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The importance of vetting tenants and sureties

The importance of vetting tenants and sureties

It is a well-known fact by experienced landlords that defaulting tenants can wreak havoc. Virtually all of the problems the landlord face with its tenants, can be limited and/or eliminated through a good screening process. Getting this wrong may hold devastating consequences for a landlord. Not all tenants and their sureties are equal and for this reason it is of paramount importance that the correct vetting procedures are in place before entering into an agreement of lease with a potential tenant.

Many prospective tenants will engage the landlord or its agent with a credit record that seems impeccable, but if one gets hold of the previous landlords and delve into the tenant’s history, it may well become apparent that they have been problem tenants in the past.

The following information is particularly important for vetting a potential tenant for a landlord:

The landlord and / or its agent should review the prospective tenant’s business plan, especially if they are a start-up business. If the business plan does not make sense to you, this may indicate that they will not have the funds to pay the landlord.

The landlord and / or its agent should obtain permission from prospective tenants and its sureties to conduct a credit and property check on their current business. Information on defaults listed, liquidation status, judgments etc are essential when considering the risk at hand. If the proposed tenant or its surety is the registered owner of immovable property, information such as value of the property, year purchased, the size of the bond registered over the property etc becomes critical in calculating whether the proposed tenant or its surety possesses the means to extinguish any claim that may arise from the agreement of lease.

Many entrepreneurs have formed corporate entities for tax or other purposes. It is critical to find out whether people are behind the entity and assess them as well as the “shell” of the company. In the event that the proposed tenant is relatively new in the business world, you should request and obtain a personal guarantee in the form of a suretyship agreement whereby the director, member or shareholder of the principal tenant, binds himself / herself to be jointly and severally liable for any arrears, damages and / or costs of the proposed principal tenant. This will allow you to pursue the director, member or shareholder in his or her personal capacity, if the company happens to go insolvent. Without such a suretyship, the tenant’s insolvency may leave you with nothing to cover the arrears or damages. Similarly, a background check on the directors / members are warranted together with a statement of the prospective surety’s assets and liabilities. This is to ensure that the latter has the capacity to settle its obligations in terms of the lease in case the business fail. It should be noted that not only can a director, member or shareholder linked to the proposed tenant sign a suretyship agreement but any Adult, Company, closed corporation or trust may conclude a suretyship agreement on behalf of that tenant. The golden rule is to spread risk by having as many sureties as possible.

As an alternative to a personal guarantee, you may request the proposed tenant to provide a bank guarantee or ask the proposed tenant to pay a deposit which is held in an interest bearing account. By requiring a deposit in excess or equal to three months’ rent may indicate to the landlord that the tenant has a healthy cashflow and caution the tenant that they should strictly adhere to the lease terms to ensure the return of the deposit.

The landlord or its agent should always follow up referrals from the proposed tenant’s previous landlord. However, the new landlord should be aware that if the proposed tenant’s history is not satisfactory, the previous landlord may hide the truth so as to get rid of the tenant.

In the event that things go south, the landlord, by way of its agent, should take immediate action. If the tenant does miss a payment or otherwise breaches a material term of the lease, then immediate action is to be taken in order to mitigate the landlord’s damages.

Good tenants are the life blood of profitable real estate investments while bad tenants can only give you headaches and can torpedo your financial goals. It is important to understand how to find good tenants and manage your relationship with them to ensure the success of your investment.