RISKS FOR COMMERCIAL LEASE LANDLORDS

Posted by Dash Kovalenko in News

Commercial property ownership and leasing can be a lucrative investment, but it has risks.

Landlords of commercial leases face various challenges that can affect their financial return and property value.

Therefore, before anyone considers becoming a landlord, they need to be aware of and understand the risks so they can implement effective management strategies to overcome those risks.

 

  1. Tenant Default (including Bankruptcy)

One of the most significant risks for commercial landlords is tenant default. If a tenant fails to pay rent or breaches the terms of the lease agreement, the landlord faces reduced income and potential legal costs associated with proceedings to evict the tenant. In more severe cases, for example, if a tenant goes bankrupt, landlords may find it difficult to recover anything. Conducting thorough background checks and requiring security deposits and personal guarantees can help mitigate this risk.

  1. Vacancy and Rental Income Loss

The property market can be unpredictable. Economic downturns, changes in business trends, or even shifts in local demographics can lead to higher vacancy rates. An extended period without tenants can reduce a landlord’s cash flow, impacting their ability to cover mortgage payments (if any) as well as any other outgoing costs. To minimise vacancy risks, landlords should consider flexible lease terms or tenant incentives, such as reduced rent for the initial months of leasing, ensuring they attract and retain tenants.

  1. Maintenance and Repair Costs

As property owners, landlords are responsible for the commercial property's maintenance and repairs. Over time, these costs can accumulate, particularly for older buildings requiring significant upgrades (seismic or otherwise) or renovations to remain competitive in the market. Failure to address maintenance issues promptly can lead to tenant dissatisfaction, reduced rental rates, or even legal liability. Landlords should budget for ongoing maintenance and conduct regular property inspections to identify and address potential issues before they escalate.

  1. Regulatory Compliance and Legal Liabilities

Commercial landlords must navigate various regulations and compliance requirements, including zoning laws, building codes, health and safety regulations, and environmental standards. Non-compliance can result in legal issues, fines, or costly remediation efforts. Landlords should remain informed about relevant laws and consider consulting with legal professionals specialising in real estate to ensure compliance and limit liability.

While being a commercial lease landlord can be rewarding, it comes with inherent risks that require careful management and planning. By understanding the potential challenges above, landlords can develop strategies to mitigate these risks. A well-informed approach to managing a commercial lease can lead to lasting success and profitability in the real estate market.

If you would like more information regarding the above or have any questions, please contact us.

Dasha Kovalenko | Senior Associate | Dasha.Kovalenko@shieffangland.co.nz

This paper gives a general overview of the topics covered and is not intended to be relied upon as legal advice.