Most commercial lease disputes do not arise from unexpected events. They arise from clauses that were always there but not considered or fully appreciated at the time of signing. By the time those clauses are enforced, the tenant’s leverage is usually gone.
In NSW, some leases, particularly retail leases, are subject to statutory protections. However, many other commercial leases are not and are governed primarily by their terms.
This article identifies the key terms that commercial tenants should carefully consider and, where possible, negotiate before entering into a binding agreement.
1. Lease Term and Options
The length of the lease and any options to renew should align with the tenant’s business plan.
Tenants should consider:
(i) whether the initial term is long enough to justify fit-out costs and establishment expenses;
(ii) whether options to renew are included, and on what terms; and
(iii) whether the exercise of an option is conditional.
Missed deadlines or technical non-compliance can result in the option being lost, regardless of how long the tenant has occupied the premises.
The statutory minimum five-year term for retail leases in NSW was removed with amendments to the Retail Leases Act 1994 (NSW) that took effect on 1 July 2017. As a result, retail leases of any length can be agreed and the term of the lease is governed purely by what is in the lease, the same as with commercial leases.
Because there are no statutory minimum terms, negotiating suitable initial terms and options to renew is now critical, particularly for tenants investing in fit-out or having goodwill tied to the location of the premises.
2. Rent, Rent Reviews and Increases
Tenants should seek certainty around the base rent, including any incentives (for example rent-free periods and fit-out contributions).
Rent considerations should go beyond just the starting figure. How rent changes over time can often create difficulties for the tenant throughout the lease term. Key issues include:
(i) fixed increases vs Consumer Price Index (CPI) vs market reviews;
(ii) “ratchet” clauses preventing rent from decreasing; and
(iii) the timing and methods of market reviews, particularly at option periods.
Rent review negotiations should be regarded as a long-term risk issue, not a short-term cost issue. For example, a 1% difference in annual increases over an eight-year lease can equate to tens of thousands of dollars. Poorly drafted rent review clauses can also result in rent escalating well beyond market levels over time.
3. Outgoings
Outgoings can increase the true cost of occupation of the premises for the tenant.
Tenants should confirm:
(i) what outgoings are recoverable by the landlord; and
(ii) whether outgoings are capped or able to increase without limit.
This is particularly important in non-retail commercial leases where statutory disclosure protections may not apply.
Tenants should expressly exclude liability for outgoings related to capital works, structural repairs and replacement of plant and equipment.
4. Make Good Obligations
Make good clauses are one of the most common and expensive end-of-lease disputes.
They usually include obligations for the tenant to:
(i) remove all fit-out; and
(ii) reinstate the premises to “original condition” or a “bare shell”.
NSW courts will generally enforce make good clauses according to their wording. Poorly drafted make good clauses can expose tenants to significant reinstatement costs.
Where appropriate, tenants should aim to tie make good obligations to a documented condition report, prepared prior to entering the premises, whilst excluding any fair wear and tear or changes previously approved by the landlord.
5. Permitted Use, Planning Controls and Exclusivity Clauses
The permitted use provisions of a lease govern what the tenant can legally do from the premises.
Tenants should ensure:
(i) the use is broad enough to accommodate its business activities (including any forecasted evolution of the business); and
(ii) the use aligns with local planning controls and zoning approvals, as a permitted use in a lease does not override planning laws.
Where relevant, tenants may also seek exclusivity clauses preventing the landlord from leasing nearby premises to direct competitors –particularly in retail developments.
6. Trading Hours
Many commercial leases impose mandatory trading hours.
Tenants should understand:
(i) whether trading hours are compulsory or permitted;
(ii) consequences of non-compliance with the trading hours; and
(iii) whether reduced trading hours are permitted during quiet periods.
Mandatory trading hours can significantly affect a tenant’s staffing costs and profitability if not properly negotiated.
7. Assignment and Subleasing
Exit flexibility for the tenant may be a critical consideration whenever there is a realistic possibility that the tenant may need or want to exit the lease before the end of the term. In practice, this arises far more often than many tenants anticipate. For example, where there is a risk the location may underperform, where there is uncertainty about future trading conditions or where businesses are dependent on a key person whose departure would make occupation impractical.
