How commercial leases work in Australia

Commercial leases in Australia give a business the right to occupy premises for a defined period in exchange for rent and other agreed costs, such as outgoings, insurance, utilities and sometimes GST. The lease sets the permitted use, rent review method, repair responsibilities, fit out rules, security, renewal options, transfer rights and make good obligations. The practical process is to assess the premises, negotiate the commercial terms, review the disclosure documents and lease with advisers, complete the fit out, operate under the lease and comply with its end of term requirements.

The most important point is that commercial leasing is governed by both the written lease and state or territory legislation. Retail premises may receive additional statutory protections that do not apply to every office, warehouse or industrial lease.

What is a commercial lease?

A commercial lease is a legally binding agreement under which a landlord, called the lessor, grants a business, called the lessee or tenant, the right to occupy identified premises for a specific term. In return, the tenant pays rent and performs the obligations set out in the lease.

A commercial lease should identify:

• The landlord and tenant
• The exact premises, including the leased area and any car parks or storage
• The lease term and commencement date
• The base rent and payment frequency
• Rent review dates and review method
• Permitted use
• Outgoings and other occupancy costs
• Repairs, maintenance and insurance responsibilities
• Fit out and signage requirements
• Security requirements
• Renewal options
• Assignment and subleasing rules
• Default and termination rights
• Make good obligations at the end of the lease

Australian government guidance also recommends checking whether the proposed use is permitted under planning rules, council requirements and the lease itself before committing to premises.^[1]

How does the commercial leasing process work?

The commercial leasing process usually has seven stages: selecting premises, negotiating key terms, completing due diligence, receiving disclosure documents where required, signing the lease, completing the fit out and managing the tenancy through renewal or exit.

1. Select and assess the premises

The business first assesses whether the premises can support its intended operation. Location is only one part of the decision. The tenant should also check access, visibility, loading, power, ventilation, fire services, toilets, storage, waste arrangements, customer access, trading restrictions and the condition of the building.

Retail and food businesses need additional checks. A restaurant or café may need suitable exhaust, grease trap capacity, gas, waste collection, outdoor dining rights, liquor licensing potential and permission for late trading. A retailer may need signage rights, delivery access, trading hour obligations and clarity about the tenancy’s position within the centre or precinct.

2. Negotiate the commercial terms

The landlord or leasing agent usually provides proposed commercial terms before the formal lease is prepared. These may cover:

• Annual or monthly rent
• Lease term
• Renewal options
• Rent free periods or other incentives
• Rent review method
• Estimated outgoings
• Security deposit or bank guarantee
• Fit out contribution
• Permitted use
• Handover date
• Car parks, storage and signage
• Conditions that must be satisfied before the lease starts

Treat these terms as a negotiation document, not as a substitute for the lease. A promise about rent relief, repairs, signage or a fit out contribution should be recorded in writing and reflected in the final documents.

3. Complete legal and commercial due diligence

Before signing, the tenant should confirm that the premises, lease structure and projected occupancy costs suit the business. Review the lease against the agreed commercial terms and identify anything that changes the original offer.

The due diligence should include:

• Confirming the permitted use
• Checking planning and council requirements
• Reviewing title, plans and the leased area
• Confirming access and operating hours
• Checking whether the landlord has planned building works
• Reviewing historical or estimated outgoings
• Assessing repair and maintenance obligations
• Confirming insurance requirements
• Checking fit out approval processes
• Pricing the likely make good cost
• Confirming renewal option deadlines
• Checking whether the lease must be registered
• Reviewing guarantees and personal liability

A condition report with dated photographs should be completed before possession. It creates evidence of the premises’ original condition and can reduce disputes about damage or make good work at the end of the lease.

4. Review disclosure documents

Retail leases in several Australian jurisdictions require the landlord to provide a disclosure statement before the tenant enters into or renews a lease. The document commonly covers rent, lease term, options, outgoings, fit out, trading hours, planned works and other information relevant to the tenancy.

