Entering into a commercial lease in Australia can shape cash flow, operational flexibility and long-term profitability. Hidden escalation clauses, onerous make-good requirements or one-sided relocation rights may convert an otherwise sound tenancy into a commercial quagmire.
This guide, prepared by our commercial leasing team, isolates the most common red flags in Australian commercial leases, explains why each matters, and offers proven drafting and negotiation suggestions so that both tenants and landlords can secure balanced, enforceable arrangements.
If you’re new to leasing, start with our general guide on leasing business premises in Australia.
Key Takeaways
- Uncapped rent reviews and capital outgoings clauses can significantly increase total lease costs over time.
- Broad make-good obligations and ambiguous repair clauses can result in substantial, unexpected exit costs.
- Relocation or demolition clauses without sufficient notice or compensation can interrupt operations and damage goodwill.
- Personal guarantees and short cure periods can expose directors and accelerate lease termination risks.
- Assignment restrictions and unreasonable landlord discretion can hinder business sales, restructures, or exit strategies.
Red Flags and Risk-Mitigation Techniques
1. Rent Review Clauses
Rent reviews typically occur annually or at option dates. Risk indicators and protective measures:
| Issue | Risk | Tenant-Friendly Position |
|---|---|---|
| Ratchet (no downward review) | Prevents rent reduction in down markets | Allow “upward or downward” market reviews |
| Uncapped CPI increases | Inflation may outpace revenue | Cap CPI at 4% annually |
| Hybrid methods | May compound increases | Use either fixed or market, not both |
Tip: Model rent over the lease term using worst-case CPI or market growth to ensure financial viability.
2. Make-Good Obligations
A make-good obligation clause compels the tenant to restore the premises to a nominated condition.
Key red flags include:
- Wide phrases such as “good repair and condition” that ignore fair wear and tear
- Obligation to remove landlord fixtures or base-building services
- No monetary cap or time limit on post-vacation rectification works
3. Outgoings & Operating Expenses
Landlords often seek to on-charge outgoings (such as rates, taxes and centre costs). Risk checklist:
| Red Flag | Impact | How to Protect |
|---|---|---|
| Undefined outgoings | Capital costs passed on | Limit to “non-capital operating expenses” |
| Admin fee markup | May double-charge tenants | Cap admin fee at 5% of outgoings |
| No audit rights | Misreported charges | Include annual audit and invoice review right |
For a detailed breakdown of who is responsible for lease costs, see our guide on responsibility for outgoings in commercial leases.
Note: Land tax recovery is prohibited under retail lease laws in NSW and VIC.
4. Relocation & Demolition Rights
Shopping-centre and mixed-use landlords often reserve broad redevelopment powers.
Watch for:
- Notice period shorter than six months
- Landlord can terminate without offering alternate premises
- No obligation to pay fit-out, moving or marketing costs
Best practice: Minimum 6-month notice, right to similar premises, and reimbursement of relocation expenses.
5. Personal Guarantees & Security Deposits
Small businesses may be asked to provide personal guarantees and bank guarantees. Where possible, try to negotiate this clause be removed.
If it can’t be removed, it can be mitigated by:
- Limiting the guarantee to six months’ rent and direct losses
- Providing a rolling reduction after each option exercised
- Converting to a bank guarantee once the tenant has two years’ unblemished payment history
6. Assignment & Subletting Restrictions
Landlords often resist lease transfers. Red flags include:
Absolute discretion to reject transfers
Clawback of business sale proceeds
Mandatory fresh guarantees from assignee directors
Solution: Require the landlord to “act reasonably” and delete any premium-sharing clause.
7. Repair, Maintenance & Compliance
Ensure the lease clearly states:
Who handles structural repairs
Exclusion of latent defects and building code upgrades
Compliance with new laws rests with the landlord unless directly related to the tenant’s use
For practical strategies to help navigate commercial lease negotiations, read our guide on tips for negotiating a commercial lease.
Case Study
A Brisbane retailer signed a five-year lease without legal review. They later faced:
A 19% rent hike due to uncapped CPI
$72,000 in make-good costs
Charges for capital outgoings
Relocation with just 30 days’ notice and no compensation
Takeaway: Failing to spot common lease red flags cost the business over $100,000. Early legal advice could have avoided these risks.
When negotiating the agreement to lease, parties should also consider available lease incentives in commercial leases, such as rent-free periods or fit-out contributions.
Frequently Asked Questions
What is a make-good clause and how can I limit my liability?
A make-good clause requires the tenant to restore the premises to a specified condition at lease expiry. Limit exposure by agreeing a photographic schedule of condition at commencement and negotiating a monetary cap or cash settlement alternative
Are rent ratchet clauses prohibited in Australian retail leases?
Retail legislation in most jurisdictions does not expressly ban ratchets, but they can be negotiated out and may face scrutiny under unconscionable conduct provisions if they result in grossly unfair outcomes
Can a landlord charge land tax to a retail tenant?
n New South Wales and Victoria, retail lease statutes prohibit recovery of land tax from tenants; in other States it is generally permissible unless excluded in the lease
How much notice must a landlord give before relocating a tenant?
Most retail lease statutes require a minimum of three to six months’ written notice; tenants should negotiate longer periods and insist on reimbursement of reasonable relocation costs
What happens if the landlord does not provide a proper disclosure statement?
If a retail landlord fails to provide a compliant disclosure statement, the tenant may have a statutory right to terminate the lease and claim reasonable compensation for losses incurred
