A Commercial Lease is an agreement between a landlord and tenant to rent a commercial property – such as office space, factory, warehouse, shop or industrial premises – for an agreed time in exchange for an agreed monthly rental payment.
The agreement covers the terms of the rental including rental period, rent payment, permitted and prohibited use of the premises, rights to assign or sublet, cleaning, security deposit, “making good”, etc.
There are specific Commercial Leases that cover shops and retail property – referred to as Retail Shop Leases. These are subject to additional State/Territory legislation, with more stringent lease requirements and tenant protections. The information on this page is for Commercial Leases, not Retail Shop Leases.
Below is a list of some of the most frequently asked questions about Commercial Leases. Click on any of the questions to reveal the answer.
What is a Commercial Lease?
- A Commercial Lease is an agreement between a landlord and tenant to occupy a commercial property such as office space, factory, warehouse, shop or industrial premises. The agreement sets out the terms of the arrangement between the landlord and tenant.
Are there different kinds of Commercial Lease?
- In Australia there are 2 main types of Commercial Lease:
- Commercial Property Lease, and
- Retail Shop Lease
All Commercial Leases are governed by property laws, which are similar all over Australia. However, Retail Shop Leases are subject to additional State/Territory legislation, with more stringent lease requirements and tenant protections.
The information on this page is focussed on Commercial Property Leases, not Retail Shop Leases.
Is a Commercial Lease the same as a Commercial Tenancy Agreement?
- Yes. They are exactly the same thing. A “tenancy agreement” is another term for “lease” and both terms refer to commercial property.
How is a Commercial Lease different to other leases?
- A Commercial Lease is similar to other types of lease, in that a tenant enters an agreement to pay for the use of premises.
However, a Commercial Lease is intended for renting business premises and there are special conditions that arise from using commercial spaces. For example, the type of business that may be conducted, safety issues, permitted use, etc. In addition, Commercial Leases are usually for longer periods so need to cover things such as assignment of the lease and renewals.
When do I need a Commercial Lease?
- If you have a space or property you want to rent out or if you want to rent a space for your business – whether to sell goods, run a small office, provide services etc. – you will need to enter into a Commercial Lease.
What is the normal scope of a Commercial Lease?
- There are many different terms that can be included in a Commercial Lease but the normal minimal requirements are:
- Term of lease (i.e. start date and duration)
- Rent amount and payment frequency (e.g. monthly, quarterly, etc.)
- Rent review, including how and when this is done
- Lease renewal options
- Permitted use of the premises
- Property expenses and whether they are covered by the landlord or tenant
- Insurance requirements
- End of lease obligations (e.g. repairs, replacements, redecoration, etc.)
- Cash bond or bank guarantee as security for damage or non-payment of rent
In addition, there is usually an indemnity clause in which the tenant agrees to release the landlord from any claims from someone entering the premises while it is being leased by the tenant. The tenant should ensure they have appropriate and adequate insurance to cover this.
What expenses are normally covered by the tenant in a Commercial Lease?
- The tenant is normally responsible for the following expenses:
- Fit-out of the premises
- Rent payments including GST
- Security deposit or bank guarantee
- Taxes, rates and other levies
- Public liability insurance (and possibly other insurance depending on the business)
- Repairs and maintenance to the premises during the lease term
- Cost of repair, replacement and redecoration of the premises at the end of the lease
Who is supposed to pay for the preparation of the Commercial Lease?
- The landlord normally pays the Commercial Lease preparation costs (and any mortgage consent fees). However, the tenant is usually responsible for the lease registration costs, as this ensures the tenant’s interests are protected.
Does the landlord or tenant normally pay for the fit-out of the premises?
- The tenant normally pays the cost of any fit-out, as this is particular to and a requirement of the tenant’s own business.
In addition, at the end of the lease term the tenant usually must remove the fit-out and return the premises to the condition it was in before the lease began.
What happens to the bond in a Commercial Lease?
- Some States now require cash bonds to be placed with the Rental Bond Board, whereas bank guarantees can still be held by the landlord or commercial property agent. You need to check the legislation for your particular State/Territory to see whether your bond will be put in a bank where the tenant is entitled to the interest or whether the bond is required to be placed with the Rental Bond Board.
Are there any advantages of leasing commercial premises rather than buying?
- You may be better off leasing your premises rather than buying for a number of reasons. For example, if you are starting up a new business or office you may wish to first gauge demand for your product, see if the location is suitable for your business or start in smaller premises with a view to later expanding into larger premises.
Leasing gives you this greater flexibility and allows you to exit your premises quicker and easier and without having your capital tied up in property.
In addition, rent payments are fully tax deductible but only the interest component (not principal repayment) of any financing costs are tax deductible.
What is the difference between a Commercial Lease and a Licence?
- A Commercial Lease is an agreement to use premises exclusively without interruption for a permitted purpose and for a set period of time in exchange for rent.
A Licence is far less formal – the landlord can remove the tenant at any time and the arrangement is not usually regulated by law.
Where a Commercial Lease always specifies the exact area to be occupied, a Licence agreement usually does not and often the tenant shares some of the space with the landlord or another tenant. On the other hand, use of fixtures, fittings and furniture are usually part of a Licence arrangement, but not usually included in a Commercial Lease.
If you are starting a business and want security of premises, you are much better off to have a Commercial Lease rather than a Licence. A Licence may be less expensive but does not provide the same security and rights to use premises as a Commercial Lease does.