To continue our discussion on commercial leases, I’d like to examine two important areas related to this topic. First, I want to touch on how to investigate the legitimacy of the tenant business that will be located in your building. Then I’ll talk about best practices for reviewing form leases.
Both matters involve protecting the property you intend to rent. Therefore, it’s essential that you’re aware of these details to ensure you have appropriate tenants and a solid agreement for this rental space.
Verifying Tenant Business Legitimacy
Once you’ve found a business interested in leasing your property, you must perform due diligence prior to signing any agreement. In short, this means you need to research the business as thoroughly as possible.
To start, you should check with the Illinois Secretary of State to determine whether the tenant entity is a valid corporation or limited liability company. If the Secretary of State has no information concerning the existence of this entity or its records show that this entity has been dissolved or is not in good standing, you should consider this a red flag and cause for concern about this entity as a prospective tenant.
A second database to review is the Better Business Bureau, which may contain insights as to how this business conducts itself. Similarly, a credit check on the individual can quickly reveal a history of payment delinquencies that will equally serve as strong warning signs against accepting this business as a tenant and/or its individual owner as a personal guarantor.
As a final matter, contacting the prospective tenant’s prior landlord can also be enlightening, especially if the landlord offers no positive information about its former tenant.
Upon consideration of all of these due diligence investigative results, you will begin to get a strong sense about the financial and business character of your prospective tenant. Then you can make a prudent business determination as to whether this tenant is creditworthy enough to enter into a long term lease relationship.
Reviewing the Form Lease
Form leases are often available for commercial transactions, as well as for residential leases. Nonetheless, if a client proposes that I utilize a form lease, I will agree but will then recommend certain modifications. This is because every commercial lease is a unique contract between the business and the landlord. So this reality should be reflected in the agreement.
As a rule, I will look through the form lease and create modifications that are in my client’s best interest. To put this process in perspective, I inquire as to whether my client has a Letter of Intent that was signed by the parties. If so, I will include many of the provisions within this Letter of Intent. Items I specifically look at include:
- rent increases,
- any requested build-outs in the leased space,
- rent abatement and
- other core terms.
Again, by modifying a form lease, I’m making sure all of my client’s needs are met in this crucial contract.
Next time, I’ll discuss the role of brokers in addition to terms and renewals.