How to Avoid Bad Tenants: Protection Advice for Commercial Landlords

The Chapman & Frazer team have a shedload of industry knowledge, we want to help you spot insolvent or bad tenants a mile away. The reality is – it’s largely up to you. So, we’ve collected five smart, precautionary steps you can take today so your property is leased by suitable and secure tenants tomorrow.

Future-proof the application process

Ensure you have a thorough application process for every new tenant. It seems obvious, but often this step is overlooked or rushed, especially when trying to promptly get payments rolling in. Not only is a robust screening process a smart way to find the best-suited tenant for your property in the short-term, but in the long-term it will save you time, stress, and money.

Firstly, we recommend determining if your applicant is leasing under a company entity? If the answer is yes, research that company to discover:

  1. If they are in administration, or have they ever been?
  2. Are you dealing with their official representative (who is the company director?)

We also suggest checking the financial position of the company, or sole trader. Do they own any assets? To get a more accurate picture, obtain a statement of assets and liabilities. Only then can you proceed with confidence that your own financial asset (the property) is in safe hands.

Always check previous references

Although you can never fully predict how an applicant will behave once they become your tenant, you can look at clues to get a seriously strong idea. Make the extra effort to personally check the previous (or current) references provided by an applicant’s past landlord or agent. Their rental history paints a helpful picture of what kind of tenant they have been – and what you can expect from them as your future tenant.

Tell-tale signs of a bad tenant include:

  • late rental or bill payments
  • lease breaches
  • previously issued with forms of notice
  • notable damage to a property
  • partial or no bond refund

If anything feels like a red flag, investigate the particulars before jumping to any solid conclusions, as things are not always black and white.

Secure a Bond or Bank Guarantee

This is the simplest way to claim some financial security in the event of a default. If a tenant defaults on their obligation, a security bond (or bank guarantee) provides some protection to you, easing your level of financial exposure.

There is no minimum or maximum security bond value applicable to commercial leasing – it’s often negotiable. Generally, for a quality tenant with a non-offensive or non noxious use of a commercial site, a bond equal to two (2) month’s rent is a good base value.

However, it’s best to negotiate the value by weighing up several risk factors including:

  • relative risk of the business or operator
  • risk of default
  • risk of damage

For example, you may want to enquire whether the potential tenant plans to house waste or chemicals on site. You should also confirm there are personal/director guarantees in place (common when a tenant leases premises under a company entity). If there are no guarantees… you want to protect yourself against any surprises. We would advise having the bond/bank guarantee varied to offset the relative risk.

Check for Personal / Director Guarantees

Think of this as an extra layer of financial security for you when leasing, in addition to a bond or bank guarantee. A personal or director’s guarantee means another individual (possibly the director of a company or related party), will personally guarantee the performance of the ‘tenant’ under the terms of the lease.

Put simply: if your tenant (i.e. a company) defaults and cannot meet its obligations, the guarantor is liable to meet those obligations. This can work advantageously, giving the directors of a company additional incentive to avoid simply ‘shutting shop’ if things get tough, as they would be personally liable.

If your tenant is a company in the process of being liquidated, the guarantor may also be forced into bankruptcy (depending on their financial position). This underlines the importance of setting up a bond or bank guarantee as a form of “liquid” financial security.

Prepare lease documentation professionally

This is both obvious and super important when it comes to protecting your property and yourself. Correctly preparing and executing a lease makes it an enforceable lease – a legal document. In our industry, we see all kinds of leases make their way across our desks: from single hand written pages setting out basic terms (please avoid this at all costs!), to simple commercial leases directly prepared by an owner (exercise with great caution!), to leases prepared by an agent (legal, within certain limitations), to robust leases prepared by solicitors.

In every instance, a human being sits at the foundation of the document. And humans are prone to make mistakes… even the most diligent ones! As the owner of a commercial property, you should take the time to ask questions and review information carefully. Ensure you’re satisfied that the document in front of you has been prepared thoroughly and reflects the negotiated terms.

“The lease” is the key document that will act as your armour if something goes wrong. As it offers such valuable protection, it’s 100% worth having your lease prepared by a professional. Seek out a solicitor with experience in commercial property matters, contact us here if you would like help.

Our insider advice is that shortcuts may seem appealing but often lead to unwelcome trouble when leasing your commercial premises. We could definitely share some horror stories created by poorly prepared leases, but they’re restricted to Halloween only.

If you are keen to avoid a sticky leasing situation, and would like some professional advice specific to your situation – our friendly team are happy to share our industry knowledge with you.