Commercial tenant vetting checklist

A commercial lease is one of the longest commitments a landlord makes on the strength of a single decision. If the tenant stops trading two years in, the cost is more than just the missed rent. Vetting properly at the start is the cheapest protection available, and most of it can be done before you have spent anything but time.

This is the checklist to work through on a prospective commercial tenant, from confirming who they are to deciding what protections to ask for. It covers the whole process rather than the accounts alone, because a lease decision rests on more than the filed figures.

The commercial tenant vetting checklist

The first group tells you whether the business is sound, the second tells you what protection to build into the lease, and the third covers what only the applicant can tell you.

• Confirm the legal entity: is the applicant a limited company, a sole trader, or a partnership, and does the name match the register exactly?
• Check the company is active, with no strike-off notice or insolvency proceedings against it.
• Read the latest filed accounts: are net assets positive, and does the current ratio clear 1?
• Compare two years of accounts for trends, not just the current position.
• Check the filing record for a pattern of late or overdue accounts.
• Check the directors for stability, disqualifications, or a trail of dissolved companies.
• Decide the deposit: how many months’ rent, held on what terms?
• Decide whether you need a guarantor, and whether a personal guarantee from a director is appropriate.
• Consider rent in advance, a shorter initial term, or a break clause if the picture is mixed.
• Take trade and previous landlord references, and follow them up rather than filing them.
• Ask what the premises will be used for, and whether the use fits the lease and your insurance.
• Ask about headcount and expected growth, so the space still fits them in two years.

The company checks

The first thing to establish is who you are actually dealing with, because the rest of the process depends on it. A limited company files accounts and director records at Companies House, and its name on the application should match the register exactly, company number included. A trading name that differs from the registered name is common and legitimate, but you want the lease in the name of the entity that carries the liability, not the brand on the signage.

Once you know the entity, the financial reading is straightforward: whether the company owns more than it owes, whether it can cover the bills falling due this year, and which way those figures have moved since the previous year. For a lease, direction matters more than for most decisions, because you are committing for years rather than for a single transaction. A business holding steady is a different proposition from one showing the same figures while sliding, and only the year-on-year comparison separates them. There is a full explanation of what to read and why in our guide to vetting a commercial tenant.

Alongside the numbers, the filing record and the director history round out the picture. A company that files on time year after year tends to be well run, and a pattern of late filings often shows up before the financial trouble does. The directors are worth a look for disqualifications or a trail of dissolved companies, though a stable board is a supporting signal rather than a decisive one; plenty of businesses that failed had long-serving, entirely respectable directors right up to the end.

The protections you build into the lease

Vetting is only useful if it changes what you do, and for a landlord the levers are the deposit, the guarantee, and the shape of the term. A tenant that checks out cleanly can have standard terms. A tenant with a weaker position can still be worth taking, provided the lease reflects the risk rather than ignoring it.

The rent deposit is the most direct protection, and the size of it should follow what the accounts told you: three months for a solid covenant, six or more where the position is thinner. A personal guarantee from a director changes the calculation entirely, because it puts an individual behind the company, though be realistic about whether the guarantor has assets worth pursuing. Rent quarterly in advance, a shorter initial term, or an earlier break are all ways of limiting how far ahead you are exposed without refusing the letting outright.

The mistake worth avoiding is treating the decision as a straight yes or no. Most applicants are neither obviously safe nor obviously unsafe, and the useful question is not whether to let to them but on what terms.

What only the applicant can tell you

The public record stops well short of everything you need. References from previous landlords and from trade suppliers tell you how a business behaves as a payer, which the accounts do not, and they are worth following up rather than accepting on paper. Ask what the premises will be used for and confirm it fits both the permitted use and your insurance, because a use you did not anticipate can be expensive later. Ask about headcount and growth plans, since a business that outgrows the unit in eighteen months is a different kind of problem from one that fails.

For a newly incorporated company, there may be no filed accounts at all, which is not in itself a reason to refuse. It does mean there is no track record to read, so the weight shifts onto the guarantee, the deposit, and the references. Be clear with yourself that you are letting on the strength of those rather than on the strength of the company.

When the answer is borderline

A single weakness in an otherwise sound picture is common and rarely decisive. Two or more arriving together is the profile that should slow you down. When we scored 100 UK companies that had gone into insolvency, most were showing two or more warning signs at the same time on the last accounts they filed while still trading, and the build-up was visible on the public record long before the end. You can read that study in our backtest of 100 insolvencies.

A borderline applicant is where the protections earn their place. A larger deposit, a personal guarantee, quarterly rent in advance, or a shorter first term all let you take the letting while limiting what a failure would cost you. The point of the checklist is not to produce a verdict on the tenant; it is to tell you which of those levers you should be reaching for.

Sole traders and partnerships

Everything above that reads from Companies House applies to limited company tenants. Sole traders and ordinary partnerships do not file accounts the same way, so there is nothing to read on the register, and the checklist shifts almost entirely onto references, bank statements the applicant is willing to share, and a personal guarantee. That is a workable process, but it is a different one, and it is worth establishing which you are dealing with before you start.

The question is rarely whether to let to a tenant. It is what protection the letting needs, and the accounts are where you find out.

CompanyIQ reads a prospective tenant’s filed accounts, scores the financial health, checks the directors and the filing record, and lays out the warning signs, so the company half of this checklist is done for you before you decide what the lease needs to look like. For the reasoning behind the financial checks, see our guide to how to check if a company is financially stable.