When leasing your commercial property, selecting the right tenant is vital. Asking the right questions will ensure that you have the information you need when choosing a tenant. Doing so will provide you with a much clearer picture of the prospective tenant’s financial health and will give you peace of mind when entering into the lease. This article sets out eight key questions to ask a potential commercial tenant.
1. What Services or Products Does Your Business Provide?
Asking about the services or products that the potential tenant provides will help give you an idea of what type of business will be operating in your premises. You can ask the prospective tenant for a brochure or any marketing material they may have about their business. It is likely that they will have a website that you can visit.
This is important because the prospective tenant’s business might not be suitable for the property you are leasing. This could be due to the:
- size of the premises;
- layout of the premises; or
- location of the premises.
Additionally, zoning regulations will geographically restrict the property. The lease will not be able to proceed if the council does not approve of the intended use of the property. While this is a consideration you may make as the landlord, it is ultimately the tenant’s responsibility to determine whether they can obtain council approval for their desired use.
2. What is the Target Market of Your Business?
Knowing the business’ target market will give you an indication of who the customers are and who will be walking in and out of your building.
For example, a toy store will attract more children than a hairdresser or a nail salon. Being aware of the type of customers the business attracts may be a factor in deciding whether you would like the business to occupy your premises.
3. When Do You Want to Occupy the Premises?
This will help determine the commencement date of the lease. It is also important to determine when you will be able to provide vacant possession of the property.
If there is a current tenant in the property, you must check when their lease is ending and whether they have an additional option that could extend the tenancy. You must also consider whether the current tenant will need to undertake any make good works on the property after their lease ends and how long this may take.
4. How Long Do You Want to Lease the Premises?
How long the prospective tenant wants to stay in the property will determine the length of the lease. For many leases this could be three, five, or seven years.
Additionally, you may want to include option terms that the tenant can exercise to extend the lease. You should consider any plans you might have with the premises in the future such as redevelopment or demolition. You should discuss this with the tenant and find a term that satisfies both parties.
5. Who Will Guarantee the Lease?
Landlords often ask the tenant to give a personal guarantee in order to secure performance and obligations under the lease. This is beneficial if the amount you are receiving as a security deposit will not cover your costs if something goes wrong.
If the tenant is a company, it is most common to request a personal guarantee. Without a guarantee, you are only able to claim losses from the company (and not the individuals). If there are no assets held in the name of the company, the loss you can recover will be limited.
If the tenant is leasing the property as an individual, it is less common to require a personal guarantee. However, you can still request this. If the tenant is a company, the directors of the company can be personal guarantors. If the tenant is an individual, they can be the guarantor themselves.
6. How Long Has Your Business Been in Operation?
This will indicate whether the business is old or new and how successful it has been to date. If the business is new or less than 12 months old, it is recommended to ask them for a business plan. This can provide you with the following useful details of the:
- history of the business;
- ownership structure;
- management personnel and their resumes;
- target market;
- operating budget; and
- projected revenue for the next 12 months.
If it is an older business, you can ask for financial documents which show financial success over the past three to five years. This can include:
- financial statements including profit and loss;
- tax returns; and
- business activity statements (BAS) .
After looking at these documents, you should have an idea of whether the tenant will be able to perform the financial obligations under the lease for the entire term.
Financial information can also help you decide how much security you want to request for the lease. Security can be requested in the form of a:
If the company is new, you may be inclined to ask for a higher bond amount.
7. Do You Have Plans to Grow Your Business?
It is beneficial to ask the prospective tenant if they are looking to expand their business and, if so, for an estimated timeline. If they are planning to expand, you should consider whether the new staff will fit into the current property. If it is likely that they will outgrow the property, then they will probably not stay for the entire lease period.
8. What Does Your Fitout Consist of and How Long Will it Take?
Speak to the tenant about what they intend to do to the property in terms of a fitout. This will depend on:
- what kind of products or services they offer;
- the current condition of the property;
- what fittings and furnishings are currently at the property and if they need to be removed.
If you are leasing the property as a bare shell, the tenant will need to undertake an extensive fitout, which will take a considerable amount of time. You should discuss with the tenant whether they want to obtain early access to do the work or whether they are happy to start this after the commencement date. If they start after the commencement date, you may want to consider offering them a rent-free period as an incentive, as they will not be able to operate their business until the work is complete.
You should also consider if there is any work that you would like done. The tenant may be willing to undertake the work if you provide them with a financial contribution to their fit-out.
When you are renting your commercial property, it is essential to choose the right tenant who will honour the obligations of the lease. There are several questions to ask a potential commercial tenant that will help you gain the information you need to make this decision. These include questions surrounding:
- financial capacity;
- growth intentions;
- expectations of the lease, such as the length; and
- any fitout required.
If you have any questions about commercial leases, call LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
Was this article helpful?
We appreciate your feedback – your submission has been successfully received.