What the Landlord Wants in a Tenant
First remember that the landlord is a business
The landlord makes his profit from renting out properties at a profit once all his costs are taken into consideration. Elements of business risk within this scenario are made up of the finance that he has to manage when purchasing the property, the cash flow from the lease rents, and also any maintenance costs usually relating to the building or with regard to grounds maintenance and general access areas.
Full repairing and insuring leases
To some extent the maintenance costs should, in theory, be all paid for, as most leases today are what is known as FRI leases (Full Repairing and Insuring). This means that the properties should, therefore, be given back in the condition that it was rented out in. However, this is not often the case.
The business risk of a new business tenant
A landlord who takes on a start up business takes on a considerable risk. For the entrepreneur setting up the business this is a new and exciting time, where as to some extent to the landlord it is just another tenant. However the landlord will have seen warning signal when he has identified the business as being a new start up business without any trade records or credit rating. Therefore for a Landlord a new start up business is riskier.
Why would a landlord take on a new business tenant?
In some of the harder to rent properties in the less desirable locations the start up business may be one of the markets for property that the landlord has to rent. The landlord may well have bought the investment properties knowing that this was the target market and feeling that this was an acceptable risk.
The landlord may have what he considers to be primary property (it can be primary, secondary or tertiary, please see our article on the different properties) and yet be approached by a new business tenant. He would therefore only be worth him taking on a start up business if there was considerable financial gain and risks were minimised.
The ideal scenario for a landlord is of course an established business, with a good credit rating wanting a long-term rent but these customers will often want good primary sites for their business or be in the market for freehold properties or alternatively be very demanding tenants. So, probably, the ideal market is somewhere in between a new start up business and the established business with a good credit rating.
Playing snap with property rentals
The landlord is forever trying to match tenants with properties (many people think it is the other way around) and he will always be after the best tenant for that property, which is often known as the covenant. To the landlord the best tenant is one who will pay the rent and carry out the repairs to the standards within the lease or above and when they do eventually leave carrying out the work within the Dilapidations that is served to the standard set out within the lease or better, followed of course by an immediate re-rental of the property without any voids.
But it is not an ideal world where commercial rentals are concerned
However, possibly due to poor marketing and not showing the property to the right tenants, or possibly due to the state of the market, i.e. poorly performing or riding high, good tenants are not available, or possibly due to the location of the property, which may have changed and been developed around, perhaps with new road systems being put in place. All of these issues can put the landlord in the position of having to decide on the quality of the tenant, or what is known as the strength of the covenant.
Strength of the covenant
In our experience, the strength of the covenant is made up not just of the quality of the tenant, but also the quality of the lease. This is from we would term basics of is it a full insuring lease and the length of the lease to perhaps more technically difficult issues on a badly drafted lease.
Start up business units that are managed by the council
New business are needed to help develop and grow the economy and make the country as a whole prosperous, providing jobs etc etc; so in most areas local authorities have start-up units which are relatively speaking low cost and lower risk to the tenant.
Low risk start up units
For the new business tenant it may be possible to find a suitable start up property. These are generally low risk to the tenant for several reasons; this can be in the form of a lowish rent or in the form of very flexible terms that can enable the business to move in and out of the premises, almost at will, subject to an agreed notice period.