From make good obligations to rent ratchet clauses, commercial lawyer Imran Mir explains the lease traps that catch business owners off guard.
Unlike residential leases, many commercial leases in Australia do not offer extensive statutory protections, as the law assumes business tenants possess the knowledge and bargaining power to negotiate their own terms. Senior Commercial Lawyer Imran Mir from Owen Hodge Lawyers outlines the common risks and how to navigate them.
Why this matters: A commercial lease is not just another contract, it is a long-term commitment that can shape the future of a business. Failing to recognise lease types, missing critical deadlines or misunderstanding obligations can result in unexpected costs, forfeited renewal rights and costly disputes. Understanding these risks before signing can protect business owners from financial traps.
For any business owner, a commercial lease is a cornerstone of operations. Securing the right premises can be an exciting milestone, but the lease itself is a complex, legally binding document with significant long-term implications. Unlike residential leases, many commercial leases in Australia do not offer extensive statutory protections, as the law assumes that business tenants possess the knowledge and bargaining power to negotiate their own terms.
Understanding the potential risks, and knowing how to navigate them, is essential to ensuring a secure and sustainable tenancy.
Commercial vs Retail Lease
One of the first and most crucial steps is determining whether your lease is commercial or retail. This distinction is critical because retail leases attract additional legislative protections under each state and territory’s Retail Leases Act (for example, the Retail Leases Act 1994 (NSW)).
Retail leases apply to businesses that sell goods or services directly to the public, such as cafes, restaurants, hair salons, and clothing stores. These leases are subject to stricter disclosure requirements, limits on recoverable costs, and restrictions on certain rent review mechanisms.
Commercial leases, on the other hand, typically cover offices, warehouses, and industrial premises. They are less regulated, and the rights and obligations of the parties are largely determined by the wording of the lease.
Failing to recognise the correct lease type can leave a tenant exposed to terms that would otherwise be void or unenforceable under retail leasing legislation.
Pre-Lease Due Diligence
Before reviewing or signing a lease, tenants should carry out comprehensive due diligence. In addition to assessing the required space, staff numbers, and location suitability, key steps include:
- Zoning and permitted use: Confirm with the local council that the premises are correctly zoned for your business activities. Ensure the lease’s permitted “use” clause specifically authorises your intended operations, not merely “general commercial use.”
- Condition report: Conduct a thorough inspection and prepare a written and photographic condition report signed by both parties. This will be vital evidence when negotiating “make good” obligations at lease end.
- Outgoings: The headline rent rarely tells the full story. Tenants are often responsible for operational expenses such as council rates, water rates, insurance, strata levies, and maintenance. The lease should define which outgoings apply, and an estimate should be obtained in advance. Under a retail lease, landlords must disclose these figures in a Disclosure Statement, but this is not required for general commercial leases.
Key Lease Clauses and Financial Traps
Commercial leases are legally dense documents, and several provisions can create unexpected costs or disputes if not carefully reviewed:
- Rent review clauses: Rent may increase annually by a fixed percentage, the Consumer Price Index (CPI), or a market review. Market reviews can work both ways, but many commercial leases include a ratchet clause preventing any decrease in rent. This is prohibited under retail leasing legislation but common in commercial leases.
- Make good obligations: These clauses require tenants to restore the premises to their “original condition” at lease end. Because “original condition” is often undefined, disputes are frequent and costly. Tenants should negotiate clear wording and keep an agreed condition report from the outset.
- Repairs and maintenance: The boundary between a tenant’s and landlord’s responsibilities can be unclear. While tenants typically maintain interiors and fixtures, landlords are usually responsible for structural elements (roof, foundation, external walls). The lease should state these responsibilities precisely.
- Early termination and subletting: Business circumstances can change. Ensure the lease allows assignment or subletting (with landlord’s reasonable consent) and clearly defines any early-termination rights or costs.
The End of the Lease
The expiry of a lease term is a critical period requiring early preparation:
- Option to renew: Many leases include an option for a further term. This right is subject to strict conditions, such as providing written notice three to six months before expiry, and the tenant must not be in breach of the lease. Missing this deadline can result in forfeiting renewal rights.
- Security deposit or bank guarantee: Confirm who holds the security and the conditions for its release. Retail lease bonds in some states must be lodged with a government authority, whereas under commercial leases the landlord may hold the funds directly.
- Make good compliance: Use your condition report to demonstrate compliance and minimise disputes. Obtain written acknowledgment from the landlord that all obligations are satisfied before vacating.
Dispute Resolution
Disagreements between landlords and tenants are common. The process depends on the lease type:
- Retail leases: The Retail Leases Act requires most disputes to go through mediation before court proceedings. In NSW, this is usually handled through the Small Business Commissioner.
- Commercial leases: Disputes are generally resolved according to the lease terms, which may stipulate mediation, arbitration, or direct recourse to court. Because litigation can be costly and time-consuming, early legal advice and clear documentation are invaluable.
A commercial lease is not just another contract; it is a long-term commitment that can shape the future of your business. By understanding the key risks, tenants can negotiate from an informed position, avoid common pitfalls, and secure premises that support sustainable growth. A proactive and well-informed approach, supported by guidance from an experienced commercial property lawyer, remains the best protection against potential issues and the strongest foundation for a successful tenancy.
Disclaimer: This content is for informational purposes only and does not constitute legal, financial, or professional advice. Always consult a qualified attorney, accountant, or other professional before making decisions regarding commercial leases.
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