A commercial lease is a long-term financial commitment in both directions. When you sign a 5-year lease with a tenant who defaults after 8 months, you don’t just lose 8 months of rent. You lose the income the lender expects to service your commercial mortgage. You lose months of vacancy while you find a replacement. You absorb leasing commissions, potentially a free rent period, and possibly tenant improvement costs – all over again. You may be left pursuing a personal guarantee through the courts while the space sits empty.
The financial due diligence you conduct before executing a commercial lease is the only tool that meaningfully separates creditworthy tenants from those who will fail within their first or second year. Unlike residential screening – which is built around individual income verification – commercial tenant screening in Canada requires you to assess a business entity: its financial history, its payment behaviour, the personal financial standing of its principals, and the quality of the personal guarantees you can obtain before the ink dries.
Our tenant screening and selection service handles commercial tenant screening professionally, including business credit checks, financial statement review, and reference verification. For owners who want to understand the process – or who are conducting due diligence themselves – this article covers every component of the commercial tenant vetting framework. And for context on what residential tenant screening looks like by comparison, see our guide on steps for finding suitable tenants, verifying identity and credit, and avoiding discrimination. Commercial is the same rigour, with significantly more complexity.
The Letter of Intent: What to Require Before Due Diligence Begins
Before you invest time in full financial due diligence on a prospective commercial tenant, require them to submit a Letter of Intent (LOI). The LOI is non-binding, but it performs two important functions: it filters out applicants who aren’t serious, and it establishes the commercial terms of the proposed lease before legal and financial diligence begins.
A well-structured LOI should specify:
- Tenant legal name and operating name.
- Names of all principals.
- Proposed use of the space (must align with permitted use under zoning and your lease standard).
- Square footage requested.
- Proposed lease term.
- Proposed base rent and escalation structure.
- Any free rent period requested.
- Tenant improvement allowance requested, if any.
- Any exclusivity requests (particularly relevant for retail).
A vague LOI – one that specifies only a general interest in the space without committing to any terms – is a signal about how the tenant will manage the lease relationship. In tight GTA commercial markets, some landlords require a deposit of one to two months’ rent to accompany the LOI, returned if the landlord declines to proceed, forfeited if the tenant withdraws without cause after the LOI is accepted.
The lease terms proposed in the LOI matter beyond just the economics. Lease term length and tenant covenant strength directly affect the cap rate your property commands at appraisal and the DSCR your lender calculates at financing or renewal. Our article on how commercial property is actually valued explains the connection: a property with long-term leases from credit tenants appraises higher – and finances better – than the same property with short-term or month-to-month occupancy. And our guide to commercial mortgages in Canada: how they differ from residential covers what lenders look for on the rent roll when they’re underwriting a commercial mortgage.
Corporate Financial Documents: What to Request and What to Look For
Financial Statements – Minimum 2 Years
Request the last 2 full years of financial statements from the operating entity. The preference hierarchy: audited (formal audit by a licensed CPA firm) > reviewed (review engagement) > compiled (compilation from internally provided records). Compiled statements are the minimum acceptable; they confirm an accountant has assembled the numbers but offer no assurance of their accuracy. Always request the corresponding CRA Notices of Assessment from the T2 corporate tax return – these are the CRA-confirmed income figures and they’re harder to manipulate than internally prepared statements.
From the financial statements, assess:
- Revenue trend: is the business growing, stable, or declining over the 2-year period?
- Gross margin: is the core business model viable? A restaurant with 5% gross margin on $80,000/month in revenue is structurally fragile regardless of top-line sales.
- EBITDA relative to proposed rent: the standard benchmark is that rent (including TMI/additional rent in a net lease) should represent no more than 10–15% of gross revenue for retail occupants. A restaurant paying $8,000/month in base rent needs to be generating at least $53,000–$80,000/month in gross sales to comfortably support that occupancy cost.
For context: the financial statement structure you’re reviewing in the tenant’s accounts – income, expenses, EBITDA, net profit – mirrors what well-run property management accounting produces on the owner’s side. Our commercial operating budget article describes what owner-side financial reporting should look like. Our accounting and bookkeeping service produces that reporting monthly.
Bank Statements – 3 to 6 Months
Financial statements tell you what happened last year. Bank statements tell you what’s happening right now. Request 3–6 months of statements for the primary operating account. Review for: actual cash flow patterns and whether revenue deposits match the income shown on the statements; NSF activity (a single NSF event can happen to anyone; multiple NSFs are a pattern); payroll withdrawals consistent with the employee count stated in the application; and consistency of revenue deposits month-to-month – seasonal businesses have seasonal patterns, but a retail tenant with wildly erratic monthly deposits carries higher occupancy risk than one with a stable revenue base.
Accounts Receivable and Payable Aging
Two additional documents that many landlords skip and shouldn’t: the AR aging report and the AP aging report. The AR aging shows who owes the business money and for how long. A business with 60–90%+ of its accounts receivable concentrated in the 90+ day bucket is carrying significant collection risk – it has money it’s owed that it may not collect, which eventually shows up as a cash flow problem and then a rent payment problem. The AP aging shows how the business pays its own suppliers. A business that consistently pays AP 60–90+ days late is demonstrating financial stress regardless of what the income statement shows.
