10 Considerations to Help You Negotiate a Commercial Lease

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Table of Contents

• 1. Rent
• 2. Rent Review
• 3. Term of the Lease
• 4. Will you need to fit out the Premises?
• 5. Permitted Use of the Premises
• 6. Assignment and Subletting
• 7. What Are the Outgoings or Operating Expenses?
• 8. Alterations or Improvements
• 9. Make Good and Refurbishment
• 10. Costs
• Key Takeaways
• Frequently Asked Questions

Suppose you have a fantastic business idea and have found an excellent location to open your shop. Now, only negotiating a favourable commercial lease with the landlord stands between you and a thriving new business. This article explores ten considerations to help you prepare to meet with the landlord or leasing agent and confidently negotiate your new lease.

1. Rent

Before renting a property, thoroughly research the rental market in the desired area. Obtain appraisals from local property agents to leverage during lease negotiations. Calculate costs per square meter to account for any size variations of the premises, especially before any surveys.

2. Rent Review

A Rent Review can take the form of a Consumer Price Index increase, a fixed percentage increase (such as 4% annually), or a market review, sometimes combining these methods. Ensuring that you do not overpay is crucial, as a 5% fixed annual increase could lead to a 25% rent rise over a five-year lease term.

3. Term of the Lease

A long-term lease offers both benefits and drawbacks. On the positive side, it provides security and the opportunity to develop your business. Additionally, it can potentially turn into a valuable asset. However, a lease that extends too far into the future can become a liability if the premises no longer meet your business needs. This may leave you with few options to terminate the agreement. It is crucial to scrutinise the option periods in the lease. This is particularly important if you are still deciding whether to remain at the premises after the initial term or extend the lease. Ensuring the lease duration aligns with your circumstances is essential.

4. Will you need to fit out the Premises?

Are the premises in need of a fit-out? If so, what will the costs be? 

Often, landlords will cover the fit-out expenses or offer a combination of a lease incentive payment and a rent-free period to help with these costs. It is important to consider these expenses when negotiating with the landlord for a lease incentive payment or a rent-free period to alleviate the financial burden.

5. Permitted Use of the Premises

Consider the proposed use and negotiate a broadly defined permitted use for your space to accommodate future business diversification or potential subleasing. Broad permitted use ensures that restrictive terms will not constrain you as your business evolves or if you choose to sublease. This will allow you to avoid the need for lease amendments. Additionally, a broad permitted use facilitates lease assignments. This is particularly important if the prospective tenant intends to continue the same activities.

6. Assignment and Subletting

Securing a lease that permits the sale of your business and the assignment or subleasing of the premises is essential.

Most landlords will allow this, subject to certain conditions.

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7. What Are the Outgoings or Operating Expenses?

When negotiating your lease, ensure the landlord discloses any outgoings or operating costs that will be passed on to you. To manage these expenses, negotiate a fixed fee or set a cap on the amount. 

8. Alterations or Improvements

Most leases state that a tenant cannot make any changes or improvements without the landlord’s consent.

Ask for a clause that permits particular works if you require a fitout of the premises, with the landlord’s consent.

9. Make Good and Refurbishment

Be mindful of lease clauses requiring you to return the premises in their original condition at the lease’s end. Some leases specify that you must return the premises as they were at the lease’s start. However, others may impose more demanding redecoration obligations, including repainting and recarpeting. To avoid surprises, ask the landlord for plans to understand better the expectations for returning the premises at the lease’s conclusion.

10. Costs

Make it clear who will pay the lease preparation costs.

Ideally, each party should bear its own costs. In the case of a retail lease, retail lease legislation in each state and territory prohibits the landlord from passing on these costs. There is no such restriction in commercial leases.

Key Takeaways

Successfully negotiating a commercial lease involves thorough preparation and attention to critical details. Research the rental market to set a fair rent, understand the implications of rent reviews, and ensure the lease term aligns with your business plans. Consider the costs and responsibilities of fitting the premises and negotiate a broad permitted use for future flexibility. Secure favourable terms for assignment and subletting and clarify the outgoings and operating expenses. Ensure any alterations or improvements are permissible with the landlord’s consent, and understand the make-good and refurbishment obligations at lease end. Finally, determine who will bear the lease preparation costs to avoid unexpected expenses. By addressing these considerations, you can confidently negotiate a lease that supports the success and growth of your business.

If you need help negotiating your commercial lease, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.

Frequently Asked Questions