Understanding Common Terms and Conditions in Australian Commercial Leasing

Commercial leasing in Australia involves a complex interplay of legal, commercial and practical considerations. Whether you are a business owner, tenant, investor or landlord, understanding the common terms and conditions in commercial leases is crucial to protecting your interests and managing financial exposure.

Many of these terms appear straightforward, but in practice they are the source of the majority of leasing disputes and unexpected costs. The following is a practical overview of key concepts and the issues we frequently see in negotiations and disputes.

1. Lease Term and Renewal Options:

The lease term is the duration for which the lease is valid, often ranging from three to ten years in Australian commercial leasing. Renewal options allow the tenant to extend the lease for an additional period. Importantly, the exercise of an option is rarely automatic which means strict notice requirements must be met, and missing these deadlines can result in losing the option entirely. Where an option triggers a market rent review, the method for determining "market rent" becomes critical and is a common source of disagreement. Understanding these terms is vital for long-term operational planning.

2. Rent and Rent Reviews:

Rent is usually expressed on a per square metre basis. Rent review mechanisms may include fixed annual increases, CPI adjustments or market reviews. A key issue many tenants overlook is the presence of ratchet clauses, which prevent rent from decreasing even if the market has softened. Another negotiation lever is the methodology for market rent reviews, including how incentives, rent-free periods and fitout contributions are treated. Choosing the right review structure based on business forecasting and economic conditions can materially reduce occupancy cost across the lease term.

3. Outgoings:

Outgoings are the operating expenses associated with the property, which may include council rates, water rates, insurance premiums, strata levies, repairs and land tax. A critical distinction exists between retail leases and commercial/office leases: for example, in VIC and QLD, landlords cannot recover land tax from retail tenants¹, but they often can from commercial tenants. Outgoings frequently increase year-on-year, and in some buildings can exceed the base rent. Careful review of the outgoings schedule, particularly how increases are calculated, is essential for accurate budgeting and risk management.

4. Security Deposit or Bank Guarantee:

Most landlords require a security deposit or bank guarantee equivalent to two to six months' rent. Corporate tenants are often also asked for directors' guarantees. Understanding the conditions for release of the security is important, as delays often arise due to disputes about make-good works or unpaid outgoings. Tenants should also ensure that the landlord's requirements for maintaining or replacing bank guarantees during the term are reasonable.

5. Make Good Provisions:

Make good clauses require tenants to return the premises to an agreed condition at the end of the lease. This could range from basic cleaning to full reinstatement of the premises to "base building condition" or "basic shell". Make good is one of the most expensive and misunderstood components of commercial or retail leasing. Tenants should consider documenting the condition of the premises at commencement and negotiating specific limits on reinstatement obligations. In some cases, agreeing to a fixed make-good amount or cash settlement can avoid disputes at end of term.

6. Subletting and Assignment:

These terms govern whether a tenant may sublet part of the premises or assign the entire lease to a new tenant. Landlord consent is generally required. In retail leasing, legislation prevents landlords from unreasonably withholding consent. Even if subletting or assigning is not part of the initial business plan, having flexibility can be critical if the business restructures, relocates or is sold. Tenants should also negotiate for a release from liability after assignment, which is a point often overlooked until it becomes a problem.

7. Default and Termination:

This section of the lease outlines circumstances that constitute default and the process for termination. Strict compliance with notice requirements is critical as a failure to remediate within the timeframe stated in the lease or any notice may trigger termination rights or additional penalties. Understanding default provisions early can reduce the risk of unexpected termination or accelerated recovery of rent.

8. Repair and Maintenance Obligations:

The lease will usually specify who is responsible for repairs and maintenance, including structural repairs, air-conditioning, utilities, and compliance with building regulations. These obligations can materially affect the usability and cost of occupying the premises. Tenants also have the legal right to quiet enjoyment of the premises meaning the landlord must not interfere with the tenant's lawful use. Frequent disruptions, unresolved defects or delayed repairs can significantly impact operations and likely lead to dispute.

9. Use of Premises:

This clause defines how the tenant may use the premises. Ensuring that the permitted use captures your current operations and future anticipated use is important. A narrow use clause can limit growth, impact compliance obligations, or even restrict your ability to assign the lease if the incoming tenant's use does not align with the original permitted use.

10. Insurance Requirements:

Tenants are usually required to hold public liability insurance and sometimes other forms of cover. The lease will specify the required coverage amounts. Tenants should ensure that their insurance dovetails with the landlord's building insurance, reducing the risk of coverage gaps. Insurance requirements also affect cost, and some landlords impose higher limits than necessary for the risk profile of the premises.

11. Dispute Resolution:

Leases often include internal dispute resolution processes, sometimes requiring mediation or arbitration before court involvement. In retail leasing, disputes frequently commence through compulsory mediation at the Small Business Commissioner equivalent in each state. Early and efficient dispute resolution helps contain cost and avoid prolonged operational disruption.

12. Personal Guarantees:

Where the tenant is a company, landlords often require personal guarantees from directors. These guarantees create personal liability if the company defaults. Tenants should consider negotiating caps, release mechanisms (especially upon assignment), or limiting the scope of the guarantee to specific obligations.

Final Considerations:

Whether you are leasing a commercial or retail premises in Australia, these terms generally form the foundation of your financial and legal exposure under the lease. The clauses above may appear standard, but their real-world implications can be significant especially regarding rent reviews, make-good, outgoings and assignment rights. Experienced lease lawyers can help you navigate the negotiation process, identify hidden risks and ensure the lease reflects your commercial objectives. Securing balanced terms from the outset protects your business, reduces future disputes and provides long-term stability for both landlord and tenant.

Footnote

¹ In NSW, land tax is recoverable but only limited to the amount that would be payable if the relevant land was the land owned by the landlord (single-holding basis).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.