A Note on Franchise Tenants
Franchise tenants introduce a variable that can work strongly in your favour: the possibility of a corporate guarantee from the franchisor. A franchisee-operated national brand with a corporate guarantee from the parent company is a fundamentally different credit than an independent operator with no institutional backing. Always ask whether a corporate guarantee is available and request the franchise agreement – it will tell you whether the franchisee is in good standing and what the franchisor’s obligations are.
Personal Financial Due Diligence on the Principals
For most small and medium-sized commercial tenants, the business entity is relatively new, undercapitalised, or heavily reliant on the principals’ personal financial standing. The corporate veil is thin. This is why personal financial due diligence on the principals is not optional – it’s the backstop that gives the personal guarantee its actual value.
Request from each principal holding more than 20% ownership:
- Personal net worth statement.
- Personal credit report (written authorisation from the principal is required to obtain this).
- 2 years of personal Notices of Assessment from CRA.
- A list of any other business interests, personal liabilities, or guarantees currently outstanding.
When speaking to the principals’ professional and business references, the reference call methodology is nearly identical to a thorough residential landlord reference check. Our article on how to properly conduct a landlord reference check – the important questions to ask covers the call structure and the specific questions that reveal the most. Our guide on employment reference check questions landlords should ask is also directly applicable when calling the tenant’s professional references and business contacts.
Personal Guarantees: What to Require and What They Actually Protect
A personal guarantee requires the principal to personally backstop the corporate tenant’s obligations under the lease – meaning if the corporation defaults and can’t pay, you can pursue the principal’s personal assets. For new businesses with limited track record, a full personal guarantee for the initial lease term is non-negotiable. For tenants with an established and verifiable payment history at renewal, a limited guarantee – capped at 6 to 12 months’ rent – may be acceptable.
One Ontario-specific point: personal guarantees in commercial leases must be executed as a separate document from the lease itself to be clearly enforceable in a collection action. Do not embed the guarantee clause in the lease body and assume it will be treated as a standalone obligation under a court judgment. Have your lawyer draft the guarantee as a separate document.
Business Credit Checks: Equifax Business, D&B, and CRA Compliance
Business credit checks are one of the most underused tools in commercial tenant screening. Unlike personal credit reports, Equifax Business Credit Reports do not require the subject’s consent – they’re publicly available data on registered businesses. They provide: a business credit score, payment history across trade lines, public filings (judgments, liens, collections), and years in business. The cost is $40–$150 depending on the depth of report. For a lease representing $50,000–$500,000+ in total rent commitment, this is not an expense worth skipping.
The Dun & Bradstreet PAYDEX score is the other key business credit metric. It measures payment behaviour across trade lines on a 0–100 scale: 80+ means the business consistently pays on time or early; below 70 indicates regular late payments; below 50 signals significant payment problems. A PAYDEX score in the 60s for a tenant asking for a 5-year commitment is a conversation worth having before you execute the lease.
Our tenant screening and selection service includes access to both Equifax Business and D&B databases as part of the standard commercial screening process.
CRA compliance verification is the third element here. Ask the tenant to provide written confirmation from their accountant that HST filings, payroll remittances, and corporate tax returns are current. A business with unresolved CRA arrears carries a secured creditor – CRA – with priority ahead of you. If the business defaults and CRA has a lien registered, your ability to recover on a judgment or through lease enforcement is significantly reduced. Note that social media due diligence – checking the business’s online presence, reviews, and public activity – is useful supplementary context. Our article on why landlords should screen tenants’ social media accounts covers the PIPEDA framework around online screening. Social media is context, not a substitute for the formal credit and financial review.
Business and Landlord References: What to Ask and Who to Call
Request contact information for: the tenant’s current or most recent commercial landlord; 2–3 primary suppliers; their business banker; and a professional advisor (accountant or lawyer). Call each independently – do not rely on contact numbers provided by the tenant. Find the phone numbers yourself.
For the previous commercial landlord, the call structure maps directly to the residential landlord reference framework covered in our how to properly conduct a landlord reference check – the important questions to ask guide. The key questions: Did they pay rent on time, consistently? Did they maintain the premises to lease standard? Did they leave voluntarily at lease expiry, or were there issues? Would you lease to them again? A reference who becomes evasive on that last question is giving you information even if they’re not giving you words.
Industry-Specific Verification
- Food service and restaurants: all food premises inspection records are public in Ontario through the Food Premises Inspection Disclosure System. Check the history before you commit – a pattern of infractions tells you about operational standards.
- Professional service tenants: verify professional licences through the relevant regulating body: Law Society of Ontario, College of Physicians and Surgeons, Ontario College of Pharmacists, etc. A professional tenant with a licensing issue mid-lease faces business continuity problems that quickly become rent payment problems.
- Franchise tenants: contact the franchisor’s real estate or franchise development team directly to confirm the franchisee is in good standing, complying with franchise standards, and authorised to sign a new lease. Franchisors maintain their own performance records on franchisees – most will share relevant information with a landlord conducting good-faith due diligence.
