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Signs of insolvency: Is your commercial tenant is heading for insolvency?

Signs of insolvency: Is your commercial tenant is heading for insolvency?
Signs of insolvency: Is your commercial tenant is heading for insolvency?

Landlords must be able to recognise the signs that a commercial tenant is in financial distress to help them to minimise their losses.

The number of UK companies going into administration hit a five year peak. There’s no doubt that businesses of all shapes and sizes are currently going through turbulent and uncertain economic times.

As high street businesses struggle to keep pace with online retailers and Brexit casts a shadow of financial uncertainty, commercial landlords must take steps to protect themselves from non-paying tenants.

If a commercial tenant becomes insolvent, landlords are often left facing large losses in rent arrears. To minimise losses, it’s important to always have an eye on the ball.

Landlords can protect themselves by learning the signs to look out for that could indicate that a commercial tenant is facing financial difficulties and heading for insolvency.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal, financial, or professional advice. While we strive to ensure the accuracy and timeliness of the content, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the information, products, services, or related graphics contained in this article for any purpose.

1. Paying rent late

One of the most obvious signs that a tenant is in financial distress is paying rent late or falling into arrears when they have previously always been prompt payers.

2. Making redundancies

Finding out that your tenant has been making redundancies should ring alarm bells that the business has taken a dip and is struggling.

3. Requesting to sub-let the property

If your tenant suddenly requests to sub-let part of the property it could be a sign that the business has shrunk or that they are struggling to afford the price of rent.

4. Requesting changes to their payment schedule

Tenants that request to change their payment schedule from quarterly payments to monthly payments may be struggling to find the money for their next quarterly invoice.

5. Company credit risk reporting

Here at Clearway, we provide an exclusive DeCRA (debtor credit risk assessment) service.

Our powerful system was designed to help commercial landlords to monitor commercial data, credit ratings and analytics to avoid leasing to high-risk businesses and spot the signs of corporate distress and potential rent default early on.

What is insolvency?

Commercial insolvency refers to the financial state of a business entity when it is unable to meet its financial obligations as they become due. In simpler terms, it means that a company is unable to pay its debts and liabilities when they are due. Commercial insolvency can arise due to various reasons, including declining sales, excessive debt, poor financial management, economic downturns, or changes in market conditions.

When a company becomes commercially insolvent, it may face significant challenges in continuing its operations and may ultimately lead to bankruptcy or liquidation. In many jurisdictions, insolvency laws provide a framework for dealing with financially distressed businesses, aiming to maximize returns to creditors while balancing the interests of stakeholders, including employees, shareholders, and creditors.

Some common indicators of commercial insolvency include:

  1. Cash Flow Problems: The company struggles to generate sufficient cash flow to cover its operating expenses, debt repayments, and other financial obligations.
  2. Increasing Debt Levels: The company accumulates debt over time, often resorting to borrowing to finance its operations or refinance existing debt.
  3. Default on Payments: The company fails to pay its debts, including payments to suppliers, creditors, lenders, or tax authorities, by their due dates.
  4. Declining Profitability: The company experiences persistent losses or declining profitability due to factors such as decreasing sales, rising costs, or inefficient operations.
  5. Legal Action by Creditors: Creditors take legal action against the company to recover outstanding debts, such as issuing demands for payment, initiating legal proceedings, or seeking court judgments.

Commercial insolvency can have significant consequences for all parties involved, including creditors, shareholders, employees, suppliers, and customers. Depending on the jurisdiction and circumstances, companies facing insolvency may explore various options for restructuring, reorganizing, or winding down their operations, such as debt restructuring, administration, receivership, or liquidation.

It’s important for business owners, directors, and stakeholders to be aware of the signs of commercial insolvency and seek professional advice and assistance promptly if they believe their company is facing financial distress. Taking early action can help mitigate risks, explore available options, and potentially facilitate a more orderly and beneficial resolution for all parties involved.

What action should I take?

As the landlord of a company that may be facing insolvency, it’s important to take proactive steps to protect your interests while also considering the broader implications for your tenant and any other stakeholders involved. Here’s what you should consider doing:

  1. Assess the Situation: Begin by gathering information about the financial health of your tenant. Review their payment history, financial statements, and any communication indicating financial difficulties. Understanding the extent of their insolvency risk will help you make informed decisions.
  2. Open Communication: Initiate a dialogue with your tenant to discuss their financial situation openly and transparently. Express your concerns and inquire about their plans to address any outstanding rent payments or potential lease termination. Maintaining open communication can facilitate constructive discussions and potentially lead to mutually beneficial solutions.
  3. Review Lease Agreement: Thoroughly review the terms of the lease agreement, paying close attention to clauses related to default, termination, and insolvency. Familiarise yourself with your rights and obligations as a landlord in the event of tenant insolvency, including any remedies or recourse available to you under the lease agreement or applicable laws.
  4. Explore Options: Consider the various options available to you in response to your tenant’s potential insolvency. This may include negotiating a rent payment plan, granting temporary rent relief, revising lease terms, or facilitating an orderly exit from the premises. Evaluate the feasibility and implications of each option based on your own financial considerations and the impact on your tenant.
  5. Seek Legal Advice: Consult with a qualified legal advisor or property lawyer who specialises in commercial real estate and landlord-tenant matters. They can provide guidance on your rights and obligations, help you navigate complex legal issues, and advise you on the most appropriate course of action given the circumstances.
  6. Monitor Developments: Stay informed about developments related to your tenant’s financial situation, such as bankruptcy filings, restructuring plans, or changes in ownership. Monitor communication from your tenant and any updates from relevant authorities or insolvency practitioners involved in the process.
  7. Protect Your Interests: Take proactive steps to protect your interests and mitigate potential losses. This may include securing any outstanding rent payments, enforcing lease provisions, safeguarding your property from damage or misuse, and exploring options for finding a new tenant if necessary.
  8. Plan for Contingencies: Develop contingency plans to address potential scenarios, such as lease termination, eviction proceedings, or transitioning to a new tenant. Consider the financial and operational implications of each scenario and develop strategies to minimise disruptions to your rental income and property portfolio.

For more information or advice, get in touch with our team.

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