If you’re a commercial landlord, how can you make sure that a business downturn for your tenant doesn’t turn into a commercial nightmare for you?
The key points are:
- Talk to your tenant
- Talk to your lenders
- Consider the long-term – what maintains your property’s value?
The main issue for landlords will be their tenants’ failure to pay their rent, causing:
- An immediate and obvious cash-flow problem which could mean landlords are unable to service their own bank loans or mortgages
- A feeling that they have been taken advantage of and that the tenant may be using an aggressive tactic when they are not facing that much hardship
- Sympathy for their tenants and a desire to support them.
If your business tenant fails to pay rent, what should you do?
If you want to keep income from the building and you would prefer to keep your tenant, you need to negotiate a settlement which works for both of you, maintaining a healthy landlord and tenant relationship and setting a clear agreement as to how both will help each other through the crisis.
You should consider:
- An agreed rent free or holiday period of, perhaps, one or two quarters in return for a fixed higher rent the following year
- A rent free period in return for a longer lease being agreed, or perhaps break clauses being removed to give the landlord more certainty of income, once the crisis has passed
- A rent free period just to keep the tenant in occupation. Some properties are hard to let. In this market it is unclear whether, if your current tenant vacates, there will be a ready supply of new tenants looking to move in in the foreseeable future, so keeping the building occupied and another party responsible for the rates and security may be attractive.
Talk to your lenders if rent free periods are being granted, perhaps to negotiate a mortgage interest holiday. In these circumstances, all you are really losing is the margin between your bank debt and the rent, although for many landlords this could be their main source of income.
Can’t I just evict them?
While you may feel that your tenant is not suffering such grave hardship that they cannot afford the rent, you should think carefully before taking drastic action – if they have been a problem for years and you want the property back, perhaps to redevelop it, you might refuse to agree to any rent reduction or rent-free period, forcing them to forfeit the lease and enabling you to recover possession of the premises. This could, of course have a negative effect on your local reputation, but you may accept that when considering the balance of risk and reward.
My tenant is already in trouble, what should I do?
If the situation has gone beyond rent-free periods, you should consider:
- Using the rent deposit if available
- Liaising with lenders and the local council to explain your position; this would leave scope for a swift review of the situation
- Liaising with your tenant to see if you could come to a new arrangement offering greater security or a cross-guarantee.