Encyclopedia
Covenant (tenant)
How strong the tenant is financially, which affects how a landlord or buyer values the lease.
For example: A landlord compares a well-established business and a startup, and asks the startup for a larger deposit or a guarantor. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you are choosing between two buildings at the same price. One is leased to a national grocery chain on a long lease; the other to a new local business. Lenders and buyers see the grocer as a stronger covenant, so that building may sell at a lower capitalisation rate (cap rate) and be easier to finance.
What I’d tell a friend
Look at who stands behind the rent, not just the rent itself. A strong tenant can be worth paying more for.
Why it matters to you
A strong tenant makes the income more reliable, which raises the value and makes financing easier. A weak one can mean a lower price or a guarantee requirement.
How to use it in your deal
Landlords should ask for financial statements, credit checks and references, and use deposits, guarantees or letters of credit for weaker covenants. Tenants with a short track record can offer a larger deposit or a personal guarantee with limits to win the space. Buyers should look at who the tenants are, not just the rents.
Lenders will judge the rent roll by tenant strength. Ask for financial statements and check credit before signing, and consider a guarantee or larger deposit for weaker tenants. A strong covenant can also help a landlord get better financing, so landlords may trade rent for a stronger tenant.
Mistakes I see
Assuming a big brand name means the parent company signed. Checking the numbers once and never again. Accepting a guarantee from someone without assets.
In BC and Vancouver
There's no BC rule; this is a credit judgement. The Commercial Tenancy Act and the lease govern remedies if a tenant defaults.
Official sources: Commercial Tenancy Act (BC Laws) · CanLII (court decisions)
What it means
Tenant covenant is the financial strength of a tenant and its promise to pay rent. A strong covenant is a tenant with solid finances and a long track record.
Investors and lenders weigh covenant heavily, because the income is only as reliable as the tenant paying it.
Checking covenant
Ask for financial statements, credit reports and details of who signed the lease, such as a parent company or an indemnifier.
Check whether a personal or corporate backer is in place and whether the lease lets the tenant assign to a weaker party. I can help you read these points in a lease.
Questions to ask before you sign
- Who exactly signed the lease?
- What financial information can the tenant provide?
- Is there a guarantee or deposit?
- How would the loss of this tenant affect value?
Keep reading
Related terms: Guarantor, Indemnifier, Rent roll
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.