Security for Commercial Property Landlords – Why do you need it?
As a landlord, you can sometimes feel in a precarious position when renting out your property. You are trusting the tenant to pay the rent, abide by their repairing obligations and comply with any agreements relating to the use of the property. We want to ensure that you are best protected in the event that things do not go as smoothly as envisaged, so we have summarised below some of the key ways to protect your position as a landlord.
Obtaining a rent deposit
A Rent Deposit is a sum of money provided by the tenant to the landlord as security for payment of the rent and performance of the tenant’s covenants in the lease.
One of the main advantages in obtaining a Rent Deposit is that you will be holding a specific sum of money usually for the term of the lease. This provides peace of mind that funds are in a designated account, which can be called upon, if necessary. Also, where the Rent Deposit is provided for within a separate Rent Deposit Deed, specific provisions can be included so that the Rent Deposit sum will be forfeited to the landlord in the event of the tenant’s insolvency. The tenant also has a continuing obligation to reimburse the Rent Deposit if sums are deducted in order that the Deposit is maintained for the whole lease term.
On the other hand, some tenants are hesitant to agree to a Rent Deposit as this entails a lump sum up front cost for them, which if they are starting out they just may not have and may argue will cause cash flow issues for them.
Obtaining a personal guarantee
A personal guarantee is generally, a contractual promise made by an individual or individuals to the landlord to repay the liabilities of the tenant, for example if the tenant fails to pay rent or breaches any of their obligations.
A personal guarantee can be a useful tool where the tenant is a limited company. This is because directors and shareholders of a limited company are not usually personally responsible for the liabilities of the company, as the limited company is a separate legal entity in itself. A personal guarantee creates a separate contract between the guarantor, for example a director or shareholder of the company and the landlord in relation to the liabilities of the company. So, a personal guarantee can be used to circumvent some of the concerns with contracting with a limited company.
However, a disadvantage is the unwillingness of some tenants to enter into a personal guarantee on the basis that it could have serious consequences on their own finances and personal assets. Yet, from a landlord’s perspective, once the tenant’s personal finances are at risk, the tenant will have a vested interest in ensuring compliance with its obligations within the lease. There is also a risk that the personal guarantor has little or no assets and is therefore not worth pursuing. A landlord should therefore consider the financial covenant strength of anyone providing a personal guarantee.
This note contains some initial points for consideration, so if you have any questions regarding entering into a lease, or would like further information in relation to obtaining or negotiating security as a landlord, please contact our experienced Commercial Property Team.
