Legal Insight: What I Look for in a Commercial Lease
With the reduced tax benefits of negative gearing, investors are increasingly prioritising assets that deliver strong and reliable income rather than relying on capital growth. In this environment, commercial property has become relatively more attractive than residential property due to its typically higher rental yields, and less reliance on future price appreciation.
A commercial lease is one of the most important documents in the transaction. Whether you are a landlord, tenant or purchasing a tenanted property, the lease will affect the value of the property, the income it generates and the legal and financial obligations of the parties for years to come.
When I review a commercial lease, these are the key issues I focus on.
Lease Term, Options and Early Termination
I first consider whether the lease term suits my client’s objectives and whether any options to renew are appropriate. I also consider whether any legislation affects the minimum lease term or otherwise impacts the parties’ rights and obligations. Missing the deadline to exercise an option can result in the loss of valuable renewal rights.
I then look at what happens if the tenant wants to leave before the lease expires. In most cases, the tenant cannot simply walk away. They may remain liable for rent and outgoings until the premises are re-let, together with the landlord’s reasonable costs of finding a replacement tenant, including advertising, leasing commissions and legal costs.
Rent Reviews
I check how and when the rent will change. Rent reviews may be based on CPI, fixed percentage increases or market rent. Where market rent reviews apply, the lease should clearly set out the process for determining the new rent if the parties cannot agree.
Outgoings
Commercial tenants are often responsible for some or all of the property’s operating costs. The lease should clearly identify which outgoings are recoverable, including council rates, owners corporation fees, insurance and, where permitted, land tax. Clear drafting helps avoid disputes over who is responsible for particular expenses.
Maintenance and Repairs
The lease should clearly allocate responsibility for maintenance and repairs. I pay particular attention to expensive items such as air conditioning, essential services and structural repairs, as these are common sources of dispute.
Make Good Obligations
Make good clauses often become an issue when the lease ends. Depending on the lease, the tenant may need to remove fit-out, repaint or restore the premises to their original condition. These obligations can result in significant costs if they are not understood before the lease is signed.
Permitted Use
The permitted use clause should accurately describe the tenant’s intended use of the premises while allowing enough flexibility for the business to evolve. It should also be consistent with planning controls and any restrictions affecting the property.
Assignment and Subletting
If the tenant sells the business or relocates, the assignment provisions become important. I review when the landlord’s consent is required, whether consent can be withheld and whether the outgoing tenant remains liable after the assignment.
Special Conditions
The special conditions are often the most important part of a commercial lease. While many leases are based on a standard form, the special conditions are where the parties negotiate changes to the standard terms.
I pay close attention to these clauses because they often allocate key legal and financial risks. A special condition can significantly change the effect of the standard terms, so it is important to understand how the lease operates as a whole before signing.
Security
Many leases require a bank guarantee or personal guarantee from directors or other third parties. Before signing, it is important to understand the extent of those obligations, when the security can be called upon and when it will be released.
Final Thoughts
A commercial lease does much more than record the agreed rent and lease term. It allocates the legal and financial risks between the parties throughout the tenancy. A clause that appears straightforward can have significant consequences if circumstances change.
Whether you are a landlord, tenant or purchaser of a tenanted property, understanding the key terms before signing can help identify risks early, avoid costly disputes and ensure the lease reflects the commercial agreement reached between the parties.
Contact our team today or call us on 03 8910 8940 to book a lease review.
Robert Belcher
Principal Lawyer
Robert Belcher Legal
Disclaimer: This article provides general information only and is not legal advice. Every commercial lease is different, and the legal issues will depend on the terms of the lease and the particular circumstances. You should obtain legal advice specific to your situation before making any decisions or signing a commercial lease.