What to include in a commercial lease

A commercial lease should include the parties, the premises, the term and any options, the rent and how it is reviewed, outgoings, security, permitted use, repairs, make good, assignment, insurance and what happens on default. It should also deal with any incentive or fitout and, for a retail lease, follow your state’s retail leases Act. The aim is a lease that records the whole deal and leaves little room for argument later.

The key clauses

Rent, reviews and outgoings

These clauses decide what the tenant pays over the life of the lease. Set out the rent review method for each year, including any option term. Define outgoings by listing the costs you will recover, and say how the tenant’s share is calculated.

Vague wording here often leads to disputes during the term. If the lease says “market review” but not how the valuer is chosen, or “outgoings” without a list, the parties can disagree about what was agreed.

Security and guarantees

Most landlords ask for a bond or bank guarantee, often equal to a few months’ rent plus GST. If the tenant is a company, ask for personal guarantees from the directors. The lease should say when you can draw on the security and when it must be returned.

Use, repairs and make good

A clear permitted use avoids disputes about what the tenant can do. Repair clauses should say who is responsible for the structure, the roof, air conditioning and other plant.

The make good clause should say what condition the premises must be returned in. A condition report with photos at the start makes it easier to enforce. See make good clause explained.

Leasing out your premises? We prepare the lease and the documents that go with it, wherever the property is. Have your lease drafted.

Incentives and fitout

If you are giving a rent-free period, a rent reduction or a fitout contribution, record it. Many landlords use a separate incentive deed, so the incentive isn’t shown on the registered lease. Say what happens to the incentive if the lease ends early or is assigned.

If either party is doing fitout works before the lease starts, set out the works, who pays and the date for completion.

Extra steps for a retail lease

If the premises are retail, your state’s retail leases Act adds requirements. Depending on the state, these include:

• giving the tenant a disclosure statement before the lease is entered into, in most states a set number of days before
• a minimum term of 5 years in Victoria and SA, unless an exception applies
• limits on rent reviews, outgoings and the landlord’s legal costs
• in Queensland, a Form 11 financial advice report and a Form 12 legal advice report from the tenant
• in Victoria, a waiver certificate from the Victorian Small Business Commission if the term is less than 5 years

A retail lease that ignores the Act can leave the landlord unable to enforce some clauses. See commercial lease vs retail lease to check whether yours is retail.

Registration

If the lease is longer than 3 years, including options, it should usually be registered on the title. The exact limit differs by state. The lease should say who registers it and who pays.

Can I use a template?

You can, but a generic template won’t know your deal or your state’s rules. Clauses that are easy to miss include the rent review method for the option term, the outgoings definition, the make good standard and the retail leases Act requirements. If you use a template, check each of these before it goes to the tenant.

Before the lease is signed

Many deals start with a heads of agreement that sets out the main terms. Make sure the lease matches it, and that the tenant signs before getting the keys. A tenant in possession without a signed lease can create uncertainty about which terms apply.