Recognise the warning signs

November 1, 2018

John Morgan, partner and head of commercial property at Gordon Brown Law Firm LLP, shares his top tips for business landlords

The news of late has been full of stories of woe on the high street, with national chains such as Homebase and Mothercare entering arrangements with their creditors, Maplin and Poundworld becoming insolvent, Marks and Spencer closing stores, Mike Ashley’s Sports Direct buying out struggling House of Fraser and, more locally, the closure of Grainger Games.

The picture is no less stark on the local high street: passing trade is in decline as national traders close, taking their habitual customers away from the stores around them, and changes to business rates have made it even harder to stay afloat.

Many small businesses are struggling and in town centres vacancy rates are at their worst level since the last recession.

Landlords of commercial properties, and particularly retail properties, have good reason to be concerned – while no one yet knows how Brexit will impact on the UK, most commentators expect that the economy will slow down further, at least in the short term. More business failures, both high and low profile must be expected.

It’s not easy for a landlord to monitor cash flow for small tenants – particularly if they are not incorporated businesses, so landlords should pay close attention to how their tenants are trading. In general, landlords should look out for unusual behaviour from their tenants, in particular:

  • Are opening hours being cut, or is a shop closed unexpectedly during a working day?
  • Has the tenant had to lose employees?
  • Are tenants late in paying rent when they weren’t before?
  • Are tenants paying rent in unusual instalments (are they using any money received to reduce their debts, when they can’t pay the full rent)?
  • Are you receiving sudden, urgent requests from tenants for permission to assign or sub-let?

Where any of these warning signs occur, an early and frank conversation can enable a landlord to consider putting concession arrangements in place to manage a tenant who is struggling.

This can protect a landlord from the expense of an empty property, where rental income ceases, and a landlord has to fund the cost of business rates, utilities, and finding a new tenant.

While some properties will be re-let easily, there is an over-supply of commercial and retail space in many local town centres – landlords might not obtain the rent they have received previously, if a unit can be re-let at all.

If the worst happens, and a tenant shuts up shop and leaves, or becomes insolvent, landlords can be left with limited options if they haven’t been pro-active.

Unpaid rent is generally not a ‘priority’ debt in insolvency, so if a landlord does not have the benefit of a third-party guarantee, or a deposit of irent, then they will join the queue of others who haven’t been paid, and will be behind lenders and other priority creditors.

The friendly commercial and litigation teams at Gordon Brown Law Firm LLP are experts in working with landlords when things aren’t going your way, and can provide pragmatic, cost- effective advice.

We can also work with you at the beginning of a new lease arrangement to ensure that your interests are protected so that if a tenant fails, you are not left in the lurch.

Gordon Brown Law Firm LLP
0191 388 1778

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