In New South Wales, a lessor’s disclosure statement for a retail lease must generally be provided at least seven days before the lease is entered into, and the tenant must provide its own disclosure statement or request an extension.^[2] In Victoria, the current Victorian Small Business Commission tenant brochure states that the landlord must provide the disclosure statement and proposed lease at least 14 days before entering into a retail lease.^[3]

These timing rules are jurisdiction specific. Do not assume that a requirement applying to a retail lease in Victoria or New South Wales applies to every commercial lease across Australia.

5. Sign the lease and provide security

Once the lease is agreed, both parties sign the formal document. The tenant may also need to provide a security deposit, bank guarantee, director guarantee or another form of security.

The security clause should explain:

• The amount or formula used
• When the security must be provided
• Whether it must be increased after a rent review
• When it can be used by the landlord
• Whether the tenant must replenish it
• When it will be returned or released

A bank guarantee can tie up borrowing capacity even when no cash is paid to the landlord. The tenant should assess its effect on working capital before accepting the proposed amount.

6. Complete the fit out and take possession

The lease usually controls who can design, approve, pay for and remove fit out works. The tenant may need landlord approval, building approval, council approval and specialist approvals before work starts.

The fit out process should document:

• Approved plans
• Construction hours
• Contractor requirements
• Building protection measures
• Fire and accessibility compliance
• Services connections
• Signage
• Handover condition
• Ownership of fixtures and equipment
• Items that must be removed at the end of the lease

Do not start construction based only on an email or verbal approval. Confirm the approval pathway and the final obligations in writing.

7. Operate, renew, assign or exit

During the lease, the tenant must pay rent and other charges on time, operate within the permitted use, maintain required insurance and comply with building rules. If the business is sold or relocated, the tenant may need the landlord’s consent to assign or sublease the premises.

In New South Wales, the retail lease assignment process includes disclosure documents and information about the proposed incoming tenant. The tenant generally has 28 days to respond after receiving the required information.^[4]

Renewal options also have strict notice deadlines. Missing an option date can mean losing the right to continue the lease, even if the tenant has occupied the premises successfully for years.

What costs does a commercial tenant pay?

A commercial tenant usually pays base rent plus some combination of outgoings, GST, utilities, insurance, fit out costs, repair costs, legal costs and make good costs. The exact allocation depends on the lease and any applicable retail leasing legislation.

Base rent

Base rent is the principal amount paid for the right to occupy the premises. It may be quoted annually, but payments are commonly made monthly in advance.

Check whether the quoted rent is:

• Per square metre or for the whole premises
• Net or gross
• Inclusive or exclusive of GST
• Inclusive or exclusive of outgoings
• Subject to a minimum rent
• Linked to turnover or another variable measure

Rent reviews

Rent reviews increase the rent during the lease or at renewal. Common methods include:

• Fixed percentage increases
• Consumer Price Index reviews
• Market reviews
• A combination of methods
• Turnover rent for some retail premises

The lease should state the review date, formula, assumptions, notice requirements and process for resolving disagreement. A market review clause should also explain what evidence can be considered and who determines the rent if the parties cannot agree.

Outgoings

Outgoings are property related costs that the tenant agrees to reimburse or pay in addition to rent. They can include council rates, water charges, insurance, cleaning, security, repairs, waste services, management fees, centre marketing and owners corporation costs, depending on the lease and applicable legislation.

The tenant should request:

• The current estimate
• The previous actual costs
• The tenant’s proportion or allocation formula
• Any management or administration fee
• Capital expenditure exclusions
• Reconciliation timing
• Evidence supporting the charge

In Victoria, a tenant under a retail premises lease is not liable to pay outgoings unless the lease specifies the outgoings recoverable from the tenant and the basis on which they are determined, apportioned and recovered. The landlord must also provide estimates and statements of outgoings at the times and in the circumstances prescribed by the Retail Leases Act 2003 (Vic).^[5] In New South Wales, a retail tenant is not liable for an outgoing unless the liability has been disclosed in the lessor’s disclosure statement. The lease must specify the recoverable outgoings and the basis on which they are determined, apportioned and recovered. NSW guidance further describes the disclosure requirement as requiring outgoings to be meaningfully disclosed and directly and reasonably related to the leased shop and to the management, operation, maintenance or repair of the relevant building or shopping centre.^[6]

GST

GST may apply to commercial rent and associated payments where the landlord is making a taxable supply. The lease should state whether rent and other charges are GST inclusive or GST exclusive.

