What role do lease agreements play in the purchase of a commercial property?

The contractual foundation: analysis and facts

Why does the contract dictate the purchase price?

Before you buy a commercial property, you need to understand how the market works. Investors value properties based on their income potential. This means: How much money is left over at the end of the year? The commercial property lease defines this cash flow. The lease term, rent, and ancillary cost regulations are the variables that determine your return on investment.

A commercial lease agreement with a solvent tenant (e.g., a large retail chain) and a fixed term of 10 years makes the property valuable and bankable. A short-term contract with a struggling start-up, on the other hand, increases your risk and drives down the price.

The principle: "Purchase does not break lease"

This is the most important rule in Swiss tenancy law (Art. 261 OR) that you need to know. When you acquire a property, you automatically assume the existing commercial lease . You take over all the rights and obligations of the previous owner exactly as they were.

This is both a blessing and a curse. If you've inherited a commercial property lease that stipulates a rent far below market value and guarantees the tenant two five-year extension options, your hands are tied. You can't simply raise the rent. Therefore, due diligence (risk assessment) of the commercial property lease before purchase is the most crucial step.

Which clauses should you pay particular attention to?

A professional commercial lease agreement is complex. There are three pillars that determine whether the contract is attractive for you as a buyer:

• Lease term and options: Investors value planning security. Ideally, a commercial property lease should run for several more years. Beware of "true options": These allow the tenant to unilaterally extend the contract. For you, this means: If the tenant wants to stay, you have to let them. If they want to leave, you'll have a vacancy.
• Indexation (inflation protection): Unlike residential rents, commercial rents are often linked to the national consumer price index. A good commercial lease agreement allows you to adjust the rent annually for inflation (usually by 100%). Without this clause, you effectively lose money every year.
• Additional costs and structural issues: Who pays if the elevator breaks down or the ventilation system needs maintenance? A strong commercial lease agreement largely shifts operating costs to the tenant. If the clauses are vague, you'll be stuck with the costs, reducing your net return.

A numerical example illustrating its importance

Imagine you buy an office building. The existing commercial lease has two years remaining. Scenario A: The tenant moves out. You have six months of vacancy and need to spend 100,000 Swiss francs on renovations to find a new tenant. Scenario B: The commercial lease has seven years remaining. You have no renovation costs and guaranteed income. The difference in the purchase price between these scenarios can easily be 15 to 20 percent.

Tips for reviewing rental agreements

Purchasing a commercial property requires meticulous attention to detail. Here are strategies for reviewing a commercial lease agreement :

• Check creditworthiness: A long-term commercial lease is worthless if the tenant goes bankrupt. Ask to see debt collection records and balance sheets.
• Ensure the security deposit is paid: In the commercial sector, security deposits of 6 to 12 months' rent are common. Check whether this amount is stipulated in the commercial lease agreement and has actually been paid.
• VAT option: Check whether the lease agreement for commercial property includes an option for VAT. This allows you to claim input tax credits on renovations. However, be aware that not every tenant (e.g., doctors) can opt for VAT.

Conclusion

The question "Is the property worth the money?" can only be answered by looking at the commercial property lease . It is the foundation of the property's value. Buying blindly carries risks that can lead to financial ruin. A good commercial property lease protects against inflation, clearly defines maintenance costs, and guarantees long-term income.

Never underestimate the binding effect of the phrase "purchase does not break lease." A thorough analysis of the contracts protects you from unpleasant surprises and secures your return. Only those who understand the fine print can successfully invest in commercial real estate.

If you are looking for support in analyzing and managing your commercial properties, Loft will help you make the process efficient and secure.

Glossary

• Commercial lease agreement: A contractual agreement regarding the use of premises for business purposes. It is subject to less stringent protective regulations than residential lease agreements.
• Indexation: Clause in the lease agreement for commercial real estate that allows for an adjustment of the rent to inflation (national consumer price index).
• Sale does not break lease: Legal principle (Art. 261 OR) according to which the buyer of a property necessarily assumes all existing leases.
• Due Diligence: Careful risk assessment before purchase, in which the lease agreement for commercial real estate is analyzed in terms of terms and cost distribution.