Commercial leases in Australia: what tenants need to watch for

A lease is the longest financial commitment many businesses make

For a business with physical premises, a commercial lease is usually the largest and longest financial obligation you will sign. Unlike staff, who can be let go, or equipment, which can be sold, a lease is almost impossible to exit early without significant cost.

This matters: a commercial lease is completely different from a residential lease. The protections that apply to residential tenants do not automatically apply to a commercial lease.

The two main types of commercial lease

Retail lease: For retail business premises — shops, restaurants, beauty salons. Each state has its own Retail Leases Act, setting out certain minimum rights for tenants — such as the obligation to provide a disclosure statement before signing, and certain protections during the tenancy. Check the law of your state, because the rules differ between NSW, VIC, QLD, WA, SA and so on.

Standard commercial lease (non-retail): For offices, warehouses and workshops. There are fewer protections than under a retail lease — most terms are negotiated between the two parties. This is why a commercial solicitor is even more important for this type of lease.

The most important clauses to understand

Term and renewal options: A lease usually has an initial term (for example 3 years or 5 years) and may include an option to renew. A renewal option gives you the right to keep leasing after the term ends, on certain conditions. Importantly, the option is your right, but you must exercise it on time — missing the date usually means losing the option. This is something many people do not realise until it is too late.

Rent and reviews: How much is the rent per year or month, and how is it reviewed (increased)? It may rise by CPI, by a fixed percentage, or to market. Each review method carries a different risk — a market review can mean a steep increase.

Outgoings: On top of the rent, you may have to pay outgoings as well — building management fees, insurance, council rates and so on. The lease clauses must clearly state which outgoings you are responsible for and how they are calculated. The real total cost is often considerably higher than the advertised “rent”.

Fitout and make-good: Who pays for the fitout (renovating the premises to suit your business)? When the lease ends, you have a “make-good” obligation — to return the premises to their original condition. Make-good costs can be very large if you have done a lot of renovation.

Restrictions on transfer: If you want to sell your business and the buyer wants to keep using those premises, you need to “assign” (transfer) the lease into their name. The landlord usually has the right to agree or refuse. This clause directly affects how much you can sell your business for later.

Permitted use: The lease sets out what you are allowed to use the premises for. If you want to add a service that falls outside the “permitted use”, you need the landlord’s permission (and they may refuse).

Your rights under a retail lease

If you lease under your state’s Retail Leases Act, certain minimum rights are usually protected:

• The landlord must provide a disclosure statement (information about the lease) before you sign — so you can read it carefully and get advice
• There is usually a period during which you can withdraw after receiving the disclosure statement
• There are some rules about when the landlord can end the lease

The specific rules differ considerably between states. Do not assume the rights in one state apply in another.

Negotiating — something many people do not realise they can do

A lease is not “take it or leave it”. Many clauses can be negotiated, especially in a market where landlords need tenants:

• A rent-free period to let you do the fitout
• A cap on rent increases (rent cap) within the renewal option
• A clause protecting you if the landlord does not renew and you have to move out (compensation for disturbance)
• A limit on make-good costs

Ask, and negotiate — the worst they can say is no. If you do not ask, you definitely will not get it.

Who should read your lease before you sign

A solicitor who specialises in commercial/retail leases: Not a general solicitor — someone who specialises in your type of lease. They will help you understand complex clauses, spot hidden risks, and negotiate terms that are not reasonable.

An accountant: To work out the real total cost (rent + outgoings + fitout) and assess whether these premises are financially viable for your business plan.

Signing the lease first and asking a solicitor afterwards is the wrong order. Your solicitor needs to read it and advise you before you sign anything — including any initial “letter of intent” or “heads of agreement”, because some of those documents can be binding too.

Practical links

If you are buying a business that comes with premises, see the related guide on buying an existing business in Australia to understand how that business’s lease affects your decision to buy.

If you are considering a franchise and need premises, see the related guide on franchising in Australia — many franchises require you to sign your own lease, and the franchisor is not the party guaranteeing you to the landlord.