Tenant instability: Minimising the impact on Landlords
In light of the worrying trends in the retail market, real estate trainee Rachel Hetherington considers how landlords can minimise the impact of tenant’s financial instability on landlord’s rental income.
This year has seen House of Fraser, Toys “R” Us”, New Look, Mothercare and numerous other retailers experience financial difficulties and resort to Company Voluntary Arrangements (“CVAs”) to, amongst other things, manage debts. Many CVAs focus on closing non-profiting stores and renegotiating lease terms on low profiting stores, to reduce costs and improve financial stability. Such arrangements often disproportionately impact landlords. Even HMV is in administration (again).
As a landlord, you want certainty of income. Therefore, in increasingly rough retail seas where insolvency is becoming more common, it is more important than ever that you know your tenant, attempt to foresee potential risks to the receipt of rent, and guard against rent arrears, forced renegotiation of lease terms or lease termination.
Know your Tenant
As a landlord it is important to keep abreast of any changes in the tenant’s conduct which could suggest that the tenant may default in the future.
Such indicators might include:
- difficulties paying debts;
- rent arrears;
- increasingly delayed rent payments;
- payments made by third parties;
- business re-structuring;
- reduction in profits;
- other store closures; or
- worrying trends in the market in which your tenant operates.
Such information can be obtained from keeping your own internal records up to date (for example dates of rent payments), setting up company house alerts, analysing the company’s accounts and, if available, annual reports, reading newspaper articles, word-of-mouth etc.
Such indicators could help you to identify early on a risk of default later down the line, help you to minimise the impact and take remedial action.
Guard against Rent Arrears
If you have identified some worrying changes and perceive financial instability and so a potential default in the future, there are various options to guard against rent arrears, for example:
– minimise any outstanding debts by more actively collecting payment
– draw-down any available rent deposit to pay any arrears. Is the “rainy day” already here?
– recover rent arrears from any guarantors or former tenants with liability
– if there is a sub-lease, serve a notice to seek payment direct from the sub-tenant.
– consider making a money claim for any rent arrears
– consider taking back possession and forfeiture of the lease and re-letting the property to a more financially stable tenant
– consider taking control of the tenant’s goods and selling to recover the outstanding rent.
– consider working with your tenants to find acceptable changes to the terms of the lease (such as reducing rent, altering rent-payment dates or relaxing certain assignment or sub-letting provisions) and formalising such arrangements, to avoid the risk of insolvency and default later down the line.
The options available are dependent upon your given situation and the terms of the lease.
In an increasingly rocky retail market, it is important that if you become concerned about the financial health of a current tenant that you act promptly, analyse the various options available and act accordingly to avoid your hand being forced into a lease renegotiation or the risk of termination through a CVA. Please see our detailed article on CVAs below.
If you are concerned about the financial position of one or more of your tenants or if you would like any further information on the issues highlighted then please contact our Real Estate Team.