Beginner’s guide to buying a commercial property for investment - Part 4: maintenance costs, refurbishments and outgoings of commercial property investment
Commercial property maintenance costs
Typically, the maintenance costs are not covered by the owner the allocation of responsibility for the particular repair or maintenance action will be prescribed in the Leasing Agreement. The tenant will generally be required to keep the premises up to the relevant health and safety standards and is responsible for any refurbishments which will usually require approval by the landlord, which again should be specified in the Leasing Agreement. However, if the commercial property that you are considering purchasing is rundown and will require costly refurbishments it is likely to deter any potential tenants from leasing it as they are usually aware of how costly it will be for them and thus select a property that is already in good condition. Furthermore, especially in areas where there is a high vacancy rate, if the lease is coming to an end the owner may decide to undertake refurbishments in an attempt to retain the tenant rather than have a vacant property.
Make a detailed condition report of the property before entering into the lease. The condition report should document the condition of the premises at the time the tenant takes control and before the tenant makes any changes. Also just like a residential property, take date-stamped photographs for yourself and the tenant for a visual record of the condition in case a dispute arises and photos are needed as evidence.
Many premises will need fixtures, fittings and services installed. Who is responsible for the fit-out costs will be determined by negotiation and documented in the Lease Agreement between the tenant and the landlord. As the owner you may also want to specify which tradespeople can undertake any refurbishment work to ensure that the work conducted to your asset is of high quality. Some commercial property landlords (especially shop or shopping centre owners) will also require that the tenant renovates the premises on a regular basis (as you agree in the lease agreement) to ensure that the property remains in good condition and can continue to attract quality customers and tenants into the future.
Note: refurbish or refitting requirements in the lease agreement will be void unless the relevant clauses provides sufficient detail to indicate its nature, extent and the timing or any refit or refurbishment. Furthermore, the cost that the tenant is required to contribute towards the cost of any of the landlord’s finishes, fixtures, fittings, equipment or services can be voided unless the landlord notifies the tenant of these costs in the Disclosure Statement that is given to the tenant.
Outgoings such as council rates, insurance, repairs and maintenance are typically paid by the tenant in accordance with the Lease Agreement. This is unlike a residential investment property where these costs are borne by the owner.
Find the full guide here: Commercial property buyers - guide for investors
Back to part 3 - Lease duration, quality of tenants and purchase costs of commercial property
Continue to part 5 - Lease agreements, permissible activities and use of common areas
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