Referencing a new commercial tenant?

Referencing a new commercial tenant?

10:11 AM, 21st March 2023, About 11 months ago 12

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Hello, I have a long term commercial tenant who is looking to sell on his business on as a going concern. Putting aside the issue of surrendering the existing lease for the minute, what referencing do you do for an incoming commercial tenant?

Not sure if the new tenant will be a newbie starting up from scratch taking on their first business venture, or someone already experienced with an existing business and accounts etc.

Any advice welcome.

Thank you,

Reluctant Landlord


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Julesgflawyer

11:06 AM, 21st March 2023, About 11 months ago

The buyer may prefer to take anassignment of the existing lease, particularly if it is protected under the 1954 Act. If so, think about requiring an authorised guarantee agreement from your current tenant as well as doing normal DD on the incoming T. Otherwise its the normal copies of accounts and bank references, primarily.

Darren Peters

13:17 PM, 21st March 2023, About 11 months ago

You could look up the name of the LtdCo and its director(s) at Companies house (all online and free). It’ll give you some information - their yearly accounts, any other companies the directors own - any moves to strike off.

Accommod8

18:21 PM, 21st March 2023, About 11 months ago

If you're local, depending on circumstances described below, I'd ask to meet, possibly twice, to gain a sense of his/her resources, his/her guarantor's assets, his/her business plans etc. Written references area nearly always going to be impressive, so I would research beyond that.
Depending on what's left of a presumably FRI occupational lease, and whether as often, there are 1 way/2 way break clauses, you can determine whether to suggest an agreed lease termination, with a new one written by you ( but financed by them), as FRI leases are much more protective of landlords in general than in residential. You can even seek a year's rent in advance if they have little business experience.
However, if the Limited company's shares are being purchased as I understand it you would not have a say in the matter, but would have to accept them as the new owners subject to all the Ts&Cs of the existing lease, unless there's currently a guarantor looking to assign it, where then you would get a say in whether to accept a replacement guarantor.
We have had this scenario play out ourselves recently with the transfer of a day nursery.
Sorry-that's a bit all over the place!

John P

7:04 AM, 22nd March 2023, About 11 months ago

Yes, if your lease is with a limited company, it continues regardless of who owns the company. Terms of lease may include something about this scenario, but essentially, a Ltd Co is an independent 'person'.
If a sole trader, the contract is with the individual who owns the business..

Reluctant Landlord

8:48 AM, 22nd March 2023, About 11 months ago

interesting replies - I was looking to see what the answers were myself as thinking of maybe looking at buying some commercial units.

If a sole trader who happens to be just buying the business, you have to check them as if they were a residential tenant? Can you ask to see the books of the leaving tenant to see what state the business is in so you can determine if the incoming tenant has the resources to carry this on?

I am assuming a few sole traders are looking to sell on their business if margins tight/they don't see a profit in it anymore. If someone takes over surely you need to know if they have the finance to take that business on before you lease the property to them?

Julesgflawyer

9:36 AM, 22nd March 2023, About 11 months ago

Reply to the comment left by John P at 22/03/2023 - 07:04
True, but not many sole traders will be incorporated.

Accommod8

10:27 AM, 22nd March 2023, About 11 months ago

Reluctant Landlord:
As the business is to continue as a going concern, then he/she will want the purchase to include goodwill, so this would be someone buying the business itself, from what you say.
Assuming it's a Limited Company, that is an entity in itself, so I don't think you can have a say in it, as it's a private matter who owns the shares. I stand corrected if anyone thinks otherwise.
To DSR:
Almost completely off topic sorry but, if by commercial units you happen to mean small industrial units typically on an industrial estate ( although also sometimes an independent site with good road transport connections), then personally I would look to develop and therefore control this entirely.
You, as freeholder (avoid being a leaseholder if possible) establish the occupational leases with very strict criteria where you dictate the terms of your Full Repairing and Insuring (FRI) leases.
For example, a typical commercial lease requires the tenant to redecorate every three years, and to return the property in good condition at the end of the lease. Arrears can be dealt with by almost immediately warning that breach can quickly render the lease terminated.
A row of say six x 200m sq. small business units (with toilet facilities but without offices pre-installed) in parts of the North West including Merseyside could generate about £108,000 per annum (6 x £18K) when full against a total outlay including finance of about £975,000 when buying the land for £250k. If an average of 5 of these are tenanted, that's £90k. Then there's capital appreciation over the term for refinancing as and if required.
You can still reclaim VAT on construction costs too I think. You are likely to get about 40 years of use before having to fully renovate them, rebuild, repurpose or sell the site. You would effectively become a developer-investor. If positioned near motorway junctions, although relatively few sites available, but some still in the North, these will remain popular as distribution depots.
They can be a more relaxing way of owning property on average compared with residential.
NOTE: All comments are based on supposition rather than fact.

Freda Blogs

13:03 PM, 22nd March 2023, About 11 months ago

I am assuming the lease will have provisions to the effect that as competent landlord*, you have to give permission for any new tenant(s) to take an assignment of the lease, ‘such consent not to be unreasonably refused’. As others have said, do some financial checks – a man of straw is a good reason to refuse. If it’s a small outfit, take a rent deposit and a personal guarantee.

Alternatively consider a sublet if the lease will allow, so the current tenant remains on the hook for the rent etc.

Ensure you use a solicitor experienced in commercial property to deal with the paperwork, not all are. It will pay you to do so (and your lease may provide for the tenants to pay your reasonable legal costs anyway).

*Google the definition - not an indicator of ability as a LL, but your status re the tenancy.

Julesgflawyer

13:06 PM, 22nd March 2023, About 11 months ago

Reply to the comment left by Freda Blogs at 22/03/2023 - 13:03
"Competent landlord" per LTA 1954 unlikely to be relevant unless purchasing a leasehold interest. And irrelevant to alienation provisions in occupational leases.

Freda Blogs

10:50 AM, 23rd March 2023, About 11 months ago

Reply to the comment left by Julesgflawyer at 22/03/2023 - 13:06
You misunderstand what I am saying. Competent LL is to do with the status of the OP and clarifying who he/she is in relation to this decision, and that observation was not attached to or intended to be conflated with the observation re alienation provisions.

The LL has very right under most LTA leases to have a view as to who takes over the lease, provided they are working within the alienation provisions, generally speaking 'not to be unreasonably withheld or delayed' etc.

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