A landlord's main purpose in letting property is to secure an income stream, so the tenant's ability to pay the rent throughout the term is fundamental.
A landlord's main purpose in letting property is to secure an income stream, so the tenant's ability to pay the rent throughout the term is fundamental. Recent high-profile insolvencies, such as the collapse of Toys R Us and Maplin, show that even household names can suddenly see their fortunes change, so landlords must do their homework and put in place as much protection as possible. Yildiz Betez, commercial property lawyer with Thackray Williams explains.
Getting the right tenant
The nature of the tenant's business will be the first thing to consider. Your solicitor can tell you whether planning permission for the building is restricted to specific uses. They should also check if there is an obligation not to let the property to a business that would compete with neighbouring tenants. If you own a multi-let property you may also be liable to other tenants if a new business adversely affects theirs, for example by causing a nuisance. Getting the right mix of tenants is important and you are entitled to have a tenant mix policy but should make sure it is rational and that tenants know about it.
Check the tenant’s financial standing
Before you grant the lease, you should check that the tenant is solvent and appears able to meet its financial commitments to you. If you are letting to a company, Companies House records will show that the company exists, who its directors are, any loans secured against its assets and whether the company is subject to any insolvency proceedings. There can, however, be a time lag with information being posted to the Companies House website, so it is always a good idea to check as well with the Insolvency Service and the Gazette’s online search facility: https://www.thegazette.co.uk/.
If you are letting to an individual, you should do a credit and bankruptcy search and search the register of County Court and High Court judgments, to reveal anything registered against your tenant.
Guaranteeing the rent
If you think your proposed tenant may not have the financial strength to pay the rent and keep the property maintained, you should seek extra security. The two most common ways of doing this are by taking a rent deposit or asking the tenant to provide a guarantor. You could ask for both.
A rent deposit is an agreed sum of money that the tenant pays in advance, to be held in reserve and drawn on by the landlord if the tenant is in default. To avoid arguments later, your solicitor should draw up a rent deposit deed for you and your tenant to sign. This will set out:
- the size of the deposit;
- who will hold it and on what basis; and
- when the landlord can draw on the money.
- The advantage of a rent deposit is that the landlord will usually control the money. The disadvantage for the tenant is the need to tie up a lump sum for a period of time.
A lease guarantee is a promise by a third party to make sure that the tenant complies with its obligations under the lease. There is usually also an obligation to indemnify the landlord for any losses suffered as a result of a breach by the tenant. Guarantees can be given by individuals or companies. If the proposed tenant is a company with a stronger parent company, the guarantee would usually come from that business.
The advantage to the tenant of offering a guarantor is that there is no outlay in advance, and if they pay the rent and comply with their obligations under the lease the guarantee will never be called on. However, from the landlord’s point of view, there is a risk that a guarantee might be released, for example by them agreeing to vary the lease or allowing it to be assigned. For this reason, it is very important to take legal advice.