How to navigate selling a commercial property with sitting tenants

Understanding the value of a sitting tenant

Unlike residential properties, commercial premises are often sold with sitting tenants, which reflects the fact that most commercial properties are leased from a landlord rather than owner-occupied. 

From a seller’s perspective, having sitting tenants can be both an advantage and a challenge. While tenanted properties often appeal to investors seeking immediate income, they can also limit flexibility and narrow the pool of potential buyers.

When sitting tenants are an asset

Although selling a tenanted commercial investment property is not as straightforward as a vacant property, it can be a significant advantage in some cases. 

Having a sitting tenant allows investors to generate immediate rental income with a predictable yield and lower vacancy risk. That can significantly boost the property's valuation, particularly when the tenant is reliable, on a long lease and has a good payment history.

When sitting tenants can be a hindrance

However, selling a tenanted commercial investment property is not always a positive. It can restrict you to investment buyers, rather than developers or owner-occupiers. It may also lack investment appeal if you have a long-term tenant paying below the current market rent and the lease lacks provisions, such as rent review clauses, to increase it.

In this situation, you should review your tenancy agreements before listing the property, and carefully consider how to present it. 

Can you evict a sitting tenant when selling commercial property?

The short answer to that question is no, not without an appropriate cause in the lease. The sale of the property and the lease are separate legal arrangements. The lease continues during the sale and then transfers to the new owner, who assumes the landlord’s rights and obligations. 

If you want to sell the property with vacant possession, you will need to wait until the lease expires or exercise a break clause to terminate the lease early. If the lease is long-term and does not contain a break clause, you could explore whether the tenant is willing to surrender the lease. That will involve negotiation and usually a financial settlement to compensate the tenant. 

Read more: Lease surrender negotiations: when to pay and when to walk away

What lease information should you provide to potential buyers? 

Transparency is key when selling a commercial property with sitting tenants. Your sales particulars should clearly state that the property is tenanted, along with the rent and remaining lease term. Doing so can make the property more attractive to certain buyers and avoid wasted time.

The buyer’s solicitor will carry out standard pre-contract enquiries, including questions about any ongoing commercial tenancies. You’ll need to provide the following details:

• Tenant’s name and contact details

• Rent amount and any deposit held

• Rent review provisions

• Service charge arrangements

• Any disputes or ongoing issues

Answering these questions honestly will build buyer confidence and help you avoid legal complications or delays in the sale process.

Seven steps to selling a commercial property with sitting tenants

1. Review the lease

Managing tenant rights during a commercial property disposal will help you avoid complications and protect the value of the sale. 

You need a thorough understanding of the lease to ensure you comply with its terms and identify any provisions that could impact your tenants. Prospective buyers will inherit the rights and obligations under the lease, so you also need to be aware of any clauses that could prevent them from proceeding with the purchase. 

The key clauses to be aware of include:

• Pre-emption rights - These are rare, but some leases give the tenant first refusal when a property is sold. If these rights are present, the landlord must either offer the property to the tenant on the same terms as a third-party offer or negotiate to discharge the covenant before completing the sale.

• Notice requirements - Some leases require you to notify tenants of an impending sale or meet certain conditions before you can transfer ownership to the buyer.

• The right to renew - If a lease is governed by the Landlord and Tenant Act 1954, the tenant may have a statutory right to renew the lease at the end of its term. That can affect potential buyers, particularly if they want to redevelop the property or explore a change of use.

2. Time the sale strategically

Selling a tenanted commercial investment property usually requires more considered timing than if it were vacant. Properties tend to command higher prices when tenants have recently signed new leases or when recent rent reviews have boosted income. 

On the other hand, if a major tenant’s lease is nearing expiry, the investment is likely to be less attractive, which could lead to a lower sale price. 

3. Consider who you’re selling to 

Commercial properties with sitting tenants generally attract specific types of buyers. Developers and owner-occupiers may see a sitting tenant as a potential obstacle and only show interest if the lease is short-term or includes break clauses. For investors, however, a reliable tenant provides immediate income and reduces the risk of prolonged vacancies.

Understanding your likely audience will help you shape your sales strategy, from how you market the property and present the lease terms to the valuation method. 

4. Communicate clearly with your tenants

Legally, landlords are not usually required to inform tenants when they put a commercial property on the market, although you must notify them in writing once you complete the sale. 

However, being transparent about your intention to sell, giving tenants plenty of notice and addressing any questions promptly can reduce uncertainty, prevent tension and make viewings and surveys a lot easier. It can also help you maintain a good relationship with the tenant and keep the sale running smoothly from start to finish.

5. Resolve any outstanding disputes or liabilities 

You should settle any unresolved disputes, outstanding repair obligations or rent arrears with the tenant before marketing the property. That will help to remove any legal complications that could otherwise deter buyers or leave you exposed to legal claims after the sale is completed. 

6. Adhere to the principle of ‘quiet enjoyment’ 

When selling a tenanted commercial investment property, you must respect the tenant’s right to the ‘quiet enjoyment’ of their premises, which is a fundamental right under the terms of a commercial lease. 

That means you should take steps to ensure that parts of the sales process, such as viewings, inspections and surveys, do not disrupt the tenant’s operations. You can do that by providing the required notices as set out in the lease, coordinating with the tenant and conducting viewings outside of normal operating hours whenever possible. 

7. Work with commercial property sale specialists

Selling a commercial property with tenants benefits from the expertise of professionals with experience in investment transactions. They will help you manage the tenant’s rights during the commercial property disposal and ensure you meet your legal obligations.  

They will provide valuable insights into market conditions, pricing strategies and buyer expectations, and they will know how to structure the transaction to maximise value while presenting rental income, yield and lease structures in ways that appeal to investment buyers. 

Selling a tenanted commercial property with BTG Eddisons

At BTG Eddisons, our nationwide teams of commercial property agents operate across a wide range of sectors. They have vast experience selling properties with sitting tenants and managing tenant rights during commercial property disposals, and can guide you through the process while protecting your interests at every stage.

Get in touch to find out more about selling or letting a property with BTG Eddisons, complete our enquiry form or arrange a meeting with an expert from our nearest office.