Questions to Ask Before Renting Out Your Commercial Space

In Short

• Understand your lease terms – Decide on the lease duration, renewal options, and rent increase method to avoid surprises.
• Know your tenant – Check their financial stability, business type, and whether they need personal guarantees.
• Plan for lease end – Set clear expectations for property conditions when the lease ends to prevent disputes.

Tips for Businesses

Before signing a lease, check if you need to make changes to the space and negotiate terms upfront. Make sure you understand the renewal process, rent increases, and your responsibilities at the end of the lease. If unsure, get legal advice to protect your business and avoid costly mistakes.

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Table of Contents

• What Is the Term of the Lease?
• Who Is the Tenant?
• Does the Tenant Require Any Works to Be Done to the Premises?
• What Are the Make Good Requirements at the End of the Lease?
• What Are the Assignment Conditions of the Lease?
• Key Takeaways
• Frequently Asked Questions

Before you rent out your commercial space, it is essential to understand the arrangement you would like to have with the incoming tenant. This article will help you understand the types of questions you should ask and other considerations before entering into any leasing agreement with the incoming tenant. 

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What Is the Term of the Lease?

You should consider the lease term, including whether you want to rent the property for a longer or shorter duration. Also, think about option periods for extending the lease. Accordingly, you should also take into account the notice periods for the tenant, who must notify you before entering into an additional option period. Typically, the market standard notice period ranges from three to nine months before the lease expiration date. 

With the above, you will also need to calculate the rental increase method each year, whether:

• CPI;
• fixed percentage increase; or 
• market rent. 

Who Is the Tenant?

Before entering into any agreement, you should understand who the tenant is and their business. This is important because you must consider if they can make on-time payments and meet their responsibilities under the lease. For example, you might encounter a tenant running a business that is not as established as others. In this case, you might request personal guarantors from the directors of the tenant company. This ensures that if the tenant defaults on payments, you can personally pursue the guarantors for any violations. 

Understanding the tenant’s business will help you understand how they plan to utilise the space you offer. It could also foster a mix of different tenants in a building to attract more customers or clients. Consequently, the permitted use within the lease should mirror the type of business the tenant will operate at the premises. Any deviation from this permitted use may lead to a breach of the lease. 

Does the Tenant Require Any Works to Be Done to the Premises?

You will want to determine whether the tenant intends to extensively fit-out the premises or undertake significant works prior to the lease commencement. If so, you may want to consider entering into a lease agreement, as this will govern the relationship between the parties and the works to be carried out before the lease begins. 

A lease agreement will help define:

• the works the tenant intends to undertake;
• the nature of those works; 
• what the tenant can or can’t do concerning the fitout; and 
• any works you, as the landlord, may already be providing or will provide to the tenant. 

If minor works are carried out by the tenant, this may be included in the lease with an early access period. This allows the tenant to occupy the premises under a licence before the commencement date. This generally applies when the minor works take only a few days or weeks to complete. 

What Are the Make Good Requirements at the End of the Lease?

Regardless, the lease will also include provisions for restoring the premises once the tenant vacates at the end of the lease term. Here, you will want to think about what you expect from the tenant upon their departure: 

• whether you want the premises returned to the condition it was in at the start of the lease; or 
• if you prefer the tenant to completely de-fit the premises and return the property to what is typically called a ‘bare shell.’ 

Naturally, this will depend on the nature of the commercial agreement reached between you and the tenant. 

What Are the Assignment Conditions of the Lease?

Consider whether to include an assignment provision in the lease and what the conditions of assignment will be. When the lease is assigned, the tenant must obtain the landlord’s consent before the assignment. If it is a retail lease, both parties must comply with the legislative requirements specified in the state’s retail act. In the case of a commercial lease, you will have greater flexibility to determine the consent requirements needed from the tenant and the proposed assignee. 

You might also want to consider whether the incoming tenant, to whom the lease has been assigned, must continue the same permitted use as the outgoing tenant or if you would prefer to have a different permitted use for the new tenant. 

Key Takeaways

Renting out your commercial space involves several key considerations to ensure a smooth and successful lease arrangement. Clear lease terms can help prevent disputes and protect your interests, including:

• rental increases;
• tenant suitability;
• permitted use;
• fit-out requirements; 
• make-good obligations; and 
• assignment conditions.

A well-structured lease agreement sets expectations for both parties, reducing legal risks. Seeking professional legal and financial advice can further safeguard your investment. By asking the right questions upfront, you can attract the right tenants and establish a stable, mutually beneficial leasing arrangement.

If you have any further questions, our experienced leasing lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page. 

Frequently Asked Questions

What should I consider when determining the lease term?

You should decide on the lease duration, option periods for extension, and notice periods for renewals. Additionally, consider how rental increases will be applied (e.g., CPI, fixed percentage, or market rent).

How can I assess the suitability of a tenant?

It is important to understand who the tenant is, their business stability, and whether they can meet their lease obligations. You may also request personal guarantees from company directors to secure rent payments.