Leasing business premises is one of the most important financial and legal decisions a business owner can make. A commercial lease agreement is typically a lengthy, legally binding document that sets out the rights and responsibilities of both tenant and landlord. If not properly negotiated or understood, it can expose your business to unnecessary risk and long-term costs.
This guide is written for Australian business owners who want to better understand how commercial leases work. Our experienced commercial lease lawyer explains:
The different types of business leases available in Australia
Key terms and conditions commonly found in a commercial lease agreement
Why it’s critical to negotiate terms that align with your business needs
Key Takeaways
- Understand the different types of businesses leases.
- Know your rights and obligations as a tenant under Australian law.
- Be aware of the key terms and conditions that should be included in a lease agreement.
- Recognise the importance of negotiating lease terms to suit your business needs.
- Learn the steps to take if disputes arise during the lease period.
- Seek legal advice before signing the lease and for any ongoing legal issues.
The Different Types of Business Leases
In Australia, business leases fall into two broad categories:
Retail Shop Leases: governed by specific retail tenancy laws when premises are primarily used to sell or hire goods or services to the public
Non-Retail Commercial Leases: applying to offices, warehouses, and other premises outside the retail definition
Retail leases offer tenants additional statutory protections, including:
Minimum lease terms
Pre-lease disclosure obligations
Limits on outgoings and rent increases
Rights to compensation in certain circumstances
What is a Retail Lease?
Retail leases are governed by State and Territory retail tenancy legislation, such as the Retail Leases Act 1994 (NSW) and similar laws across Australia.
A lease will generally be considered a retail lease where the premises are:
Used mainly for the retail sale or hire of goods or services, and
Located in a shopping centre or used as a standalone retail space
Whether a lease qualifies as “retail” depends on its use and the legislation. Disputes may arise where the use is mixed (e.g. warehousing or distribution).
Examples of Cases Considering Retail Lease Classification
Eastmark Holdings Pty Ltd v Kabraji – examined whether warehouse operations could be considered “retail” in nature
Macedonian Cultural Centre Ilinden Inc v Mackie – addressed use by a not-for-profit group in a multi-use facility
Southgate Management Pty Ltd v Katotakis – considered whether premises in a non-traditional shopping centre were subject to retail lease protections
Understanding whether your lease qualifies as a retail lease is critical, as it affects the rights and obligations of both landlords and tenants under Australian law.
Commercial Lease Considerations
Before committing to a lease, make sure you understand the common red flags in commercial leases that could impact your business.
1. Lease Term
The term of the lease refers to the period of time between the start of the lease and the end of the lease, including any renewal options.
It’s important to pay attention to:
- the conditions on which the option to renew can be exercised
- whether the lease can be terminated early by the lessor
- whether the lease can be terminated by the tenant if something happens that means the premises cannot be occupied or used for the purpose that it was leased for
Business owners must take care to ensure the lease term aligns with the plans of the business. Changes to the location of the premises can cause significant business disruption.
2. Rent and Rent Reviews
The amount of rent and when rental payment can be increased (and by how much) are a key part of a business premises lease.
If a business tenant has agreed to a rent-free period, this must be accurately recorded in the lease. Further, rent reviews can be based on:
- fixed increases
- adjustment for CPI (Consumer Price Index)
- market rate rent reviews
Business owners must understand and calculate how much their rent will increase by. This rental increase should be factored into any budgets and business planning.
3. Outgoings
Rental outgoings are additional costs the tenant may be responsible for, such as council rates, insurance, and maintenance.
Often, these are paid directly by the lessor and then shared between the tenants. Outgoings may be a fixed amount, but will often be an estimate. Business owners should take care to understand what types of outgoings they are responsible for and whether they have a right to audit records of outgoings.
4. Fit-Out and Alterations
Fit out and other building works may be carried out prior to or during the lease term. Fit out works can be common and may depend on the intended use of the premises.
