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Covenant strength key for landlords

23rd August 2013

Covenant strength key for landlords

Since the recession, which is now almost 6 years ago, landlords for commercial space have been forced to change their attitudes towards tenants regarding the surety that they require from incoming tenants. This is because over the past 5 years landlords have seen many of their tenants get in to deep water and not be able to survive, therefore leaving them with empty dilapidated spaces. At this point the landlord has to re-furbish the space then re-let the space causing significant capital costs as well as a void period while re-marketing the space. A deposit put down by the incoming tenant is designed to cover this but pre-recession with business’s growing landlords were far more generous with the amount of deposit required to secure a space. 

Times have changed now and in almost every circumstance a landlord will look to receive some sort of deposit from an incoming tenant. The amount of deposit required will vary depending from landlord to landlord, ones which have been stung in the past are likely to be more cautious, however the most important factor effecting the level of deposit are the strength of the tenants accounts. Landlords in every circumstance when deciding on how much deposit is required will request the companies last 3 years of audited accounts and the analysis is normally a very simple bottom line test of profit and loss. 

Traditionally if the profit from the last 3 years was three times the amount of the annual rent then no deposit is required. This is sometimes still the case but a lot of the time landlords will look to receive a 3 months rental deposit. For a start-up or a new company with limited trading history landlords have been requesting deposits of up to 9-12 months which has been pushing a lot of smaller companies in to serviced office spaces. 

This news was brought to you by Morgan Pryce, a specialist tenant acquisition agent with offices in Oxford Circus and the City. Morgan Pryce specialises in search, negotiation and project management and works exclusively for tenants.

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