When an investor is looking at commercial properties to purchase, one of the most reassuring things they can hear is that a property has a “good tenant” - the rent is coming in, the lease is in place, and the tenant may even be a household name. On the face of it, what could possibly go wrong? Well, quite a lot, actually!

A ‘strong’ tenant cannot compensate for the wrong rent, a weak lease, an unsuitable building or a poor location. You also can’t guarantee that a strong company will continue to want this particular property.

The question is not simply, “Is this a good tenant?” It is, “Is this the right tenant, in the right property, on the right lease, paying the right rent, in a location with a future?”

I think of this as testing for five potential mismatches. Any one of these can turn what appears to be a secure investment into a very expensive problem.

Mismatch one: the name above the door is not the company on the lease
A recognisable name is not automatically a strong covenant. The company on the lease may be a lightly capitalised subsidiary, or franchise, with no parent company guarantee.

It’s important to identify the precise legal entity and do a credit check and review its accounts, net assets, cash, debt and payment history. Look for restructuring, closures and sector pressures and, increasingly, resilience in the face of AI. For an SME, filed accounts may be historic, so seek current trading information where appropriate. If you don’t get a great covenant then look at whether it can be secured with personal guarantees, rent deposits or guarantors.