Due Diligence – Enquiries before Contract
What information do you need before buying a tenanted property?
It is essential to carry out thorough investigations (known as due diligence) before entering into a contract to buy any property, but particularly so where there is a tenant in occupation. Your solicitor should make all the necessary searches and enquiries and report to you on the results. Some of the most important issues are discussed below.
Check the title deeds
You will need to see a copy of the tenant’s lease and any supplemental documents such as a side letter, a rent deposit deed, a rent review memorandum and licences to assign, underlet and alter. Check that the documents reflect what you have been told by the seller or the seller’s agents. Does the lease plan show the extent of the tenant’s premises correctly? What is the current rent? Has the tenant obtained permission for all alterations? What are the landlord’s covenants and will you be able to perform them?
Payments, arrears and disputes
Make sure you review the tenant’s payment history. Are there any arrears? What correspondence has been sent and received? Has a rent deposit been drawn on? Has a guarantor been asked to pay any rent? Has the tenant disputed a service charge bill? The lease will be providing you with a source of income so make sure it is a reliable source.
If there are arrears of rent (or insurance rent or service charge), you need to understand how much is in arrears, how long it has been in arrears and how the seller proposes to deal with the arrears. One option is for the buyer to take the risk: the buyer pays any arrears to the seller and then has the right to sue the tenant for the arrears. This is the preferred option of most sellers. Another option is for the seller to take the risk and retain the right to sue for the arrears after completion.
Is the seller aware of any problems caused by the tenant?
Find out if there have been any complaints about the tenant’s behaviour, made either by the seller or by neighbouring occupiers or other third parties. Is the tenant using the premises in an unlawful way? Is the tenant’s behaviour causing a nuisance? Problems such as these will have consequences for you as landlord and you need to know about them so you can make an informed decision as to whether to proceed with your purchase.