The Australian Taxation Office treats rent and certain tenant reimbursements of landlord outgoings as consideration for the supply of commercial premises where the lease is a taxable supply.^[7] A GST registered tenant may be able to claim an input tax credit if the relevant requirements are met, but the tenant should confirm the treatment with its accountant.

Fit out and operating costs

The tenant may pay for design, construction, approvals, equipment, connections, signage, utilities, cleaning, repairs and insurance. A rent free period or fit out contribution may reduce the initial cost, but it does not necessarily remove the tenant’s other occupancy expenses.

Prepare a cash flow that includes the highest likely monthly occupancy cost, not only the advertised rent.

What is the difference between gross and net leases?

A gross lease generally bundles some property expenses into the rent, while a net lease separately charges the tenant for specified outgoings. The labels are not always used consistently, so the lease wording matters more than the title given to the arrangement.

A tenant comparing premises should calculate:

1. Base rent
2. Estimated outgoings
3. GST
4. Utilities and operational costs
5. Insurance
6. Fit out financing
7. Annual rent increases
8. Expected make good costs

For example, a lower advertised rent may be less affordable if the premises has high centre charges, security costs, marketing levies or repair responsibilities. Ask for the total occupancy cost in writing before comparing locations.

What protections apply to retail leases?

Retail lease protections vary between states and territories and may depend on the type, size, location and use of the premises. A retail lease may be regulated even when the parties describe it informally as a commercial lease.

Possible statutory protections include requirements relating to:

• Disclosure statements
• Lease timing
• Outgoings
• Rent reviews
• Minimum standards
• Relocation or demolition
• Assignment
• Dispute resolution
• Access to a small business or retail leasing commissioner

The first step is to identify the governing jurisdiction and determine whether the premises falls within the relevant retail leasing legislation. A lease for a shop in a shopping centre may be treated differently from an office lease, warehouse lease or standalone industrial tenancy.

For Melbourne retailers, specialist precinct knowledge can be useful when assessing trading conditions, tenancy mix and site suitability. Ainsworth Property publishes a practical guide to Queen Victoria Market leasing for retailers and landlords, and its F&B leasing guide for Melbourne CBD restaurant and café operators covers operational issues that can materially affect a food tenancy.

What should a tenant negotiate before signing?

A tenant should negotiate the parts of the lease that affect cash flow, operational flexibility and exit risk. The most important terms are not always the headline rent.

Prioritise:

• A permitted use broad enough for the planned business and reasonable future changes
• A rent review method that can be budgeted
• A clear cap or allocation method for outgoings where possible
• A practical fit out approval process
• Adequate time for approvals and construction
• Rent commencement linked to possession or agreed milestones
• Rights to install signage and equipment
• Exclusive use protections in a shopping centre where relevant
• Renewal options with clear exercise dates
• Assignment rights if the business may be sold
• Limits on personal guarantees
• Repair obligations that match the tenant’s control of the premises
• A make good obligation that is specific and affordable
• Relief if the premises cannot be legally used for the permitted purpose

Landlords also assess the tenant’s financial capacity, business experience, proposed use and fit out quality. A well prepared business plan, cash flow, trading evidence and clear site proposal can make negotiations more efficient.

For landlords, the lease should align the permitted use, tenant mix, building strategy, outgoings recovery and future redevelopment plans. Specialist retail leasing advice can be particularly relevant for CBD, high street, food and beverage and shopping centre assets. Ainsworth Property explains the distinction between a specialist retail leasing firm and a general commercial agent.

