Commercial Tenant Creditworthiness: What to Check Before Heads of Terms

For an investor landlord, the value of a commercial property is heavily influenced by the quality of the tenant covenant. A 15-year lease to a FTSE 100 company is a different asset class from the same lease to a newly incorporated company with no track record. Understanding the difference — and communicating it clearly — is part of the CRE broker's value.

This article sets out a practical approach to tenant creditworthiness assessment before heads of terms are agreed.

Why covenant strength matters

Commercial property valuations are primarily income-driven. The capitalisation rate applied to a commercial lease depends on:

• The certainty of the rental income stream
• The length of the remaining term
• The strength of the tenant covenant

A stronger tenant means a lower yield and a higher capital value. A weaker tenant means a higher yield and a lower value — or no value as an investment asset at all, if the property is only worth its vacant possession value.

For a landlord client, recommending a tenant without understanding their financial position is a risk you are passing on without disclosure.

What to check

Companies House — for any UK-incorporated company, the fundamental check is Companies House: accounts, current directors, registered address, any filing anomalies. Look for:

• Filed accounts (abridged accounts tell you less, but their presence confirms a trading company)
• The date of incorporation — a company formed last month for the purpose of entering a lease is a very different proposition from a company with ten years of trading history
• Any previous directors who have been associated with dissolved or insolvent companies
• Charges registered against the company's assets — a company with multiple fixed and floating charges has limited free assets

Credit reference check — specialist commercial credit agencies (Experian Business, Creditsafe, Dun & Bradstreet) produce credit ratings for UK companies based on filed accounts, payment history, and public records. These identify acute risk quickly.

Latest filed accounts — for any tenant taking on a significant rent commitment, review the most recently filed accounts and look at:

• Revenue trend (growing, flat, declining)
• EBITDA margin
• Net cash position
• Net assets (positive or negative)
• Whether the auditor has issued any going concern qualifications

A company with net liabilities and a going concern note is a very high-risk tenant, regardless of what the directors say about their trading prospects.

Personal guarantees — where the tenant entity is a limited company with a thin balance sheet or recent incorporation, landlords frequently require a personal guarantee from a director or shareholder. A guarantee from a director whose personal assets are limited or who has undischarged county court judgments (CCJs) is worth little.

Rent deposit — as an alternative or supplement to a personal guarantee, a rent deposit of three to six months' rent (held in a segregated account, documented by a formal deed) provides immediate security without requiring personal liability.

References — landlord references from previous or current commercial premises confirm trading history and payment behaviour. Former landlords will usually respond honestly if approached directly.

Red flags to escalate to the landlord

• Company incorporated within the last 12 months with no trading history
• Accounts more than 12 months old (late filing is itself a compliance failure)
• Going concern qualification in the audit report
• Director or principal with previous associations with insolvent companies
• Unwillingness to provide accounts or references
• Transaction structured through an intermediate holding company with no assets

None of these is automatically a reason to reject a tenant. But each requires the landlord to make an informed decision about what additional security is needed.

Where AI helps

AI can:

• Summarise Companies House filings and filed accounts into a structured credit assessment
• Flag common red flags in a company's filing history
• Draft a tenant due diligence summary for the landlord client
• Generate a checklist of information to request from a prospective tenant before heads of terms

AI cannot replace a credit reference agency search or a formal financial analysis. But it can triage the publicly available information quickly and help the broker advise the landlord before commitments are made.

A practical process

Before recommending a tenant to a landlord client:

1. Run a Companies House check — incorporation date, directors, accounts, charges
2. Order a commercial credit report (most agencies charge £5–20 per report)
3. Review the most recent filed accounts
4. Request landlord references from the tenant's existing or previous premises
5. Advise the landlord on the covenant strength and recommended security (guarantee, deposit, or both)
6. Document your advice in writing

This process takes less than two hours and protects both your client and your professional position.