– Here’s What to Do When You Inherit Tenants –
In commercial real estate, the reality is that you can pick the property but you can’t always pick the tenants.
Inherited tenants are a part of life with many types of commercial real estate, and they can limit the financial burden of slowly occupying a vacant building.
They can also offset expenses of utilities and taxes while providing an immediate source of income. The alternative is to start from scratch and advertise for new commercial tenants, which can be a time-consuming and expensive process.
Before finalizing the sale of a commercial property, there are some steps you can take to ensure that your relationship with the existing tenants will be successful.
Meet the Tenants: A tenant meeting will let you know whether the inherited tenant is someone with whom you can form a long-term relationship. Take the opportunity to discuss complaints and issues with the building or leased space. Each tenant in the building is unique and can give valuable insight into the overall operation of the tenanted building.
Know Your Rights: Lease agreements clearly define the rights of a landlord. Investors need to be aware of their limitations and expectations as a landlord before finalizing the sale. Some leases need the landlord to maintain certain aspects of the property. Maintenance of the structure and common areas are relatively common landlord responsibilities.
Be Aware of the Tenant’s Rights: The lease agreement should have clear language that indicates the rights and responsibilities of the tenant as well as the means available to tenants to remedy disputes. This may include rent rebates, court or arbitration, or ultimately termination of the lease. As a landlord, being aware of these processes can prevent costly disputes.
Review All Leases Before Closing the Sale: Every lease agreement is as unique as the tenant businesses that enter into them. Make sure you are comfortable with the terms of each lease and the tenants that hold the leases. Landlord and tenant rights should complement your business model. If you are uncomfortable with the terms of the lease or the tenants, then you may wish to reconsider the purchase of the commercial building.
Review Your Rights as the Buyer: Buyers have a unique opportunity to accept or refuse a tenant as a condition of the sale. It may be necessary to find ways to renegotiate lease agreements or refuse tenants as a condition of the sale. There are risks when exercising your rights as a buyer, but it may be the only way to make the purchase conform to your business model. Current landlords may be required to pay penalties to tenants to terminate or renegotiate their leases and this could affect your ability to negotiate the purchase price or finalize the sale.
Commercial Property Purchases Are Complex: The added complexity of reviewing commercial lease terms can make the process even more difficult. However, the potential for profit is greater when buying a building with an established stream of income. Buyers will want to review the lease terms with a lawyer or real estate professional before making their final decision to buy a commercial property.
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Here’s What to Do When You Inherit Tenants