1. Lease Term and Options to Renew
The lease term is one of the most fundamental decisions you will make as a commercial tenant. A longer initial term provides stability and certainty for your business, but it also locks you in. If your business is new or growing, you may prefer a shorter initial term with options to renew—this gives you the flexibility to walk away if the location does not work, while securing the right to stay if it does.
Options to renew must be exercised within strict timeframes, typically three to six months before the current term expires. Missing the deadline can mean losing your right to extend. Make sure you diarise these dates and understand the process for exercising your option, including any rent review mechanisms that apply.
2. Rent Reviews and Outgoings
Commercial leases commonly include provisions for periodic rent reviews, which can be structured as fixed percentage increases, market reviews, or CPI-linked adjustments. Each method has different implications for your budget. Fixed increases are predictable but may exceed market rates in a downturn. Market reviews reflect current conditions but introduce uncertainty. Understanding which method applies—and when—is essential for financial planning.
Outgoings are the costs associated with operating and maintaining the building, including council rates, water rates, insurance, and management fees. In some leases, tenants pay a proportionate share of outgoings on top of the base rent. Ensure you understand exactly what outgoings you will be responsible for, whether there are any caps, and how they are calculated and reconciled each year.
3. Make Good Obligations
Make good clauses require tenants to restore the premises to their original condition at the end of the lease. This can be a significant and often underestimated cost, particularly if you have fitted out the space with partitions, flooring, signage, or specialised equipment. Some landlords will negotiate a reduced make good obligation, such as returning the premises to a “base building” condition rather than the exact original state.
Before signing, have your lawyer negotiate make good terms that are reasonable and clearly defined. Consider obtaining a quote for make good works early so there are no surprises when the lease ends.
4. Permitted Use and Exclusivity
Your lease will specify the permitted use of the premises. This should accurately reflect your business activities, as operating outside the permitted use can be a breach of the lease. If your business evolves over time, you may need the landlord's consent to change the permitted use, so it is worth negotiating broader use provisions upfront.
If your business depends on being the only provider of a particular product or service in a shopping centre or commercial complex, you should negotiate an exclusivity clause. Without one, the landlord is free to lease neighbouring premises to a direct competitor.
5. Assignment and Subletting
Circumstances change, and you may need to transfer your lease to a new tenant (assignment) or sublet part of the premises. Most commercial leases require the landlord's consent for assignment or subletting, and that consent cannot be unreasonably withheld under the Retail Leases Act 2003 (Vic) for retail premises. However, the specific conditions and processes vary, and some leases impose restrictive conditions on transfers.
Having flexible assignment and subletting provisions gives you an exit strategy if your business needs change. Your lawyer can help ensure these clauses protect your interests while remaining acceptable to the landlord.