Rent to Rent – Commercial Lease or Management Agreement?
Rent to Rent – Commercial Lease or Management Agreement?
Andy Haynes takes a look at some of the differences between different documents that can be used in Rent to Rent deals. If you have any questions on this note or require advice on any other property matter, please email andy@bradleyhayneslaw.co.uk or call 01905 900 919.
Property owners and property managers often sign documents purporting to be agreements under which the manager can let and manage the property. Often these documents are drafted in a way that does not work as intended and may not be viewed by courts as suitable for such a deal.
Regardless of how a document is titled, courts will make rulings and award damages based on the terms of the agreement. For this reason, it is very important that the parties understand the terms of their agreement and sign documents which give proper legal effect to their intended deal.
While we see many types of documents being used (such as ASTs and Company Lets, which are not really suitable for a Rent to Rent purpose). The two types of agreements we tend to provide our clients for this type of arrangement are leases and management agreements.
A common question our clients ask is whether they should enter into a lease or a management agreement and the answer very much depends on the specifics of the deal and we ask our clients to consider the following:
Mortgage Concerns
Entering into a lease is likely to be a breach of the property owner’s mortgage terms as it creates a legal interest in the property. A management agreement is likely to be a better option in this regard as it is a contract to manage the property on the owners behalf (in the same way as say a letting agent does) – but this will depend on the terms of the mortgage which should always be checked.
Statutory Protections
Both residential and commercial leases provide tenants with a number of statutory protections, such as security of tenure and certain rights of compensation. Under a management agreement, the manager would not be entitled to these statutory rights.
Repair Obligations
A more standard commercial lease would generally place onerous repair obligations on the tenant. In contrast, under management agreements landlords tend to retain more obligations. However, we can draft both management agreements and leases tailored to the needs of our clients, so if you would prefer a commercial lease but have concerns about the onerous obligations, please let us know and we can discuss our tailored, pro-tenant lease.
Investment
If significant investment is going into works at the property, a client may prefer the option of a lease if it is available as a Lease is likely to be harder to forfeit than the termination of a contract for services such as a management agreement.
VAT
If you are entering into a number of management agreements and anticipating a high turnover, then VAT may be a concern due to the fact that VAT will be payable by registered businesses with turnover exceeding the current the VAT threshold.
VAT will not generally be payable on leases unless the landlord has opted to tax, which is residential property is usually unlikely.
We always recommend our clients obtain advice from independent tax advisors on these points.
Underletting
While Management Agreements are generally drafted to provide wide rights allowing the Manager to let the property, leases often contain restrictive clauses in relation to underletting. You will want to be sure that the terms of your lease or management agreement permit underletting in the way you intend.
Please contact a member of our Commercial Property team if you would like assistance with a commercial lease or a management agreement. We will be happy to discuss your plans for your property and assist with drafting a bespoke document that works for your agreement.
If you have any questions on this note or require advice on any other property matter, please email andy@bradleyhayneslaw.co.uk or call 01905 900 919.