PropertyNov 27 2019

The risks of commercial property investment

  • Identify the risks attached to investing in commercial property
  • Describe the ways in which an investor should seek legal advice
  • Identify the risks when it comes to buying an off-plan property
  • Identify the risks attached to investing in commercial property
  • Describe the ways in which an investor should seek legal advice
  • Identify the risks when it comes to buying an off-plan property
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Approx.30min
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CPD
Approx.30min
The risks of commercial property investment

To the investors who held completed leases with sub-leases in place with the sub-tenant company, all would have appeared well until 1 October 2018 when quarterly payments due from the sub-tenant company of the “additional rent”, were not paid. 

Following a further missed payment of that return in January 2019, the sub-tenant company was put into administration. 

Troubled scheme

In addition to the failure of the management company, investors were made aware by the administrator of three further unpalatable facts concerning the scheme:

  • That the management company had not generated enough income to pay all of the rent, service charge and additional rents under the sub-leases (although that may not have come as a surprise to investors given that two “additional rent” payments had been missed);
  • That the investors would have to fund payment of the rent and service charge payable under their own leases (and then seek to recover those payments from the administrators) to prevent those leases from being determined by their landlord;
  • That to enable the administrators, to remain in office and continue the administration, the investors would have to waive their right to receive “additional rent” on a daily basis until all other necessary expenses of the administration had been paid. Therefore, even to the extent that rents were being generated by occupational lettings, those rents would first be used to pay rent, service charge and administration expenses.

At best, those tenants 'lucky' enough to have completed their leases have some form of asset. 

Given that the company responsible for generating the return in their investment is in administration, the value of that asset must be of dubious value as the success of the scheme relied on the completion and letting of all of the rooms in the project, not just the room an investor owns. 

Those buyers who have exchanged contracts but who have not completed face a more uncertain future, they may lose their deposits or, even worse, be forced by whoever has the benefit of the agreements to grant those leases to complete the grant of leases which have drastically decreased in value.

In principle, such a scheme is not an unattractive investment if, and whenever, the scheme becomes viable the returns on let rooms might be expected to be between 5-7 per cent. 

Risks

However, it is essential that the investor (not unusually, in this case, a great number of the tenants were based overseas) understands the product, the process by which it would be realised and the risk associated with it. 

Some of that can be dealt with by in-depth research but a lot will fall to the investor's lawyer to deal with.

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