When you locate a new tenant in commercial or retail property leasing, it is essential that you have a tenant application process to check the integrity and suitability of the tenant to the property and the client. Some tenants are more suitable than others to the property and or the landlord’s investment plans. Look for the weaknesses within any tenant before the lease transaction is completed and put in place.
Whilst it is always nice to fix a vacancy problem within a property for a landlord, tenants should be vetted for occupancy suitability and stability. Don’t be too eager to negotiate and close on a lease transaction without sufficient tenant and business investigation.
Here is an example of what I am saying. In a recent case involving a property that had been vacant for a long time, a tenant was found from the petroleum industry. The terms and conditions of the lease offer were quite attractive and reasonable for the property type. The landlord was encouraged and keen to do the lease based on the generous rental offer and the extended lease term that the tenant required. On further investigation through a credit history check it was found that the tenant had a very low credit rating and a history of business default. Fortunately the lease in question had not reached finality and therefore the lease agreement could be avoided by the landlord; another tenant was then located and a different lease was created.
The message here is that you should not take a tenant on face value; find out more before you recommend to your client that they proceed with the lease.
Here are some ideas to help you with this application process:
- Start-up businesses can be a leasing problem. Without a business history you have nothing to work with or check during the lease negotiation. In that case you will need director’s guarantees, a reasonable bank guarantee, and or a cash bond. If a tenant default occurs during the term of the lease, the landlord will have something to fall back on by way of monetary offset. It should also be said that the size of the bank guarantee or cash bond should also be equivalent to between three and six months of rental and outgoings payments that would normally be paid under the terms of the lease. That will then give the landlord a sufficient monetary buffer whilst they seek another tenant as a replacement.
- Seek the history and identity of the tenant as part of the application for leasing the premises. Wherever possible, talk to other landlords where the tenant has been in occupancy. With an established tenant, get a history of the business and its activities; understand the reasons for the tenant seeking relocation. You can also ask the tenant for a copy of business financial records from the previous financial year and the current business activity. That information should be accurately prepared and submitted confidentially through their accountant and or solicitor. You may also want to look at their business plan; that is a normal requirement with retail tenants.
- In exchange for a tenant making an offer to lease premises, they should pay a reasonable monetary deposit, produce guarantees and bonds, and sign the lease accurately for the property and premises in question. Do not give access to the premises until those things have been satisfied. It is very hard to remove a tenant from premises after they have been given the key. Make sure that all circumstances of lease offer, lease documentation, and payment of rental are fully and completely satisfied before occupancy is provided to the tenant.
- Some tenants look to change the premises with extensive fit out modification. If that is to be the case, they should provide to the landlord design drawings relating to the fitout, the floor plates, the services and amenities, and their occupancy. The lease should incorporate extensive provisions for make good by the tenant prior to the expiry of occupancy.
- The use of the property should be well defined and protected in the of the lease document. Be quite specific when it comes to the definition of property use by the tenant. In that way you will restrict their occupancy to a particular industry and use of building. This is a very important strategy when it comes to buildings containing multiple tenants. Normally you would want to avoid the replication of tenant types within the one property. A specific and accurate permitted use clause will also protect the landlord in times of sublease and lease assignment.
- Make sure that any lease offer complies with property legislation and the intentions of the landlord. Also ensure that any disclosures required between the landlord and the tenants are accurately and comprehensively communicated. Don’t let a lack of information threaten the integrity of the lease negotiation.
- When it comes to any lease negotiation, property inspection, and discussions with landlords and tenants, it is essential that all factors and key issues are documented in writing and through accurately maintained business notes. Many lease negotiations can become situations of dispute; your notes are critical to avoiding the problem.
So there are some very specific things to look for as part of the leasing process. It is wise to establish a checklist within a property type based on your location and the requirements of lease negotiation in your town or city.