Protecting Rental Income

This article examines some of the ways a landlord can seek to protect its rental stream.

One of the most important considerations for landlords is to protect the income stream when letting properties. Careful due diligence should be undertaken on potential tenants, however, as leases tend to be for several years in length, circumstances can change and tenants may find themselves unable to comply with their lease covenants. Leases in general, if drafted correctly will contain various provisions protecting a landlord against tenant default.

Rent Deposit

A rent deposit is a sum of money provided by a tenant to a landlord as security for payment of rent and performance of its lease covenants. The rent deposit monies are usually held in a bank account established and operated by the landlord. The rent deposit agreement details the circumstances in which a landlord can drawdown against this sum and the conditions that must be satisfied for the deposit to be repaid to a tenant. The rent deposit will usually be held for the entire duration of a lease.

A rent deposit is attractive to landlords as it is an immediately accessible source of funds that can be utilised as soon as a tenant is in breach of relevant covenants within a lease. There is also no need to terminate the lease to take legal proceedings to recover the debt or secure performance of the obligation. The major disadvantage is that a rent deposit does not usually exceed a sum equating to 12 months rent. However, the amount of the rent deposit is a commercial decision between the parties.

Post Dated Cheques

A landlord can request a tenant to provide post-dated cheques for the entirety of the term of a lease. Post-dated cheques are commonly used as security instruments in Bahrain to guarantee future payments.

The post-dated cheques will act as security allowing landlords to cash the cheques on the dates set out. In addition, under Bahrain law, a post-dated cheque which is subsequently not honoured is a criminal offence. Article 393 of Legislative Decree No. 15 of 1976 provides that the penalty for an unhonoured cheque will be a prison sentence of a maximum of 3 years and / or a fine. However, this is subject to proving that the issuer of the cheque was acting in 'bad faith'. Such a requirement may be difficult for landlords to prove. Whilst the above penalty and consequently reputational damage is likely to encourage non - default by tenants, this option on its own may not provide...