Rural spectator: Commercial Tenancies of Rural Properties - Top Tips
Letting out under-used farm buildings for business purposes can be a great way to diversify and increase income. However, commercial leases have the potential to cause major issues if the agreed terms are not suitable for the landlord's requirements. Here are our 'top tips' to consider when agreeing a letting to avoid headaches and expense further down the line.
Know your Tenant and Understand their Business
If the building you're letting is within the farm you need to be sure that your tenant's business is compatible, particularly if you live there. Ask questions about matters such as vehicle movements, noise levels, and operating hours so that restrictions can be included in the lease if necessary.
You should establish who will be paying the rent, as this may not be the person you have met and will need to be the named tenant. If the letting is to a limited partnership or company, agreeing a personal guarantee or rent deposit will mean that if the firm folds there is still someone ‘on the hook’ for any unpaid rent or damages.
Consider references from previous landlords, accountants, and bank managers to assist with your background research.
Security of Tenure
Under most commercial leases tenants will have an automatic right to renew at the end of the fixed term unless it is expressly agreed with the landlord that the security of tenure provisions of the Landlord and Tenant Act 1954 are to be excluded prior to entering into the lease.
The legal notice and declaration procedure for excluding security of tenure must be followed correctly before the lease is entered into or the landlord may inadvertently grant their tenant a right to renew.
This could have negative impacts on the value of your property and may mean that you cannot easily recover possession as intended.
Energy Efficiency Ratings
An Energy Performance Certificate (EPC) will be required for the majority of buildings before letting, although there are some exemptions where energy consumption is minimal. An EPC assessor will determine how energy efficient the building is and will produce a rating from A (best) to G (worst).
After 1 April 2018, for all new lettings the building must achieve a rating of E or above. After 1 April 2023, the same standard must be met in order to continue letting a building.
Landlords should, therefore, consider budgeting for improvements such as insulation and other works, which will increase the rating.
Landlords can be subject to penalty charges from £5,000 up to £50,000 for failing for lettings which don't meet the necessary E rating, so ensuring compliance is vital.
Permitted Development and Planning
The Town and Country Planning (General Permitted Development) (England) Order 2015 (as amended 2018), granted a potential right for certain agricultural buildings to be converted for a range of commercial uses. These developments are proving to be increasingly lucrative for landowners, however, the building must currently be or have last been used in agriculture and there are a number of stringent criteria to comply with.
By allowing a commercial tenant to occupy the building prior to changing its use, these rights may be forfeited so landowners should carefully consider the suitability for conversion of buildings and application of these Permitted Development rights before agreeing to a let.
You could enter into an Agreement for Lease whilst you explore planning so that the new lease will complete as soon as the change of use is granted/approved – this will provide early commitment from an end user and guarantee immediate rental return.
We often see examples where buildings have been let on an informal basis without the necessary planning consents in place. If identified by the council, this can not only jeopardise your ability to exercise Permitted Development rights in the future, but it may also lead to enforcement action.
Also, if the building you are intending to let was itself constructed for the purposes of agriculture under Permitted Development rights then it cannot be occupied by for any other use for at least 10 years. In this situation, the council would have the right to potentially demand the demolition of the building.
Buildings which have always been used for agricultural purposes may not have the planning permission necessary for the tenant's requirements. It pays to be clear from the outset who is responsible for obtaining the correct consents and who will be liable in the event of planning enforcement action.
Repairs, Insurance, and Other Outgoings
A key part of agreeing a lease is preventing disagreements in the future over the cost of repairs, insurance, and other charges.
The lease should clearly set out which party is responsible for which repairs, insurances, rates, utilities, services, and any other costs which may be incurred during the term of the tenancy. This will, of course, have an impact on the rent which can be charged, so should be a point for discussion with the tenant at the outset.
A full photographic schedule of condition could be compiled at commencement of the agreement, which both parties should agree to. This will help when dealing with tenant improvements and dilapidations at the end of the tenancy.
VAT is not ordinarily charged on rent unless the landlord has specifically waived the VAT exemption for the building or it is being occupied for storage purposes. Whilst a building may not be opted at the start of the lease, the landlord may wish to opt in the future, so provisions should be included to reserve the right to charge VAT at a later date.
Many commercial tenants will be VAT registered so will be able to recover additional VAT charges, but the lease should be clear that the tenant is liable for VAT, in addition, to rent if it does become payable.
Whether your property is due to be sold or passed down to the next generation, accountants should be consulted to advise on the impact of letting on capital taxes and reliefs for CGT and IHT, which could potentially be lost by changing from agricultural use.
Your accountant may also advise on ownership structures and tax treatment of rental income.
Agricultural buildings are not usually rated, however, the occupation by a commercial tenant should trigger a rating valuation so the lease should include for the tenant to pay the rates if chargeable.
If the property then becomes vacant, the owner will then be charged empty property rates, which is an expense to bear in mind when deciding to start letting. However, there are some exemptions and reliefs available.
The best way to avoid issues further down the line is to ensure that the terms of the lease accurately reflect what happens in practice and what has been agreed with the tenant. Think carefully about what your objectives are and how any new tenant's business and activities will fit with the rest of the farming enterprise. Take heed of health and safety requirements and make clear which party is responsible for what both during the tenancy and when it comes to an end.
Whilst there are possible pitfalls when letting farm buildings, there is great potential to both add value to your property and to enhance income to your overall business, by seeking professional advice at an early stage.