Investing in commercial property can be a lucrative way to earn income. In fact, buying a commercial property and having business tenants as opposed to a residential property with individual tenants can yield a return of 6-12%, whereas residential properties usually earn just 1-4%.
It also generally provides a fairly steady cash flow due to businesses taking out longer leases than residential tenants. However, for this higher return, more work is required. Commercial Landlords must ensure high quality maintenance of common areas, usually a bigger initial investment than residential properties, and a higher risk due to more public visitors or customers to the units.
Before you rent a space to a client, you must first determine the “demise”. The demise is the area of the building dedicated for use by the tenant. Would they be using the entire building or just a unit? Are there common areas for the tenants to utilise? It’s important to lay this out in detail in case something is damaged and needs to be repaired or replaced in determining the responsible party (depending on where the item was located). Demising gives the tenant right over the property, but as landlord, you will still have the right to enter the premises for specific reasons, such as to perform repairs or inspect the area to make sure the tenant is living up to their end of the lease by taking care of it. Usually landlords are required to give an agreed upon notice before entering, except, of course, in the case of an emergency.
After this, the tenant would decide if the “fit out” of the premises was sufficient as is, or if they needed to fit it out according to their own specifications. They may have to build their own storefront, add outlets or utilities, build a kitchen, etc. If the tenant cannot remain on the premises during the fit out, it is common to work out some rent-free time with them, but this is entirely up to you and should be agreed upon before you lease to them.
When it comes to repair and maintenance, it’s important to clearly determine who’s responsible for each repair, such as electrical, plumbing, safety and mechanical so in the event that repairs are needed, there’s no denying responsibility. If it is clear to both parties, repairs will happen quickly and disagreements and lawsuits can be avoided.
Who needs Commercial Landlords Insurance?
Commercial Landlords Insurance is essential for all commercial property owners who rent commercial space to tenants. It protects owners of commercially tenanted units such as strata title office suites, strata title shops, and strata title factory units.
If you have business tenants, Commercial Landlords Insurance is an essential part of your Commercial Property Insurance policy. You may rent to professionals who will treat your property as their own, but unfortunately, this isn’t always the case. Damage can be caused to your property maliciously, or it could be an accident, but whatever the cause, it’s important that you have the right amount of coverage to get your property back to leasing quality again. You depend on your commercial property for income, so it’s important that you protect it completely.
It’s also essential for any commercial landlord to determine what the tenant’s and landlord’s respective insurance policies will cover. As a landlord, you will not insure the fixtures or content of the tenant’s unit, so they will have to do so. Landlords also may require that the tenant have builder’s insurance if they are making changes to the fit out, as well as public liability insurance to protect the landlord from lawsuits by their customers. These agreements should be built into the original lease. Most commercial landlords will require that their tenants have up-to-date insurance coverage for Public Liability to protect themselves against any legal liability due to personal injury or property damage caused by the tenant or their business, Glass coverage for plate glass replacement, and, depending on the type of business owned by the tenant, Industrial Special Risk which covers an insured for physical loss, destruction or damage to property belonging to the insured for which responsibility has been assumed. Sometimes Worker’s Compensation coverage is required as well.
What can be Included in a Commercial Landlords Insurance Policy?
As with most insurance policies, Commercial Landlords Insurance policies vary depending on the nature of the business of your tenants and can be customised to provide you with coverage to protect your individual property. Some of the covers it includes are:
- Commercial Property: This covers costs for repairing or replacing your property and your assets if they are damaged by fire, flood, storms, or even by your tenant.
- Loss of Rent: If a tenant has moved out and has left the space in need of repairs before you can rent it to the next tenant, Commercial Landlords Insurance will cover your loss of rent while the repairs are being done.
- Theft: Theft coverage protects you in the event that your fixtures, fittings, or any furnishings that you have on within the property are stolen.
- Glass: Plate glass is highly expensive to replace. This coverage will protect you from costs incurred as a result of accidental or deliberate breakage of your plate glass.
- Liability: With Liability coverage, you are covered for your legal liability that may occur from ownership of your property causing personal injury to a third party or property damage to property belonging to third parties.
- Machinery Breakdown: This covers you for any machinery that breaks down.
- Cross Liability: This coverage obliges the insurer to protect each insured as if a separate policy had been issued to each party.
- Notice of Cancellation: This requires the tenant’s insurance policy to state that the landlord be notified before the policy can be canceled.
- Increase in Premiums: This allows the landlord to recoup any increases in their insurance policy from the tenant due to actions of the tenant. Things that could cause the landlord’s insurance to go up are storage of hazardous materials or the use of a kitchen that could increase the risk of fire.
- Business Interruption: This covers rent if the unit cannot be rented due to fire, storm, etc. Sometimes, especially after a natural disaster, it could take a lot of time for the repairs to be able to be completed.
Responsibilities of a Commercial Landlord
Although some consider investing in commercial property as a “passive” form of income, commercial landlords still have many important responsibilities. Commercial Landlords must:
- Maintain the property to be safe and in leasable condition. It is also important that common areas remain clean and attractive to aid in attracting customers to your tenants’ units. Your tenants will benefit from a customer-enticing environment which in turn will benefit you as you won’t have a high turnover for tenant occupancy and ultimately, you can charge higher rent for properties that attract a lot of traffic.
- Adequately insure the property. Although it is the responsibility of the tenant to have insurance as well, you should work with them to make sure everything is protected and there are no gaps in coverage.
- Adhere to any lease conditions and legislation.
- Make sure all the appropriate safety certifications are in place, such as Fire.
Rights of a Commercial Landlord
As a landlord, you have your rights too. Your tenants have to agree to live up to certain expectations that include:
- Paying rent in a timely manner.
- Adhering to the lease conditions that were mutually agreed upon.
- You may hold a bank guarantee as security over the property in the event the tenant goes into default.
Finding new tenants to rent your property can be a time-consuming and costly process. You need to have the space cleaned, have any repairs or inspections completed, pay to advertise the space, take applications, check references, and perform interviews. This is why it’s so important to be highly selective when choosing a new tenant and to be up front and thorough with the responsibilities of each party in regards to the property and insurance coverage.
Commercial Landlords Insurance cover is important for the peace of mind of any business owner. Commercial Landlords are particularly vulnerable as they take on greater risk by assuming responsibility for the tenants in their property. You want to assume the best in your tenants, but unfortunately, you don’t always see the best. Commercial Landlords Insurance can provide comprehensive cover against unintentional and deliberate acts by them, as well as damage caused as a result of circumstances out of their control. For your commercial investment to be a profitable one, you must have the ability to generate profitable income by managing, mitigating and transferring risks. All of the care and preparation in the world won’t protect you from every circumstance; sometimes they’re just beyond our control. While it is possible to reduce the risk that you are exposed to, it is still vital to compliment your risk prevention strategies with a comprehensive insurance policy that can fully protect your commercial property, your assets, and your tenants.
If you are considering investing in commercial property or are already a commercial property owner, contact PSC Direct today to find out more about how the right Commercial Property Insurance and Commercial Landlords Insurance can protect you.