Everything in a commercial lease is negotiable. Understanding what to push for, and what landlords usually concede, can save you significant money over the lease term.
Rent review mechanisms
How rent changes over the lease term is one of the most important negotiating points.
Rent increases by a set percentage each review. Predictable for budgeting. Try to negotiate a reasonable rate (2-3% rather than 4-5%).
Rent adjusts with inflation. Fair in principle, but can result in significant increases if inflation is high. Consider a cap (e.g., "CPI but not more than 4%").
Rent adjusted to market rate. In theory can go down, but landlords push for increases. Ensure the review mechanism allows for genuine negotiation and independent determination.
Ratchet clauses
Rent can only increase, never decrease. Highly unfavourable to tenants. Push hard to remove these or at least negotiate a floor below which rent cannot fall.
Fit-out contributions
Landlords often contribute to tenant fit-out, particularly for new or refurbished premises.
- Cash contribution (e.g., $50,000 towards fit-out)
- Works by landlord (partitioning, electrical, flooring)
- Rent-free period instead of cash contribution
The contribution is often linked to lease length. A landlord may offer more for a 6-year lease than a 3-year lease because they're getting longer-term security.
Make-good obligations
"Make-good" is what you must do when the lease ends. This can be expensive if not negotiated properly.
- Full make-good: Return premises to original condition (strip out all fit-out)
- Fair wear and tear excluded: Normal deterioration allowed
- Landlord election: Landlord can choose to keep fit-out or require removal
Make-good can be a significant expense
A full strip-out of a retail or office premises can be a substantial cost at lease end. Negotiate modified make-good or landlord election clauses to reduce your exposure.
Personal guarantees
Most landlords require company directors to personally guarantee the lease. Negotiating points:
- Cap on guarantee amount (e.g., 12 months rent, not entire remaining term)
- Guarantee release after performance period (e.g., 2 years of reliable payment)
- Release on assignment if new tenant provides equivalent guarantee
- Bank guarantee or bond instead of personal guarantee
Key areas to negotiate
- Rent-free period: Time to fit out and establish your business before rent starts
- Fitout contribution: Landlord contribution to making the space work for you
- Rent review mechanism: CPI rather than market reviews, or ratchet clauses removed or limited
- Make good obligations: Fair wear and tear, or removal of specific items only
- Break clause: Right to exit if your business needs change
Getting help with negotiations
Having a lawyer involved early in negotiations often gets better outcomes than trying to negotiate yourself and then asking for legal review. We can:
- Identify problematic clauses before you commit
- Suggest alternative wording that protects your interests
- Negotiate directly with the landlord's lawyers
We negotiate commercial leases regularly and know what's achievable. Contact us on 06 835 7394.
What Carlile Dowling does at this stage
- - Identify your key negotiating priorities
- - Advise on what's achievable in current market conditions
- - Negotiate directly with the landlord's lawyer
- - Draft special conditions to protect your interests
- - Structure personal guarantee to minimise your exposure