A commercial lease is typically one of the largest financial commitments a business makes. It binds the tenant to a location for years, carries substantial make-good obligations, and contains provisions that can — if not understood — result in significant unexpected costs.
Most commercial leases are prepared by the landlord’s solicitor. They are designed to protect the landlord. Understanding the key provisions, what is negotiable, and where the traps are, is one of the more practically important things a business owner can do before signing.
Commercial vs Retail Leases: The First Distinction
The legal framework governing a lease depends on whether the premises are classified as commercial or retail.
Retail leases — in premises used for the sale of goods or services to the public — are regulated by specific state legislation (for example, the Retail Leases Act 1994 (NSW), the Retail Leases Act 2003 (Vic)). These Acts provide tenants with a range of protections that are not available in purely commercial leases, including minimum lease terms, disclosure obligations on landlords, caps on certain costs, and access to specialist dispute resolution through state tribunals.
Commercial leases — in office, industrial, or other non-retail premises — are generally governed only by general contract law and the terms of the lease itself. Tenants in commercial premises have fewer statutory protections and rely more heavily on the negotiated terms of the agreement.
Before entering any lease, it is worth understanding which framework applies. The distinction matters for the protections available and for how disputes are resolved.
Key Provisions in Any Commercial Lease
The Term
The initial lease term and any options to renew are among the most important commercial terms. Longer terms provide stability; shorter terms (or more renewal options) provide flexibility.
Options to renew are the tenant’s right, not the landlord’s. They allow the tenant to extend the lease on terms agreed upfront — commonly the same terms as the current lease, with rent reviewed to market at the commencement of the renewed term.
Critical point on options: Most leases require the tenant to exercise the option by giving written notice within a specific window (commonly 6-12 months before the end of the term). Missing this window typically means the option lapses and the tenant has no automatic right to renew. A calendar reminder for option exercise windows, set well in advance, is a simple but frequently overlooked precaution.
Rent and Rent Review
Commercial leases typically include a rent review mechanism — a scheduled process for adjusting rent during the term. Common methods include:
- Fixed increases — a fixed percentage increase per year or at specified intervals (e.g. 3% per annum)
- CPI increases — rent increases in line with the Consumer Price Index
- Market review — rent is reset to the current market rate at a defined review date. Market reviews can result in significant increases (or, in falling markets, decreases, though many leases cap downward reviews)
- Combination — some leases use annual fixed or CPI increases with a market review at the commencement of each renewal option term
Understanding the rent review mechanism — and the potential financial exposure under each type — before signing is important. A market review clause in a landlord’s market can result in substantially higher rent than the tenant anticipated when they committed to the lease.
Outgoings
Most commercial leases require the tenant to contribute to the landlord’s outgoings — the costs associated with owning and managing the building. These typically include:
- Council rates and land tax
- Building insurance premiums
- Property management fees
- Common area maintenance
- Capital expenditure (in some leases)
Outgoings obligations vary significantly between leases. Some leases are “gross” (a single inclusive rent with no outgoings payable separately); others are “net” (base rent plus a separate outgoings contribution that can add substantially to the total cost of occupancy).
Understanding the outgoings structure — and reviewing the historical outgoings schedule before signing — helps avoid surprises.
Permitted Use
The lease will specify the permitted use of the premises. Operating outside that permitted use is a breach of the lease.
Where a business’s activities expand or change, a restrictive permitted use clause can become a problem. Tenants may want to ensure the permitted use clause is drafted broadly enough to accommodate reasonably foreseeable changes to the business.
Assignment and Subletting
Most commercial leases require landlord consent before the tenant can assign the lease to a new tenant or sublet the premises. This is particularly relevant in the context of a business sale — where the buyer needs to step into the tenant’s position, landlord consent to assignment will typically be required.
Landlords can generally impose reasonable conditions on consent. They can assess the financial position of the proposed assignee and may require a personal guarantee from the new tenant’s principals. They cannot unreasonably withhold consent, but what is “unreasonable” is a fact-specific question.
Make-Good Obligations
The make-good clause specifies what the tenant must do to the premises at the end of the lease — restoring them to a defined condition before handing them back to the landlord.