Red Flags That Should Pause or Stop the Deal
- Business incorporated less than 12 months ago with no prior operating history under a predecessor entity. There is no track record to assess – only projections. Price this risk accordingly.
- Financial statements show declining revenue over 2+ consecutive years without a credible, documented explanation.
- Principal has a personal bankruptcy or consumer proposal within the last 5 years.
- CRA lien or judgment registered against the business or the principals.
- Previous landlord reference is evasive, non-responsive, or provides a lukewarm reference for a tenant who claimed an excellent relationship with them. The delta between what the tenant says and what the reference confirms is itself information. As our analysis of the real cost of losing a tenant in Toronto shows, the downstream cost of a wrong placement consistently exceeds what owners estimate upfront.
- Proposed rent exceeds 15–20% of the business’s gross revenue. The unit economics don’t support the tenancy without significant sales growth that hasn’t happened yet.
- Tenant requests unusually long rent-free period or above-market TI allowance without a commensurate rent rate. These concessions can signal a cash-flow problem masked by upfront landlord investment.
- Principal refuses to provide a personal guarantee or attempts to limit it to a nominal amount on a new business with no track record. Even thorough screening doesn’t eliminate all default risk – our rent guarantee program provides an income backstop for landlords who want protection beyond the lease and guarantee structure.
Structuring the Lease to Protect Against Default Risk
Financial due diligence identifies the risk. Lease structure manages it. Even after thorough vetting, the lease terms you negotiate provide the last line of protection.
Security Deposits
Commercial leases can require 3, 6, or even 12 months’ rent as a security deposit – far beyond the residential standard. The appropriate amount depends on the creditworthiness of the tenant. A well-capitalised tenant with a 10-year financial history might warrant 3 months. A new business with a first-time commercial tenant on a 5-year commitment warrants considerably more.
Operating Cost Provisions
Define operating cost recoveries (TMI) clearly, with the calculation method specified. Vague TMI provisions create reconciliation disputes. Itemise which costs are recoverable, which are excluded, and how the proportionate share is calculated.
Assignment and Subletting
Require landlord consent for any assignment or subletting. A right of first refusal to terminate the lease if the tenant tries to assign or sublet without consent is worth including for new or marginal-credit tenants.
Ontario’s Commercial Tenancies Act – Distraint and Termination Rights
Ontario’s Commercial Tenancies Act gives commercial landlords rights that don’t exist in residential: the right of distraint (seizing the tenant’s business goods and equipment to satisfy rent arrears) and the ability to terminate for non-payment on significantly shorter notice than residential. These rights must be exercised precisely and under legal counsel to be enforceable – improperly executed distraint exposes the landlord to substantial liability. But knowing the rights exist is part of understanding what the commercial lease framework actually gives you. Our tenant evictions management service handles commercial default proceedings from initial notice through enforcement.
For additional income protection beyond the lease structure: our overview of rent default insurance in Ontario: what it covers and what it doesn’t and our rent insurance service cover the landlord income protection products that work alongside the lease and personal guarantee.
Frequently Asked Questions
Can I run a credit check on a commercial tenant in Canada?
Yes. Business credit reports from Equifax Business and Dun & Bradstreet are available without the subject’s consent – they’re compiled from trade line data and public filings. Personal credit reports on the principals require written authorisation. Both should be part of standard commercial tenant due diligence. Our tenant screening and selection service accesses these databases as part of the commercial screening process.
What financial documents should I request from a prospective commercial tenant?
At minimum: 2 years of financial statements (reviewed or audited preferred; compiled is the minimum floor), 3–6 months of business bank statements for the primary operating account, personal net worth statements for principals with significant ownership, 2 years of personal NOAs, and written CRA compliance confirmation from their accountant. For franchise tenants, also request the franchise agreement and confirm whether a corporate guarantee is available.
How do I evaluate whether a commercial tenant can afford my space?
The standard occupancy cost benchmark for retail tenants: rent (base + TMI/additional rent) should represent no more than 10–15% of gross annual revenue. A restaurant paying $96,000 per year in total occupancy cost should be generating at least $640,000–$960,000 in annual gross sales to support that commitment without financial stress. Professional services can support a higher occupancy cost ratio because their gross margins are higher.
Should I require a personal guarantee from a commercial tenant?
Yes – particularly for new businesses, businesses with limited operating history, or tenants whose corporate financial statements are thin relative to the lease commitment. A full personal guarantee for the initial lease term is standard practice for new tenants. For established tenants with a verified payment track record at renewal, a limited guarantee (capped at 6–12 months’ rent) may be appropriate. In Ontario, the guarantee must be executed as a separate document from the lease to be clearly enforceable.
What happens if a commercial tenant defaults in Ontario?
Under Ontario’s Commercial Tenancies Act, commercial landlords have the right of distraint (seizing the tenant’s business assets to recover rent arrears) and can terminate the tenancy on significantly shorter notice than residential. These remedies must be exercised correctly under legal counsel – improperly executed distraint can expose the landlord to liability. Our tenant evictions management service handles commercial default proceedings from initial notice to final enforcement.
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