Most small business owners sign their first commercial lease without negotiating a single term. Every term in that document was written to protect the landlord — not you. Here is how to push back before you sign.
Tip 1: Understand the difference between asking rent and market rent
The rent the landlord advertises is not necessarily the market rent. In a soft leasing market — such as when a premises has been vacant for more than 3 months — there is almost always negotiating room. Research comparable premises in the area and understand what the actual market is doing before you enter negotiations.
Tip 2: Always negotiate a rent-free period
A rent-free period (typically 1–3 months on a standard 5-year lease) is standard and expected in commercial leasing. It compensates for the time you spend fitting out the premises before you can trade. If the landlord will not offer rent-free time, ask for a reduced rent period, a fit-out contribution, or another form of financial incentive.
What is negotiable in a commercial lease?
Almost everything: headline rent, rent-free period, rent review mechanism (CPI vs market vs fixed), lease term, option to renew terms, make-good obligations, permitted use definition, assignment rights, and fit-out contribution from the landlord.
Tip 3: Fix the rent review mechanism
The rent review mechanism determines how your rent increases over the lease term. CPI reviews (tied to inflation) are predictable. Fixed percentage reviews (e.g. 3% per year) are predictable and can be better or worse than CPI depending on inflation rates. Market reviews — where rent is reset to market on review date — are unpredictable and can result in large increases. Negotiate hard on this.
Tip 4: Cap the make-good obligation
A make-good clause requires you to return the premises to its original condition at the end of the lease. Without clarity on what this means, you could face costs of $50,000–$200,000 at lease end. Negotiate a clear and specific definition of what make-good requires — or negotiate a make-good payment cap.
Tip 5: Confirm the permitted use is broad enough
The permitted use clause defines what you can operate from the premises. If it says "café" and you want to add a wine licence, you may be in breach of lease. Make sure the permitted use definition covers your intended concept fully, including any future additions you are considering.
Tip 6: Get an assignment right in writing
If you ever want to sell your business, the buyer will need to take over the lease. Without an assignment right — or with a landlord who can unreasonably withhold consent — you effectively cannot sell the business. This is a massive hidden risk that most first-time leaseholders overlook.
Tip 7: Understand your personal guarantee exposure
Most commercial landlords require the directors of a company to personally guarantee the lease. This means if the business fails, you are personally liable for the remaining rent. Negotiate the scope and duration of the personal guarantee — and understand exactly what you are signing before you agree to it.
Tip 8: Use a commercial tenancy solicitor
A commercial tenancy solicitor costs $500–$1,500 to review a lease. Given that a 5-year lease at $4,000/month is a $240,000 total commitment, this is one of the highest-return professional fees you will ever pay. Do not skip it.
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