Tenants should review:
(i) whether landlord consent to assignment or subleasing is required;
(ii) the conditions attached to consent and the information required to be provided for the landlord’s consideration;
(iii) timeframes for landlord responses; and
(iv) whether the landlord can impose new conditions or require lease variations.
Tenants should ensure that if landlord consent is required, it cannot be unreasonable withheld or delayed.
The Retail Leases Act 1994 (NSW) significantly limits a landlord’s ability to refuse or delay consent to an assignment of a retail lease.
For a non-retail commercial tenant in NSW, the position on assignment is materially different and the tenant’s rights and risks are driven almost entirely by the lease itself. In some cases, tenants are surprised to discover that assignment provisions effectively prevent any meaningful ability to sell the business or exit the lease by assignment.
8. Personal Guarantees and Security
Landlords commonly require personal guarantees, bank guarantees or security deposits as security for the tenant’s performance of its obligations under the lease.
From a tenant’s perspective, personal guarantees are often the highest risk obligation in a commercial lease, yet they are frequently treated as routine. A personal guarantee makes directors or individuals personally liable for the lease obligations and allows the landlord to pursue personal assets.
If tenants are unable to avoid providing personal guarantees, they should consider negotiating:
(i) limits on the duration or liability of personal guarantees; and
(ii) release of guarantors after assignment of the lease or a period of compliance.
Negotiating a return period for the security deposit or bank guarantee is often overlooked, but it can becommercially significant, particularly where the security is substantial. Tenantsshould ensure the lease specifies when the security must be returned, thetimeframe for return (e.g. within 10 business days) and that no landlorddiscretion applies if the tenant obligations have been met.
9. Repair, Maintenance and Compliance with Laws
Tenants should ensure their obligations do not extend beyond non-structural repairs and routine maintenance (fair wear and tear excluded). Without careful drafting, tenants may inadvertently assume responsibility for structural elements, major plant and equipment and costly compliance upgrades.
Some leases require tenants to upgrade premises to meet new standards, even where those upgrades relate to the building structure or base building services. Tenants should confirm that any upgrade obligations extend only to the extent they are necessitated by the tenant’s specific use of the premises.
10. Relocation and Redevelopment Rights
Some leases allow landlords to relocate tenants or terminate for redevelopment.These clauses can materially affect business continuity if exercised.
Tenants should carefully review:
(i) the scope of the landlord’s relocation rights;
(ii) whether compensation is payable to the tenant;
(iii) termination notice periods; and
(iv) whether the alternative premises are genuinely comparable.
In NSW, landlords must follow steps and pay costs in accordance with section 34A of the Retail Leases Act 1994 (NSW) before relocatinga tenant under a retail lease. In commercial (non-retail) leases, theseprotections and compensation rights usually do not exist unless negotiated.
Why Legal Advice Matters
A commercial lease should support a tenant’s business, not restrict it. Whilst not every term will be negotiable, knowing which clauses matter most, and how they operate in practice, is critical.
Early legal advice on a commercial lease allows tenants to:
(i) identify key risks before commitment;
(ii) negotiate commercially, not emotionally;
(iii) avoid disputes and unexpected costs; and
(iv) enter the lease with clarity and confidence.
In many cases, modest amendments negotiated upfront can prevent significant legal and financial exposure later.
How Watson Webb Can Assist
Watson Webb advises commercial tenants onthe practical and legal risks associated with leasing. Our approach iscommercially focused, and we target the clauses that materially affect risk,cash flow and future flexibility, while keeping negotiations efficient andproportionate.
If you are considering entering a commercial lease, or have been presented with lease documents for review, we encourage you to contact Watson Webb and Owen Roberts, Senior Associate, to obtain advice tailored to your circumstances before signing.
Disclaimer
This article is provided for general information purposes only and does not constitute legal advice. It is not intended to address the specific circumstances of any individual or business, and reliance should not be placed on it as a substitute for obtaining legal advice tailored to your particular situation.
You should obtain independent legal advice before entering into, varying, or relying on any commercial lease.
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