Commercial Leases - Choosing the right tenant

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In these times of economic uncertainty many businesses are struggling. Some of them may be finding it tough to pay their rent, and some may be going out of business entirely.

As a landlord, your tenant may be your sole stream of income. It is becoming increasingly important to ensure you have the right tenants, and the right protections, to avoid situations where that stream is suddenly switched off. Below are some ways landlords can avoid worst-case scenarios by doing their due diligence before a lease is even signed.

It is important to remember that this will be an ongoing relationship. Who are you dealing with? Have you met all the tenant’s owners?

Default

If a lessee stops paying rent (a ‘default’) it can result in a very time consuming and costly process to end the lease and remove the tenant. Default can leave landlords with lost income, hefty legal fees and an empty premise. Asking for financial records or a business plan can help you foresee any financial issues that may cause missed rent payments.

Useless Guarantees

The standard ADLS/REINZ lease provides a space for a personal guarantee, generally from the directors or shareholders of the tenant company. However, this will only work if you remember to fill out that part of the lease!

The guarantee means that if the tenant fails to meet its obligations the guarantors will be personally liable. However, this guarantee will be worthless if the guarantor also cannot fulfil the obligations. Many directors will have asset protection to keep their assets out of the reach of creditors, such as putting their assets into a Trust.

This makes it vital for landlords to not only ask the lessee but also the guarantors what assets and funding they have as a backup.

No Enforceable Security

When a suitable lessee is found, it is just as important to ensure the tenant’s obligations are secured by adequate security. As mentioned above, this will almost always be a personal guarantee from the lessee’s directors or shareholders. However, if the guarantors have a lack of assets alternative forms of security should be investigated. Alternative forms of security could include bonds, bank guarantees or PPSR financing statements.

Poor Choice of Tenant

It is important to remember that this will be an ongoing relationship. Who are you dealing with? Have you met all the tenant’s owners? Are their expectations for the lease and premises reasonable? Have they been a tenant before, if so, do they have a reference? The last thing you need is a nightmare, needy tenant taking up your time.

We know it is appealing to get a tenant in right away, but even in times where there may be an excess in supply of commercial premises, due diligence on prospective lessees and careful drafting of deeds of lease will always be worth it.

As always, if you have any questions about any property or business matter, whether as landlord or tenant, don’t hesitate to contact us.