Make-good clauses vary enormously. At one end, they require only that the tenant return the premises in reasonable condition with fair wear and tear accepted. At the other, they require the tenant to remove all fit-out, repair all damage (including fair wear and tear), and restore the premises to the condition they were in at lease commencement.
Make-good can be one of the most significant financial obligations at the end of a lease — particularly for tenants who have invested heavily in fit-out. Understanding what is required, and ideally negotiating to limit or cap the make-good obligation at the outset, can avoid a very large unexpected cost when the business moves on.
Incentives
In competitive leasing markets, landlords frequently offer incentives to attract tenants — rent-free periods, fit-out contributions, or reduced rent for a period. These incentives are often more negotiable than the base rent itself.
Incentives should be carefully documented in the lease or in a deed of agreement. Oral promises about incentives that are not recorded in the lease documents may not be enforceable.
The Disclosure Statement (Retail Leases)
In states with retail leases legislation, landlords are required to provide a disclosure statement before the lease is entered into. The disclosure statement is a prescribed form that sets out key information about the lease — including the term, rent, rent review mechanism, outgoings, fit-out obligations, and the landlord’s knowledge of any planned changes to the shopping centre or precinct.
Reading the disclosure statement carefully — and checking whether the lease documents are consistent with what is disclosed — is an important step before proceeding. Where there are discrepancies between the disclosure statement and the lease, the tenant may have specific remedies under the relevant legislation.
Negotiating a Commercial Lease
The starting position on a commercial lease — particularly in a landlord’s market — often looks non-negotiable. In practice, most provisions are negotiable to some degree, particularly in:
- Lease term and renewal options
- Rent and rent review mechanism
- Outgoings cap or exclusions
- Make-good obligations
- Assignment and subletting conditions
- Personal guarantee scope and duration
The leverage available to a tenant depends on market conditions, the desirability of the premises, and how many competing tenants the landlord is dealing with. In a tenant’s market, significant improvements to the starting position can be achieved. In a landlord’s market, the room is narrower — but provisions like make-good, outgoings, and permitted use frequently remain open to negotiation.
Personal Guarantees in Commercial Leases
Most commercial leases for premises occupied by a company require the directors of the company to sign a personal guarantee — making them personally liable if the company fails to meet its rental obligations.
The scope of personal guarantees in leases varies:
- Some are limited to a defined amount (e.g. six months’ rent)
- Some are unlimited in amount but limited in time
- Some are unlimited in both — covering all obligations under the lease for its full term, including make-good
Negotiating a cap on the guarantee — in amount, in duration, or in the circumstances that trigger it — is worth attempting. Landlords in strong markets often resist, but the position is almost always worth raising.
What Happens If the Business Needs to Exit the Lease Early
Exiting a commercial lease before the end of the term is not straightforward. Options typically include:
Assignment — finding a new tenant to take over the lease, with the landlord’s consent. The original tenant may remain liable under the lease even after assignment if the new tenant defaults.
Subletting — subletting the premises to another occupant while remaining the head tenant.
Surrender — negotiating a deed of surrender with the landlord to mutually terminate the lease. This typically requires a payment — the landlord needs to be compensated for the loss of future rent.
Abandonment — simply vacating without agreement. This leaves the full remaining rent exposure alive and the landlord free to pursue the tenant (and any guarantors) for damages.
The lease exit article in this series covers the general law on contract termination; for leases specifically, the above options reflect commercial practice rather than unilateral legal rights.
The Bottom Line
A commercial lease is a multi-year financial commitment with significant obligations — including obligations that bite at the end of the lease rather than the beginning. Understanding the key provisions before signing, negotiating where there is room, and building a clear picture of the total cost of occupancy (rent plus outgoings plus make-good) tends to produce materially better outcomes than accepting the first draft.
Given the financial significance of most commercial leases, getting legal review before execution — not after — is consistently worthwhile.
This article contains general information only and does not constitute legal advice. Envision Legal accepts no liability for any loss arising from reliance on this content. You should seek independent legal advice tailored to your specific circumstances. For enquiries, contact Envision Legal.