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Lessons for private investors: Spotting the signs of insolvency

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As the current period of economic uncertainty continues, one thing has always been certain in business, some companies will survive, indeed thrive, and others will not.

While we hope that all businesses have the potential to ride out the ongoing political and economic conditions as well as changing consumer habits, the reality is that some will become insolvent. We are well aware of the troubles faced by the retail sector, but as managing agents, we need to be vigilant to spot potential signs of tenant failure. 

Taking a proactive approach to property management and keeping your eyes open to not just the physical condition of the buildings but also the health of the tenant can avoid a costly vacant period for clients.


Property Inspections:

Property inspection are the ideal time to do this, but what should you look out for when visiting a clients property? Naturally one looks at repair, decoration, location, health and safety, fire risks etc. These are a given. But you should look at who is occupying the property and how much of it is being occupied. This could give valuable insight into tenant solvency.

If a tenant occupies all of the property and is using it fully then maybe - in the case of an office user - they might need more space and maybe there is an asset management opportunity. 

If the tenant only occupies a small part of the property, then perhaps their business is struggling? Maybe they need to assign or sublet? Maybe the business is about to fail, and their sparse occupancy is a tell-tale sign?


Case Study:

By way of a case study, we inspected an office property in north London a year ago. the tenant was only occupying about 30% of the property, whereas we had noted full occupation on previous inspections. We were also experiencing delays in rent payments. Clearly, the tenant was in trouble. 

We contacted the tenant and had a discussion urging them to put the unit on the market to sublet or assign. We also stepped up credit control measures and ensured monies were received on time. We did this by instructing bailiffs. so the tenant knew they had to pay promptly.

Just before Christmas, the tenant advised that they were entering voluntary liquidation. Voluntary liquidation means that the landlord's remedies of using a bailiff or forfeiting the lease remain open to use. Some insolvency situations do not.

We instructed bailiffs to take the initial steps to collect rents, but we decided not to follow through as the goods on site did not amount to much in terms of value and our advice was to enter into a new license with the insolvent tenant's parent company.

This would keep some income flowing, albeit at about 25% of what was received before. It also meant we could avoid paying rates, insurance a service charge while we marketed the unit. We agreed on terms with the tenant's parent company.

At the same time, we considered the fact that there was sublease of the ground floor in place to a good tenant paying £25,000 pa. The total rent for the whole building was £85,000 pa. We were concerned that if the liquidator disclaimed the lease, as they were entitled to do, the sublease would fall away as a matter of law.

We advised our client that a surrender by the liquidator would achieve the liquidator's objectives but leave the sublease and the income in place for our client. The liquidator agreed to this course of action. We achieved a good result for our client by being vigilant during the term and noticing the early warning signs of tenant failure.

We kept income flowing and took steps to minimise the costs of empty property while we marketed the premises. We also persuaded the liquidator to change their strategy to preserve income for our clients benefit in the short term.

Your managing agent should be agile and keep a vigilant watching brief on your assets to protect and defend them in the case of tenant insolvency. 


This blog was taken from our most recent Briefing Notes: Issue 92, to see more Residential and Commercial news briefs, click here.