Most tenants review a lease at the rent line and the term line. The money is elsewhere. Escalation, outgoings, make-good, options, redevelopment, assignment, security and holding-over carry more exposure than the headline rent. They are the eight lines a landlord's lawyer drafted to protect.
Australian commercial leases run 60 to 100 pages. Most tenants read the rent and the term closely. The rest carries more money.
1. The escalation mechanism.
Fixed 4% a year compounds to 21.7% over a five-year term. Australia's ten-year average CPI of 2.8% compounds to 14.8%. That gap is nearly 7% of your rent.
Fixed escalation only works if the rate sits at or below expected inflation. Anything above CPI is a rent rise agreed in advance.
2. The outgoings recovery clause.
Outgoings means rates, land tax, insurance and building maintenance. Uncapped recovery, where outgoings run 25–35% of gross rent, creates open-ended exposure; a cap indexed to CPI limits it. Over five years the difference can run to 8–12% of total rent.
Unrecovered outgoings above 20% of rent need a cap, and the cap needs a stated consequence for the year outgoings exceed it.
3. The make-good clause.
Make-good is the obligation to restore the premises at end of lease. Full make-good to base building on a fitted-out tenancy runs $150–$500 per square metre. On 1,000m² that is $150–500k most tenants forget until year four.
Scope it before signing. Worth negotiating: make-good as inherited, a monetary cap, or a pre-agreed handback specification.
4. The option to renew.
Options to renew look tenant-friendly and often aren't. An option at then-current market rent as determined by the landlord lets the landlord set market at expiry. Fixed-uplift options can be worse. Options requiring notice 6 or 12 months out forfeit automatically if you miss the window.
Any option worth having needs a market-determination mechanism either party can trigger, reasonable notice, and no automatic forfeiture for late notice.
5. The redevelopment / relocation clause.
Landlord-drafted redevelopment clauses allow termination on 6–12 months' notice. In older buildings in growth precincts that is a real risk; Melbourne, Sydney and inner-metro pockets have all seen mid-lease terminations. Compensation varies from reasonable relocation cost to nothing.
Any redevelopment clause needs a compensation floor, typically relocation cost plus fitout. Where the risk is high, negotiate it out for the first three years.
6. The assignment and subletting clause.
"Landlord's consent, not to be unreasonably withheld" sounds standard and often isn't. Some leases recover the landlord's legal costs, some allow a rent uplift on assignment, some prohibit subletting outright.
It matters to any tenant whose business might be sold, acquired or restructured, or that might need to sublease. Which is most of them.
7. The security bond or bank guarantee.
Most Australian commercial leases require a bank guarantee of 3–6 months rent plus GST. Holding one costs 1–1.5% a year, so a $300k guarantee costs $3–4.5k annually for as long as the lease runs, or $15–22.5k over five years.
Guarantees above three months rent should be negotiated. Ratchet-down clauses, where the guarantee falls after two years of on-time rent, are standard in strong markets.
8. The holding-over provisions.
Holding over, staying on after expiry without a new lease, is where landlords capture the largest premium. Standard clauses set rent at 125–150% of the previous rent, monthly, with 30 days notice to vacate.
Within six months of expiry without a landed renewal you are heading for holding over, and the urgency has crossed to the landlord's side.
Melbourne CBD tech occupier · 1,600m² · 5-year renewal
Four of the eight bit: escalation fixed at 4%, uncapped outgoings, full-restoration make-good, holding-over at 140%. Renegotiating those four moved the renewal from expensive to at market and saved roughly $340k across the term.
The pattern.
None of these provisions is exotic; they are standard clauses in standard leases. What varies is which combination bites in your situation and how the numbers stack over the term. Which is why headline rent is a poor guide to whether a lease is fair.