How to Check If a Business Can Afford Your Commercial Property

A commercial void period is expensive. But a bad tenant — one who pays late, disputes the rent, causes damage, or defaults entirely — can cost a commercial landlord far more than the equivalent time vacant. Arrears recovery, forfeiture proceedings, dilapidations claims against an insolvent tenant, and months of lost rent while legal proceedings run their course are all significantly more costly than a proactive void.

Understanding how to assess a prospective tenant's ability to meet their lease obligations — and knowing when to require additional security — is one of the most practically useful skills a commercial landlord can develop.

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What covenant strength means

Covenant strength is the term used in commercial property for a tenant's financial ability to meet their lease obligations — paying rent, maintaining the property, and complying with the other obligations in the lease. <cite index="24-1">Covenant strength reflects a tenant's financial ability to meet lease obligations, including paying rent and maintaining the property. It is a key consideration in lease negotiations and risk assessment. Stronger tenants — profitable, well-established businesses — are viewed more favourably by landlords, who may offer more flexible terms, lower deposits, or avoid requiring guarantees.</cite>

Covenant strength is not binary. It exists on a spectrum, and the appropriate level of diligence — and the appropriate security you require — should be calibrated to the size of the financial commitment the lease represents and the financial profile of the prospective tenant.

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The information to request

For established companies:

<cite index="25-1">For a company that is established with a larger potential rent and lease obligation, you would likely rely on an Experian or Dun and Bradstreet business credit report, last 3 years' accounts, and landlord references.</cite>

Specifically, request:

• Three years of filed accounts (balance sheet, profit and loss, and ideally cash flow) — available from Companies House for free for most UK limited companies
• A business credit report from Experian, Dun & Bradstreet, or Creditsafe — these show CCJs, late payment history, and a credit rating
• References from previous commercial landlords — "has this business paid on time and maintained the property?"
• Details of the company's principal business activities and how long it has been trading

For smaller businesses and start-ups:

<cite index="25-1">For a smaller shop letting, as a landlord you would seek commercial landlord references where possible, carry out checks on individuals, and consider the context of the funds available for the business.</cite>

A start-up or early-stage business may not have three years of accounts or a meaningful credit history. In these cases:

• Request the business plan and projections
• Ask for personal bank statements for the directors
• Consider a personal guarantee from the director(s)
• Consider a higher rent deposit (3–6 months' rent rather than 1–2 months)

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Red flags in tenant assessment

<cite index="23-1">Evasive or incomplete responses to any information that is requested</cite> are the most consistent warning sign. A prospective tenant who is reluctant to provide accounts, cannot supply landlord references, or gives different explanations at different points in the negotiation warrants serious caution.

Other red flags include:

• Accounts showing consistent losses or sharply declining turnover
• CCJs registered against the company or its directors
• Previous company failures or dissolved companies associated with the same directors (check Companies House director search)
• A lease requirement that is disproportionately large relative to the company's size and financial strength
• Pressure to proceed very quickly, without allowing time for proper due diligence

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What to do when covenant strength is weak

<cite index="24-1">Landlords may request additional protections such as personal guarantees or rent deposit deeds when covenant strength is weak or uncertain.</cite>

The principal instruments for managing weak covenant strength are:

Rent deposit: A sum (typically 3–6 months' rent, sometimes more for weaker covenants) held by the landlord as security against default. The deposit should be held under a formal rent deposit deed — a legal document that governs the terms under which it can be drawn on and when it is returned. The deposit should ideally be held in a separate designated account.

Personal guarantee: A guarantee from one or more directors of the company in their personal capacity, making them personally liable for the company's lease obligations. <cite index="22-1">An advantage of asking for a personal guarantee rather than a company guarantor is that the safety net of limited liability is removed. A personal guarantee means the guarantor's personal assets — including any property they own — could be at risk.</cite>

Parent company guarantee: If the tenant is a subsidiary of a larger group, a guarantee from the parent company may provide significantly stronger security than the subsidiary's own covenant.

Shorter initial lease with option to renew: A 2-year initial lease with a landlord option to renew (or a tenant-only option) limits your exposure to a weaker tenant while allowing them to establish a track record.

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The Landlord and Tenant (Covenants) Act 1995

<cite index="26-1">Post-1996 leases typically require authorised guarantee agreements (AGAs) maintaining liability for immediate assignees. These continuing obligations catch many businesses unaware when former premises face rent arrears years after departure.</cite>

If you accept a lease assignment — your tenant transferring their lease to a new business — the new tenant becomes your direct tenant. However, under an AGA, the original tenant guarantees the new tenant's obligations for the duration of their period of holding. This means that if the assignee defaults, you have recourse against the original tenant. Understanding how AGAs work is important for landlords who accept assignments as an alternative to a new letting.

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Frequently Asked Questions

How much rent deposit should I ask for?

The appropriate rent deposit depends on the tenant's covenant strength and the lease term. For a well-capitalised company with strong accounts, 0–3 months' rent is typical. For a new company, a growing business, or any tenant where the covenant is uncertain, 3–6 months' rent is more appropriate. For very early-stage businesses or businesses with poor credit history, consider whether a rental deposit alone is sufficient security — a personal guarantee may be a necessary addition.

Can I refuse to let to a business because of its financial history?

Yes. You are under no obligation to let your commercial property to any specific business. However, you should ensure that any decision not to let is based on legitimate financial assessment rather than characteristics protected under the Equality Act 2010 (race, religion, disability, and so on). Documenting your assessment process helps demonstrate that decisions were made on objective financial grounds.

What happens if my commercial tenant stops paying rent?

If a commercial tenant falls into arrears, the principal remedies are: Commercial Rent Arrears Recovery (CRAR — a statutory process allowing you to seize and sell tenant's goods to recover rent arrears), forfeiture (re-entering the property and terminating the lease), and debt recovery proceedings. Each remedy has specific procedural requirements and practical limitations. Take legal advice promptly if a commercial tenant misses a rent payment — early action is usually more effective than delayed response.

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RE:match gives landlords and agents direct access to active occupier requirements — businesses that have already described exactly what they need. Browse live requirements and respond directly at rematch.co.uk.