be worried if they run a business in the building and the implications this may have on their livelihood. It is in your best interest to ease any insecurities.
Tailor your marketing strategy to attract investors who are interested in purchasing properties with sitting tenants. Use the most appropriate avenues to get the news out there and make sure the way you market your property suits your target audience.
There are four different methods that you can use to sell your commercial property with sitting tenants:
- Private treaty: an agreement between the buyer and seller (with the potential help of a real estate agent or broker). The price of the property is negotiated between the two parties.
- Sealed bids: potential buyers send their offers in sealed envelopes by a predetermined deadline. These bids are kept confidential and are not shared with any other buyers.
- Auctions: a public sales method where the property is sold to the highest bidder. There is usually a set minimum price that bidders cannot go below, otherwise the property may not be sold.
- Selling privately: a seller and a buyer can agree to the purchase of the property by the new landlord without the help of an estate agent.
What fees do you pay when selling a commercial property?
As you can imagine, certain fees come with selling your commercial property. It is important to know which fees you may be responsible for so that you can plan for a smooth property sale.
- Commercial agent fee: this fee is paid to commercial estate agents and usually includes marketing the property, conducting viewings and negotiating with potential buyers.
- Asbestos survey fee: a survey that assesses the presence and condition of any asbestos-containing materials. The fee for this survey depends on the size and complexity of the property.
- Energy performance certificate (EPC) fee: an EPC is a legal requirement in the UK as it provides information to potential buyers on the property’s use of energy, along with any recommendations for making the property more energy efficient.
- Legal fees: these fees are paid to a solicitor for handling the legal aspects of the sale.
- Preparing the property for sale such as decorating or clearing items after a tenant has moved out
- Mortgage payments: usually, the profits made from the sale are used to pay off the remainder of the mortgage, however, you need to continue paying the mortgage until the property has officially been sold.
The key to selling your commercial property with sitting tenants is to make sure that you understand the impact this may have on the property value, maintain open lines of communication with your tenants, and seek professional advice to navigate the process effectively.
Remember, every property is unique, and the impact on value varies based on multiple factors. With the right approach, you can make a well-informed decision that suits your circumstances when selling your commercial property with sitting tenants.
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