Commercial Leasing

A commercial lease generally refers to the lease of a property used for non-residential purposes, including offices, shops, warehouses, workshops, industrial units, storage space, trading sites and other commercial premises.

Different types of property carry different leasing risks. Retail shops and food venues, for example, tend to depend more heavily on foot traffic, fit-out, trading permits and lease renewals; office leases focus more on the term, rent adjustments and early termination; while warehouse or industrial premises may involve permitted-use restrictions, equipment installation, loading and unloading arrangements, parking, and environmental or safety requirements.

Before signing a lease, the first step is to confirm that the property’s permitted use suits the business and that the lease actually allows the intended operations. If the permitted use is drafted too narrowly, the tenant may be restricted later when expanding the business, adding services or transferring the business.

In New South Wales, some commercial leases may fall within the category of a retail lease. Where the leased premises are used for certain retail, service or consumer-facing operations, the lease may be subject to additional regulation under the Retail Leases Act.

This distinction matters, because retail leases generally carry more statutory protections and requirements — for example, disclosure documents, limits on rent adjustments, the handling of the bond, disclosure of leasing costs, and restrictions on recovering certain charges. A retail lease is a special type of commercial lease, and the way and timing of rent increases may be subject to statutory limits.

The term of a commercial lease is usually negotiated between the parties, but it must be clear and certain. A general commercial lease has no fixed maximum term, yet the term itself must be capable of being determined.

An option to renew is particularly important for tenants. If the lease contains an option to renew and the tenant exercises it within time and in the manner the lease requires, the landlord is generally bound by that option. Conversely, if the lease contains no option to renew, the tenant has no automatic right to continue occupying the premises — no matter how many years the business has traded there.

Rent is usually the most direct cost in a commercial lease, but it is not the only one. On top of the base rent, a tenant may also be required to cover outgoings such as property management fees, council rates, water charges, land tax, insurance, repair costs and other outgoings.

For ordinary commercial and industrial premises, the rent amount is generally negotiated between the parties. The rent for commercial and industrial property is not usually subject to a fixed cap, but any rent increases during the term must follow the rent-review provisions set out in the lease.

Common rent-adjustment methods include fixed-percentage increases, fixed-dollar increases, CPI adjustments, or market-rent reviews. Tenants should understand in advance how the rent may change over the coming years, so they do not look only at the first year’s rent and underestimate the long-term cost.

Landlords usually require a tenant to provide a bond or bank guarantee as security for the tenant’s performance of its lease obligations — for example, paying rent on time, making good any damage, reinstating the condition of the premises, or meeting liability for a default.

A bond may commonly be equivalent to one to two months’ rent and provides security, within limits, for the tenant’s performance; in a retail lease, the handling of the bond may be subject to stricter requirements.

For tenants, it is important to confirm the bond amount, how it is held, when it may be drawn down, when it is to be returned after the lease ends, and whether the landlord can hold the bond for an extended period while a dispute remains unresolved. For landlords, the priority is to ensure that the bond or bank guarantee is sufficient to cover reasonable risk and that the conditions for its use are clearly set out in the contract.

Many commercial leases involve fit-out or the installation of equipment — for example, restaurant kitchens, exhaust systems, beauty equipment, office partitions, signage, air conditioning, electrical upgrades or warehouse racking.

Before signing, you need to confirm whether the tenant requires the landlord’s approval to carry out fit-out, whether government or building-management approval is needed, who bears the cost of the fit-out, who owns it once completed, and whether the premises must be reinstated at the end of the lease.

Repair responsibilities also need to be clearly set out. Tenants are usually responsible for routine maintenance and for damage caused by their own use; landlords may be responsible for structural repairs or the main fabric of the building. The precise responsibilities, however, still depend on the lease terms. If the contract is unclear, disputes can easily arise later over air conditioning, electrical work, plumbing, roof leaks or equipment failures.

In commercial leasing, subletting and lease assignment are often tied to business expansion or the sale of a business.

If a tenant wishes to sublet part of the space to another party, or to assign the lease to a buyer when selling the business, it is usually necessary to check whether the lease allows it and whether the landlord’s written consent is required. Many commercial leases require the tenant to obtain the landlord’s consent before any assignment or sublet, and some may prohibit such arrangements altogether.

For a buyer looking to purchase a business, whether the lease can be cleanly assigned is often the key to whether the transaction can complete. If the business depends heavily on its existing location and the landlord will not consent to the assignment, the buyer may be unable to continue operating the business — even after the purchase price has been agreed.

For a seller, the conditions for assigning the lease, the landlord’s requirements, any transfer costs, and whether the seller will remain liable under the original lease should all be confirmed as early as possible before the business is sold.

If a landlord sells commercial premises, the new owner generally takes the property subject to the existing lease. Where a buyer purchases commercial premises that already have a lease in place, the buyer takes the property bound by that lease and cannot unilaterally require the tenant to renegotiate.

For tenants, this means the lease terms remain very important, because ownership of the property may change in the future. For buyers, purchasing commercial premises with a lease in place means reviewing the existing lease, rent, term, renewal rights, bond, the tenant’s default history and any management issues before completing the purchase.

Common defaults in a commercial lease include rent arrears, unpaid outgoings, changing the use without consent, subletting without permission, failing to maintain insurance, damaging the premises, breaching trading restrictions, or failing to make good as required.

On discovering a default, a landlord should not simply resort to changing the locks, cutting off power or seizing property. Instead, the landlord should first assess, in accordance with the lease and the relevant law, whether a notice must be issued, whether a remedy period must be given, and whether the lease can be terminated or losses recovered.

Tenants, equally, should not simply ignore a breach notice. Many leasing disputes can still be resolved by paying outstanding amounts, rectifying the issue, negotiating a payment arrangement or varying the lease — but the longer the delay, the higher the risk of the lease being terminated or of further costs being incurred.

NS Legal can assist both landlords and tenants with commercial leasing matters, including lease drafting, lease review, lease negotiation, lease registration, renewals, subletting, lease assignment, leasing disputes and the handling of defaults.

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A commercial lease usually affects the operating costs and stability of a business for years to come. Whether you are about to lease new premises, lease out commercial property, or are already facing a leasing dispute, reviewing the lease and related documents early will usually help you avoid more costly disputes down the track.