What happens when a commercial lease ends?

At the end of a commercial lease, the tenant may renew, negotiate a new lease, assign the lease, surrender it or vacate. The tenant’s obligations depend on the lease, any renewal option and applicable legislation.

The make good clause commonly requires the tenant to remove specified fixtures, repair damage, reinstate alterations, remove signage, clean the premises and return it in an agreed condition. It may require a return to base building condition, which can be significantly more expensive than simply vacating.

To manage the exit:

1. Read the make good clause before signing the lease.
2. Keep the original condition report and photographs.
3. Record all approved alterations.
4. Ask the landlord to confirm the required works in writing.
5. Obtain quotes well before the lease ends.
6. Check whether the landlord can accept a cash payment instead of physical works.
7. Confirm the date by which the premises must be vacant.
8. Arrange final meter readings, cleaning, keys and security release.

The NSW Small Business Commissioner specifically recommends agreeing in writing which fit out items remain and which must be removed, and clarifying the make good standard before signing.^[2]

A practical checklist before signing

Before signing an Australian commercial lease, a tenant should be able to answer these questions:

• What is the total annual occupancy cost?
• Is GST added to rent or outgoings?
• Which outgoings can increase?
• Is the permitted use broad enough?
• Can the required licences and approvals be obtained?
• Who pays for repairs to essential services?
• Who pays for air conditioning, plumbing, glass and structural work?
• What fit out approvals are required?
• What security must be provided?
• Is there a personal guarantee?
• What are the rent review dates?
• When must a renewal option be exercised?
• Can the lease be assigned if the business is sold?
• What happens if the landlord redevelops or relocates the premises?
• What exactly must be removed or reinstated at the end?
• Does the lease need to be registered?
• Which state or territory law applies?

A commercial lease is a long term operating commitment, not just a monthly rent payment. Have a commercial property lawyer review the lease and have an accountant test the occupancy costs against realistic sales and cash flow assumptions before signing.

Frequently Asked Questions

Is a commercial lease the same in every Australian state?

No. Commercial leases are governed by the lease contract, general contract and property law, and state or territory legislation. Retail leases may have additional disclosure, outgoings, assignment and dispute resolution protections that differ between jurisdictions.

Do commercial tenants pay outgoings in Australia?

Often, yes, but the tenant only pays the outgoings allocated under the lease and any applicable legislation. Common examples include council rates, insurance, cleaning, security, utilities, repairs and centre marketing costs.

Is GST charged on commercial rent?

GST may be charged on commercial rent and related payments when the landlord’s supply is taxable. The lease should state whether amounts are GST inclusive or exclusive, and a GST registered tenant should confirm its input tax credit position with an accountant.

What is a disclosure statement for a retail lease?

A retail lease disclosure statement is a document that gives the tenant information about the proposed tenancy, such as rent, options, outgoings, fit out, trading conditions and known works. The timing and legal effect differ between states and territories.

Can a tenant transfer a commercial lease to a buyer?

Usually, a tenant needs the landlord’s consent to assign or transfer the lease, unless the lease or applicable legislation provides otherwise. The landlord may request information about the incoming tenant’s financial position, experience and proposed use.

What does make good mean in a commercial lease?

Make good means returning the premises in the condition required by the lease when the tenancy ends. It may require removal of fit out and signage, repairs, cleaning, reinstatement or a return to base building condition.

Related Resources

• Queen Victoria Market — A Leasing Guide for Retailers and Landlords
• F&B Leasing in Melbourne CBD: What Restaurant and Café Operators Need to Know
• Specialist Retail Leasing Firm vs General Commercial Agent — A Melbourne Landlord’s Guide
• How to Find a Retail Leasing Specialist for Collins Street Melbourne

Sources

1. Choose your business location
2. Retail Tenancy Guide
3. Retail Leases Information Brochure: For Tenants
4. Transferring your lease
5. Outgoings: other charges under a lease
6. What are outgoings?
7. GST Determination GSTD 2000/10