Commercial Leases in Victoria: What Tenants and Landlords Should Review

Term, options and holding over

The lease term should be long enough to justify fit-out and goodwill investment, but short enough to preserve flexibility. Options to renew are common and useful — but only if the exercise mechanism is workable. Watch for tight notice windows (typically three to six months before expiry), option preconditions such as "no subsisting breach", and market-rent reviews on renewal that can produce a very different rent from the one negotiated originally.

Holding over provisions describe what happens if the tenant remains after the term ends without exercising an option. A monthly holdover on the last-agreed rent is common; some leases convert to a periodic tenancy that either party can end on short notice, which suits neither side for long.

Rent, outgoings and reviews

Rent is only one component of what a tenant pays. Most commercial leases require the tenant to pay some or all of the landlord's outgoings — council rates, water rates, insurance, owners corporation levies, land tax (subject to statutory restrictions), management fees and repairs. Tenants should insist on a defined list of recoverable outgoings, an audit right, and — for larger premises — an annual estimate and reconciliation.

Rent reviews are typically fixed percentage, CPI, market, or a combination of these across the term. Ratchet clauses that prevent rent going down at a market review are enforceable in non-retail contexts but restricted for retail leases. A tenant agreeing to a market review at option should also insist on the right to withdraw the exercise of option if the reviewed rent is unacceptable.

Permitted use

The permitted use clause defines what the tenant can do at the premises. Draft it too narrowly and the tenant cannot pivot the business or assign to a buyer whose use differs; draft it too broadly and the landlord may find a use it never contemplated. Both parties should also confirm that the permitted use is lawful under the relevant planning scheme and any owners corporation rules — a lease does not override planning restrictions.

Repairs, maintenance and make good

Standard commercial leases place broad repair and maintenance obligations on the tenant, sometimes phrased as "keep in good repair and condition". Tenants should limit their obligation to the condition at commencement (ideally recorded in a photographic condition report), exclude fair wear and tear, structural repairs and repairs necessitated by inherent defects, and confirm who is responsible for essential safety measures and plant such as HVAC.

Make good obligations at end of term are one of the most contested areas of commercial leasing. "Strip out to base building" can cost tens or hundreds of thousands of dollars for a fitted-out tenancy. A tenant should try to negotiate a cap, a payment in lieu of make good, or that fit-out installed with the landlord's consent may remain. A landlord should ensure the clause is clear enough to enforce.

Assignment and sale of business

If the tenant may want to sell the business during the term, the assignment clause is critical. Most leases require landlord consent, which cannot be unreasonably withheld — but the lease usually lists preconditions such as evidence of financial capacity, replacement guarantees, and payment of the landlord's costs. Tenants should also confirm whether the assignor is released or continues to be liable after assignment, because ongoing liability can materially affect the sale price of the business.

Where the business is being sold, the lease terms interact directly with the sale of business contract — see our related practice notes on commercial and business law.

Guarantees and director exposure

Where the tenant is a company, the landlord will almost always require personal guarantees from the directors and, often, a bank guarantee or security deposit of three to six months' rent. Directors should understand that a personal guarantee survives the sale of the business and, in most drafting, continues even if the lease is assigned unless the landlord expressly releases them. This is one of the most common sources of unpleasant surprise for former business owners.

Landlords, for their part, should ensure that guarantees are properly executed, that the guarantors have received independent advice where appropriate, and that any bank guarantee is in a form the bank will actually honour on demand.

Retail leases: additional protections

Where premises fall within the Retail Leases Act 2003 (Vic), the Act overrides inconsistent provisions in the lease. Key protections include a mandatory disclosure statement before signing, prohibitions on recovering land tax and certain capital costs, restrictions on ratchet clauses, minimum five-year terms in most cases, and a formal process for market-rent reviews. Not every commercial tenancy is a retail tenancy for the purposes of the Act; the definition turns on the use of the premises and, in some cases, on ministerial determinations. Both parties should confirm which regime applies before negotiating.

Insurance, indemnity and default

A commercial lease will typically require the tenant to hold public liability insurance (often $20 million), plate glass insurance and, sometimes, business interruption cover. Indemnity clauses can be very broad; a tenant should push back on indemnities for loss caused by the landlord's own acts or omissions. Default provisions should be reviewed for proportionality — some leases entitle the landlord to re-enter for trivial breaches, which invites disputes.

Why legal review before signing matters

Commercial leases are usually presented as "standard" — but almost every clause is negotiable at the point of signing and almost none is negotiable afterwards. The cost of legal review before signing is small relative to the total rent commitment and to the cost of unwinding a bad clause during the term. Both tenants and landlords benefit from a lease that clearly allocates risk, rather than one that leaves the parties to argue about it several years later.

For advice on a commercial or retail lease see our property and conveyancing practice; where the lease is negotiated as part of a business sale or acquisition, see commercial and business law.

How Hanlons can help

We act for Victorian tenants and landlords across office, industrial and retail leasing — from a single-tenancy suburban shop through to multi-tenant commercial buildings. We review and negotiate lease terms before signing, prepare and register leases, advise on retail leases compliance, and act in disputes about outgoings, make good, assignment and default.