The Intermediary – October 2026 - Flipbook - Page 63
SPECIALIST FINANCE
Opinion
Spotting the signs
of commercial
tenant distress
A
commercial property
may look like a strong
lending proposition
on paper. The
valuation supports
the borrowing,
the lease is in place, and the rent is
being paid.
The difficulty is that tenant
distress rarely arrives overnight. The
warning signs emerge gradually.
Growing arrears. Evidence of business
contraction. A request to move from
quarterly to monthly rent. None of
these issues necessarily mean a tenant
is heading towards insolvency, but
they can provide an early indication
that pressure is building.
Higher operating costs, changing
consumer behaviour and tighter
lending conditions continue to put
pressure on many occupiers, meaning
lenders are looking more closely at
tenant covenant strength than they
may have done a few years ago.
The challenge is not simply
identifying risk. It is understanding
whether that risk is material and
how it might affect the security if
circumstances deteriorate.
Rent tells the story
One of the clearest indicators of
financial stress is a tenant struggling
to meet rental obligations. An
isolated late payment may have a
perfectly innocent explanation.
However, repeated late payments or
growing arrears can indicate wider
cashflow difficulties.
Brokers should seek to understand
not only whether arrears exist, but
also their extent and duration. A
tenant already in arrears presents a
different risk profile from one with a
long history of prompt payment. For a
lender relying on that income stream,
the distinction can be significant.
Commercial landlords are
increasingly receiving requests for
greater flexibility. Such requests
do not automatically signal serious
financial difficulty. However, where
multiple concessions are being sought,
brokers should understand the reasons
behind those requests and whether
they reflect wider financial pressure
within the business.
Any variation affecting the
property’s income should form part of
the refinancing picture presented to
a lender.
Beyond the accounts
Financial pressure oen becomes
visible operationally before it appears
in formal accounts. Reduced trading
activity, shorter opening hours, staff
reductions, vacant trading space, or
falling stock levels can all provide
useful context when assessing tenant
strength. For occupiers with multiple
sites, closures elsewhere may also
be relevant.
Basic due diligence can reveal
a great deal. Companies House
filings may identify late accounts,
administrations, Company Voluntary
Arrangements (CVAs), restructuring
plans or liquidations. Insolvency
register searches, credit reports,
County Court Judgments and
winding-up petitions may also provide
useful insight.
That does not mean refinancing
should automatically be abandoned.
However, lenders will generally expect
to understand the position before
commiing funds.
Where covenant strength may be
weakening, aention naturally turns
to the protections siing behind the
lease. Questions worth asking include
how much longer the lease has to
run, whether there are any upcoming
break rights, whether a guarantor is
STEPHANIE KINGDON
is a partner in the property
disputes team at Birketts LLP
in place and whether a rent deposit or
other security is available.
A well-secured lease can provide
meaningful protection even where
concerns exist about a tenant’s
financial position.
The bigger picture
One useful question for brokers to
consider is: what would happen if the
tenant vacated tomorrow? The answer
can oen provide a clearer picture of
risk than a balance sheet and a useful
indication of how resilient the asset
would be in the event of tenant failure.
A property with a distressed tenant
may still represent an aractive
lending proposition if vacancy rates
are low and local demand is strong.
By contrast, a property in a weaker
occupational market may face a very
different challenge if the tenant
leaves. Understanding local releing
prospects helps place tenant risk into
its proper commercial context.
Distress is rarely identified through
a single issue. More oen, it emerges
through a combination of factors
which help assess the tenant’s overall
financial position. The real value
lies in identifying warning signs
early, asking sensible questions
and presenting lenders with a
balanced picture.
Not every tenant experiencing
financial pressure will become
insolvent. Equally, not every property
with a struggling tenant is a distressed
asset. However, understanding the
warning signs will help brokers
protect income streams, support
informed lending decisions and reduce
the risk of unexpected issues emerging
later in the transaction. ●
October 2026 | The Intermediary
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