Commercial property – beware of pitfalls

With the uncertainty of Brexit looming ever closer, it certainly makes sense for farmers to be looking to maximise their income streams and utilising all their assets to the full. One seemingly simple diversification is to rent under utilised buildings to a commercial occupier.

The first thing to bear in mind is that many small rural businesses can struggle financially, often through no fault of their own with problems being caused by the health or other personal problems of key individuals. Therefore, it is always advisable to seek a guarantor for the rent as even the most diligent financial research may not spot the future problem.

Then it is always advisable to establish exactly what the business will do in order to identify any possible problems, such as anti-social vehicle movements, smell or noise. Such an exercise should reveal if the business is in any way involved in recycling or stockpiling material. Such businesses should be treated with extreme caution as there are many cases of landlords being left with piles of waste, which can be very expensive to clear.

There should always be a written lease entered into by both parties. Under the Landlord and Tenant Act 1954 tenants have an automatic right to renew when the initial rental period comes to an end. This can be excluded from the lease but must be done prior to entering into the lease. You may very well not wish to provide your tenant with security of tenure.

It is likely that you will require planning consent to switch a building from agricultural use to commercial use. However, there are various General Permitted Development rights in this regard, so it is not normally too much of a barrier. But beware that if you enter a commercial lease prior to the change being approved you could lose your permitted rights. If time is of the essence, you could enter an Agreement to Lease while the planning situation is determined. Bear in mind that if a building was constructed under an agricultural Permitted Development right, then it must remain in agricultural use for at least 10 years.

The lease should make clear who is responsible for meeting planning obligations. It should set out who is responsible for repairs, insurance, rates and other charges during the life of the tenancy. Nowadays, it is very easy to make a full photographic schedule of condition at the commencement of the tenancy, which is always useful later when dealing with tenant improvements and dilapidations.

I did mention rates in the paragraph above. Whilst agricultural buildings are exempt from business rates, it is very likely that rates will be applicable if the use is changed to commercial. The tenant should be liable for the rates, but if the building falls empty, then the landlord will be liable for empty property rates although there are exemptions available.

So while converting buildings to commercial use is a potential diversification, care, often in the form of professional advice, does need to be taken at the outset to avoid the pitfalls.

If you would like any further information or to discuss any rural related matter, please contact Tom Wills, head of the agriculture & estates department at Sintons.

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