Navigating commercial tenant insolvency risks: top tips for rural landlords

In the wake of a 14-year high in company insolvencies, rural landlords find themselves facing the repercussions as their commercial tenants struggle to stay afloat. The number of companies in England and Wales going bust in the six months to the end of September 2023, was the highest since 2009.

The landscape, once supported financially throughout the pandemic, is now marked by rising inflation, increased demand and borrowing costs, coupled with weakened consumer confidence.

Mark Topliff, Associate in Rural Research at Knight Frank, explains that during the Covid lockdowns, these companies had support to help keep them in business, including furlough, bounce back loans and some leniency from HMRC and lenders. Once these measures ended, businesses were struck by interest rates hitting their profit margins and their customers' pockets.

The impacts of tenant insolvencies are not just limited to retail, office and industrial spaces; they go beyond urban settings in major towns and cities. The rural property landscape, which is often thought of as being immune to economic turbulence, is also facing the repercussions. This is affecting farms and estates leasing property to commercial businesses, as well as new or small businesses, facing difficulties securing operating loans.

Although it isn't possible to completely avoid tenants becoming insolvent, John Williams, Consultant in Knight Frank’s Rural Consultancy team, offers six strategic recommendations that landlords can take to mitigate risks and protect their interests in the case of the firm going bust:

Vet Potential Tenants: Examine the financial background and business track record of potential tenants.

Secure Written Agreements: Establish clear terms and obligations through written agreements to avoid miscommunication.

Personal Guarantees: Obtain personal guarantees from tenants to recover debts from company directors or partners in case of insolvency.

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Regular Tenant Engagement: Foster good relationships with tenants through regular reviews and communication.

Flexibility for Struggling Tenants: Be lenient within reason to assist struggling tenants in getting back on track.

Consider Lease Restructuring: In difficult situations, explore lease restructuring options, such as adjusting payment plans to accommodate cash flow.

Strategic Vacancy Management: Consider leaving a unit vacant if a suitable, reliable tenant cannot be found, as an empty unit is preferable to dealing with a problematic tenant.

What red flags should rural landlords watch out for?

The challenges posed by prevailing economic market headwinds resonate across diverse sectors. As we navigate through these uncertain times, understanding the critical warning signs of tenant disputes becomes imperative for landlords. Edward Maryon, an Associate in the Restructuring and Recovery team at Knight Frank, sheds light on key indicators that transcend traditional boundaries, offering valuable insights for landlords in the rural market:

Communication cues: Changes and lapses as payment dates approach

Landlords should pay attention to shifts in communication habits, especially leading up to payment dates. A lack of communication or irregularities in this regard may serve as a red flag, signaling potential financial strains for tenants.

Financial constraints: Impacting property upkeep

A crucial aspect for landlords to monitor is the upkeep of demised space. Financial constraints may lead to a reduction in maintenance efforts as tenants prioritise the payment of essential expenditures over property maintenance.

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Operational challenges: Staff availability and reduced opening hours

Observing changes in operational patterns is paramount for landlords. It’s good to watch out for reduced staff availability or the inability to meet payroll obligations, as this may result in tenants having to shorten opening hours.

Debt awareness from negotiation onward: Ensuring financial stability

From the initial stages of negotiating with tenants to secure tenancies, landlords and estate owners should maintain a keen awareness of their financial commitments and debt obligations. By staying attuned to funding requirements right from the first phase of the process, landlords can navigate these discussions with a clear understanding of their financial capacity, fostering stability and preventing future complications.

Strategic reassessment of your commercial let portfolio

Careful consideration of the next steps will ensure stability in the future. Some landlords may consider this an appropriate time to review alternative uses for space or rationalise a portfolio to generate capital for other projects or opportunities. Similarly, it may be helpful to have capital to hand when the green shoots of recovery start to show to allow for quick action as opportunities arise.