New commercial landlords in the West Midlands are too soft on their tenants, and as a result, risk losing money on their investments, according to a survey by Black Country law firm George Green.
Cheryl Leyser, commercial property partner at George Green, says that the strong growth in the value of commercial property, compared to falling equity markets, has tempted many private individuals to invest in commercial property and become first-time landlords.
"Many of this growing number of amateur landlords are simply not tough enough when it comes to collecting the rent and dealing with tenant disputes. Our survey showed that the newest and smallest landlords were the ones which failed to act quickly enough and had lost income," says Ms Leyser, who is based in George Green's Cradley Heath offices.
In the poll of commercial property owners based throughout Birmingham and the Black Country, George Green found that all landlords reported at least one tenant which was in serious rent arrears. Owners of fewer than five properties, and those who had been landlords for less that 12 months, were least likely to take action to recover the money owed to them.
"A retail unit or small office block or industrial estate may appear to promise a good return to small investors, but new landlords are less aware of the possible problems tenants may cause them and the process and actions they need to take to ensure that they receive their rent on time," says Ms Leyser.
"We found that many small landlords are reluctant to take professional advice and, in order to keep costs low, do not use surveyors to manage their properties and collect the rent. Nor do they take advice from their lawyers as often as they should."
According to Ms Leyser, landlords should take firm and early action on any late payment of rent. "The easiest way to deal with consistent late payers is to invoke clauses in the lease which allow for penalty interest to be charged, usually at around three to five per cent over the base rate," she tells Business Property Review.
"However, we found that less than one in ten of those we surveyed had ever made this additional charge.
"New landlords appear either to regard this step as too much hassle, or want to avoid appearing as mean and uncaring to their tenant. However, some businesses tend to view the payment of their rent as a low priority, and we are all aware that he who shouts loudest, tends to get paid first."
According to Ms Leyser, consistent or extended late payment can be an early warning sign that a business is in trouble. She advises landlords that in order to ensure payment of the rent, they should send in bailiffs to distrain on the late payer's goods.
"The bailiffs effectively assert the landlord's rights to take certain goods in lieu of payment. The tenant cannot sell the distrained goods until the rent and bailiffs costs have been paid. If it is not forthcoming, then the goods are sold to cover the costs of the rent arrears and of the bailiffs," she says.
"This may seem a harsh action to the new landlord, but some established property companies actively seek an excuse to send in bailiffs against a tenant as soon as they acquire a new property. This sends a clear message to all tenants that if they do not pay their rent on time, swift and decisive action will be taken.
"If measures to extract payment fail, landlords will have to resort to the courts, which if the tenant disappears cannot guarantee that the debt will be recovered."
Another common mistake made by new landlords when looking to re-let units is to allow the tenant access to the property before exchanging and completing the contracts.
"New landlords are often so keen to receive income on an empty unit, which may be the difference between profit and loss, that they hand over they keys before completing negotiations, often so that the new tenant can store goods," Ms Leyser explains.
"However, once the tenant has access, then it becomes harder to get agreement on demands such as a rent guarantee deposit of three to six months worth of rent, as the landlord has lost its position of strength in the negotiations. Our advice to new landlords is to toughen up and to take early and decisive action to stop bad tenants costing them money."
To help new landlords, George Green has produced a free booklet, Tips for Prospective Commercial Landlords. To get a copy, call the firm's commercial property department on 01384 410 410, e-mail your request to firstname.lastname@example.org or visit the website.