Business owners must understand clauses in the lease relating to:
- fit-out of the premises
- the extent to which alterations can be made
- who is responsible for the fit-out costs
- whether any building costs are recoverable against the tenant
- who is responsible for hiring the building contractor to carry out the fit out
5. Assignment and Subletting
Business owners may want to assign (transfer) the lease to someone else before the lease ends.
The business premises lease will often describe the conditions under which the tenant can assign the lease. Understandably, lessors want to know that any proposed replacement tenant is capable complying with the lease and minimise any costs or disruption for the lessor.
It is important for business owners to seek the written consent of the lessor before any assignment of the lease.
Another key provision relates to subletting the premises to someone else. Any sublease should be recorded in writing, along with the consent of the lessor.
6. Rights to Terminate the Business Lease
Termination clauses can be overlooked by business owners because they have no intention of ending the lease early at the time they sign the business lease. However, termination rights are important because:
- the business may not be able to earn revenue or operate if the premises are no longer available
- it is unfair for business owners to have to continue to pay rent if the premises cannot be used (other than because of the fault of the tenant)
- if a lessor can end a business premises lease early, with no penalty, this may negatively impact the business of the tenant
Termination clauses in business premises leases should be reviewed by a qualified commercial lease lawyer. They will be able to explain a tenant’s rights and negotiate any clauses that appear unfair.
7. Make Good Obligations
We discuss make good obligations in commercial leases in this article.
Negotiating the Lease
Negotiating a commercial lease can be complex. There may be a delay to the start of the business lease if negotiations are not done early and properly. Here are some tips to help business owners negotiate favourable terms:
- understand the current market conditions and comparable lease rates in the area
- engage a commercial lease lawyer who understands commercial leases to review the terms and ensure your interests are protected
- lessors may offer incentives such as rent-free periods or contributions to fit-out costs. Ensure these are clearly documented in the lease
- where possible, negotiate terms that allow for flexibility, such as shorter lease terms with options to renew or break clauses
Resolving Lease Disputes
Disputes between lessors and business tenants can arise for various reasons. There may be disagreements over rent reviews, maintenance responsibilities, or breaches of the business premises lease agreement. In Australia, there are several mechanisms for resolving lease disputes:
- mediation, whereby an independent mediator helps the parties reach a mutually acceptable resolution
- each State and Territory have tribunals that handle disputes related to commercial leases, such as the Victorian Civil and Administrative Tribunal (VCAT) or the NSW Civil and Administrative Tribunal (NCAT).
- for more complex or high-value disputes, court proceedings may be necessary.
Before signing a lease for business premises, we strongly recommend obtaining legal advice. A commercial lease is a long-term commitment that can significantly impact your cash flow, growth, and operational flexibility. Engaging a qualified Australian lease lawyer ensures you fully understand your obligations – and secure terms that protect your business.
Frequently Asked Questions (FAQs)
What is the difference between a retail lease and a commercial lease?
A retail lease applies to premises used predominantly for the sale or hire of goods or services to the public and is governed by specific retail tenancy laws. A commercial lease covers non-retail premises such as warehouses, offices, or industrial spaces and is governed by general contract law.
How long should a business lease term be?
It depends on your business needs and plans. Some businesses prefer short terms with renewal options for flexibility, while others benefit from long-term certainty. It’s essential to align the lease term with your business strategy.
What are typical lease outgoings that tenants pay?
Common outgoings include council rates, land tax (if permitted), insurance, and maintenance costs. Ensure your lease clearly defines which outgoings you’re responsible for and whether they are capped or estimated.
Can I make changes to the premises during the lease?
Most commercial leases require landlord consent before you carry out fit-outs or alterations. The lease should set out who pays for fit-out costs, who owns the fit-out, and whether you must remove it at the end of the lease.
What happens if I need to leave the premises early?
Your ability to terminate the lease early depends on the terms of the lease. Some leases allow early termination for specific events, while others may require you to find an assignee or subtenant. Legal advice is essential before exiting a lease early.
Do I need landlord consent to assign or sublet the lease?
Yes. Most leases require written consent from the landlord to assign or sublet. The lease will usually state the conditions under which this consent can be given or withheld.
