For commercial property landlords, ensuring that they have the right tenants in their property is essential. Getting new tenants can be rather daunting, to choose the right people that landlords can be confident will look after their property, pay rent properly and on time, and leave when the lease is finished. The best way to do this is to vet a potential commercial tenant before you sign a lease with them.
Why is Vetting Important for Commercial Property Landlords?
Commercial property landlords who are looking to rent out their commercial properties can often feel nervous about finding the right tenants for them. Ensuring that their property is protected and that they receive their rental payments when they are needed is essential. By properly vetting potential tenants, landlords can do everything that they can to ensure that they can lease the commercial property with confidence and trust. This is also essential for the landlord/tenant relationship.
With good vetting, landlords can help to ensure that their investment is protected, their physical commercial property is protected, and the best commercial tenants can be found.
In this article, we are going to take a look at the best ways that commercial landlords can vet commercial tenants, protecting both the property itself and their financial investment.
What is Covenant Strength?
For landlords looking to rent a commercial property to new tenants, covenant strength is a key element. The term ‘covenant strength’ refers to the commercial tenant’s ability to meet the payments that are stipulated in the rental contract, as well as maintain the property at the required standards.
In this case, the ‘covenants’ refer to the obligations that the tenant and landlord have to each other when it comes to the commercial lease of a property.
When tenants have a stronger covenant strength, landlords can be more confident of them being able to pay their rent and keep the commercial property in good condition, as per the stipulations in the rental contract. Stronger tenants would typically be a well-established, profitable business, and therefore be more desirable as a tenant.
A business’s covenant strength is judged as a comparison with other businesses.
Businesses with a strong covenant can prove that they can and have successfully paid rent and other bills for a long time. They can show that the business is in good financial shape, with a good reputation.
How Can a Landlord Assess a Potential Tenant’s Covenant Strength?
It is important for landlords to remember that different commercial properties will require different levels of covenant strength. A small office or retail unit, for example, would more likely be rented out by start-ups or small businesses (typically with a lower covenant strength), whereas a large office space over several floors in the centre of a city would typically be looking for a business with a higher covenant strength.
To assess the potential tenant’s covenant strength, landlords should be looking at aspects such as:
- Credit references
- Landlord references
- Financial reporting
- Financial asset checks
- Inspection of current commercial property
For larger and higher rental value commercial units, landlords are recommended to go through these documents thoroughly. Larger businesses might want to speak to agencies to determine the business’s covenant strength.
Landlords of smaller commercial properties – such as many of those that we list here at Boxpod, will not require too much work and can often do this themselves.
How Can I Vet Potential Commercial Tenants?
If you are a commercial landlord, it is essential that you properly vet your prospective tenants before you sign a lease agreement with them. However, paying an agency can be expensive, and, in most cases – especially for smaller commercial units – unnecessary. Landlords can save money by finding tenants without using an agent, and carrying out the vetting themselves.
The process of vetting should include looking at similar elements to the covenant strength checks. With the information that is gained through these checks, a landlord can go on to decide who the best tenant is for them and their commercial property – whether it is a warehouse, office, retail unit, or workshop.
- Look at the business’s history – take a look at how long the company has been in operation, and how long it has been profitable. You should also try to find out any details of legal disputes (especially if they relate to property), or any other details in the past.
- Get the business’s credit report – a credit report will tell you about the business’s history in payment management and should highlight any issues with credit that they have had. Landlords should look for a business with a good credit score – the lower the score, the higher the financial risk it is.
Several companies can be used to carry out credit checks on potential commercial property tenants, and these can be found online. It is carried out using data that is publicly available, so technically no permission is needed from the business, but we recommend that you advise them, for the sake of a good relationship in the future. Alternatively, businesses can request their own credit check for free, so potential landlords could also request this directly from them.
- Check financial documents – you may want to ask the business to see other financial documents such as previous bank and cash flow statements to get a better picture of how able to pay they are.
- Carry out a tenant reference check – ask the potential tenant for landlord references of commercial properties that they have rented in the past. Get in touch with former or current landlords and ask them about whether they have paid on time, whether they would rent to them again, and how the condition of the property was when they left. Landlords can also consider visiting the business’s current commercial property to check its condition.
Many of the commercial properties to rent here at Boxpod are smaller units, and can often be rented to start-ups, new, or small businesses. In some of these, it can be tricky to get a financial or credit history – due to the fact that they have not been around for long.
For landlords that are in this situation, it can be useful to look at elements such as the people behind the business – what kind of financial situation are they in – or have been in the past, where have they previously worked, and what is the company structure, for example.
Landlords have the freedom to decide who they wish to rent their commercial property to. Although the 2010 Equality Act is in place – an act designed to prevent discrimination – rejecting a business due to their financial situation is not uncommon and perfectly within a landlord’s rights.
Can a Landlord Request Additional Guarantees from Potential Tenants?
If it is the case that a commercial landlord wants to rent their property out to a business without strong covenant, perhaps if it is a new business or has a poor credit rating, they can also request additional guarantees from their tenants.
These could be something like personal guarantees or rent deposit deeds. These allow landlords to rent to businesses who, for whatever reason, might not have the strong covenant that bigger companies do, whilst keeping peace of mind that their financial needs will be met.
What are the Tenant Vetting Red Flags?
Of course, every commercial landlord has the right to choose which tenants they lease their property to. However, there are some red flags to look out for.
Of course, the vetting described above should play a major part of the process, but there are also other signs of a potential problem tenant that landlords can look out for.
- Evasive or incomplete responses to any information that is requested
- Unusual and unexplained financial documents
- A business structure that was difficult to understand
- Pressure to move quickly, especially when it comes to vetting and due diligence
- Any previous legal disputes, especially with landlords
Final Thoughts
The relationship between a commercial landlord and tenant is one, primarily, of trust. And it is, therefore, essential that both parties go into the agreement confident in each other. For landlords, vetting is a great place to start.
Here at Boxpod, we understand how expensive it can be for landlords to find and pay for tenants for their commercial properties. That’s why you can list your property with us for as little as £12/month, with no agent’s fees.
If you are a business looking for a commercial property to rent, why not take a look at our range of properties here?
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