With the current market conditions, it is vital that a commercial landlord knows what to look for in finding a good long term tenant to protect his investment. This article highlights the key issues to consider in finding and keeping a good tenant, and in hopefully avoiding a bad egg, as well as what you may do in the unfortunate event you do have a bad tenant.
Knowing your Tenant
You need to carry out checks and obtain as much financial information on the tenant at the outset and establish if the tenant is able to provide you with sufficient security and protection, before you enter into any form of lease, especially if you have not come across the tenant before. It is best to undertake credit checks and ask the tenant to provide a bank reference and accounts of the business for the last 3 years (if available). Try and find out about the tenant’s business, i.e. how long has the business been established, how many directors, how many branches etc.
If the tenant taking a lease is a newly formed company, ask the directors to provide a personal guarantee to the lease and guarantee the company’s obligations under the lease, so that you have the added security to recover unpaid rents and costs for the company’s failure to comply with obligations against the guarantor. If the tenant defaults and you are in a tough market struggling to find a new tenant, you may want the ability to oblige the guarantor to take over the term of the lease. It is common to have wording in commercial leases requiring a guarantor to enter into such an obligation if required by a landlord. However, it is always crucial to bear in mind that a guarantor is only good as his word and if he does not have sufficient assets or income, it will not be worthwhile taking action against him. Again, try and find out more information about the guarantor that is offering you security. Also consider asking other directors to guarantee for added protection.
It is common for a landlord to request a rent deposit (usually between 3-6 months rent) in advance on completion to hold in a separate deposit account so that you can make withdrawals in the event the tenant fails to pay rent or comply with other terms under the lease, e.g. repairing responsibilities. This option would provide you with control in the short term and security, especially if you have an individual taking a lease that for some reason cannot offer a guarantee. It also provides added protection on top of a guarantee if you require. However, if you find yourself dipping into the deposit, ask the tenant to top up. You or your agents should always continue to monitor.
Be Commercial and Realistic
Negotiate the terms of a lease commercially with the assistance of your agent. You do not want to be unreasonable and lose a good tenant to another landlord. Having a well drafted lease protecting your interests can save you time, money and litigation in the long run if the tenant does default. The lease should highlight each party’s obligations clearly and should provide you with the ability to re-enter the premises, charge interest on rent arrears and recover legal costs in event the tenant defaults. There is no point negotiating a lease with a tenant, which you know is to your advantage, but which you know the tenant is going to fail to perform. Be commercial and have realistic expectations of the tenant. If the tenant has little or no assets or income, it will not be worthwhile taking the tenant to court to recover rent arrears and costs at a later date.
Try and always retain control over the premises. A well drafted lease will require your written consent prior to the tenant altering the premises or transferring the lease to a third party. If you are unsure about the tenant performing long term obligations under the lease and want to reserve the opportunity of getting a better tenant, negotiate a landlord’s break clause, allowing you the opportunity to terminate the lease early. Once the lease is granted, monitor payments of rent and keep an eye on the premises. For example, if the tenant stops trading that is likely to give you an indication that the tenant may be struggling financially. Do not let the rent arrears build up before taking any action as if the tenant has little or no covenant strength, you are unlikely to have a good chance of recovering all the arrears and costs due to you.
Keeping a good Tenant
Once you have found a good tenant, you are likely to want to keep that tenant and want the security of regular payments of rent to protect your interest in the premises. Look after your tenant and deal with your obligations under the lease proactively. With market competition, you may need to be flexible when negotiating renewal terms of a lease and provide concessions to an attractive tenant, such as a rent free period, protected tenancy (giving the tenant an automatic right to renewal) etc. Your agent will be able to advise you on the terms of your negotiations with the tenant or the tenant’s agent taking into account the current market conditions.
Dealing with a bad Tenant
All landlords hope for good tenants. However, with the uncertainty of market conditions and funding you are unable to always guarantee having a good tenant. The landlords of a number of high street retailers have recently had bad experiences. It is best to take the above steps as far as you’re able to. However, if you end up with a tenant unable to pay its rent and comply with its obligations under the lease, it is best to act quickly and take legal advice rather than letting arrears build up. You will want to be careful of your actions and not waive your rights by taking the wrong course of action, for instance accepting rent when you know the tenant is in breach of some obligation under the lease. As already mentioned, you will want to be able to recover as much as you can at the early stages as there is no point taking an insolvent tenant to court. In the event of a tenant’s default, you do have options such as seizing the tenant’s goods to cover monies owed, issuing court proceedings, and other steps to apply pressure on the tenant to pay arrears, such as threatening to re-enter the premises and end the lease. It is a matter of establishing the best option for you, and acting quickly can often allow you to have a strong chance of recovering your losses before they spiral out of control.