always under the microscope…..
Why is the covenant of a tenant the only one under scrutiny in any commercial deal?…..
The world has become more risk averse as a rule and commercial property transactions have followed suit. Never is a tenants covenant more under the microscope than in today’s market.
Whether it’s a short term sub-let or a new ten year lease, tenants are having to jump through more hoops than ever to provide evidence of their standing. Even if a tenant has been trading for 3 years plus and meets or indeed exceeds the normal net profits test they are often being asked to provide hefty rent deposits/parent company guarantees as additional surety. This additional barrier to entry has played into the hands of serviced office landlords who often require no more than 1 months deposit to be held for the duration of a licence, regardless of trading history.
Most tenants oblige but not often have I been asked by them to verify the standing or covenant of the leasing party!
Doesn’t this seem odd?. Landlords or lessors go largely unchecked, tenants often blindly accept the validity of the party they are about to hand over 3 months rent in advance, 12 months rent deposit to.
Thankfully in the large majority of cases landlords are legitimate and the tenants exposure to risk is low but there are those cases where lessors or landlords fail as businesses, just like the tenants they so heavily scrutinise, and who is left exposed?, always the tenant.
As consultants we always ask the question on behalf of our clients “why is someone wanting to lease their space?”, it is not always that they have outgrown it and business is booming. Some are downsizing and are failing as businesses. Do you as a tenant want exposure to a sinking ship especially as you have given over often large sums (sometimes irrecoverable) that could be better served growing your businesses.
This is another example of how the power in any property transaction is held by the landlords and the relationship between tenant and lessor remains unequal.
To be clear most landlords provide secure high grade offices/spaces fit for purpose for their tenant customers to grow their businesses but as ever it’s those that take advantage of this one sided relationship that need to be scrutinised and challenged.
Never has the phrase “buyer beware” been more appropriate in property. The tenant should stand tall and not be afraid to challenge the landlords they are leasing space from, often the relationship is long and setting out your stall early results in a mutually beneficial one.