Why You Should Get a Commercial Lease Reviewed Early
Recently we assisted first‑time business buyers who had already signed a business sale agreement and paid their deposit before getting legal advice. Once we reviewed the premises lease, several critical issues emerged that had not been fully disclosed to them at signing – and fortunately we were able to unwind their position and recover their deposit.
Key concerns included:
- A complicated lease assignment history
- Requirements for both a personal guarantee and a substantial bond
- A short remaining lease term with no rights of renewal
- No allocated car parks, despite tenants contributing to parking‑related costs
This shows why a lease review before committing is critical. Hidden clauses and obligations can create long‑term challenges that are difficult, and expensive to unwind once you are locked in.
Assigning a Commercial Lease Is Rarely Straightforward
Many buyers assume they can simply step into the seller’s lease. In practice, this is rarely the case.
Most commercial leases require the landlord’s written consent to any assignment. That consent is not automatic.
In the example above, the landlord imposed additional, unexpected conditions as part of the approval process, causing delays and uncertainty.
Landlords will typically consider:
- The buyer’s financial position
- Whether additional security is required (personal guarantee, bank guarantee, etc)
- Additional terms or variations to the lease before granting consent
If this process is not managed early, it can delay settlement or, in some cases, derail the transaction entirely. The seller’s proactive engagement with the landlord, and the purchaser’s engagement with the consent process are both essential.
Costly Commercial Lease Terms Buyers Should Watch For
A thorough review of lease terms is essential. Key areas that commonly create issues include:
1. Rent Review Mechanisms
Rent increases may be based on:
- Fixed annual percentages
- CPI adjustments
- Market rent valuations
Market reviews can lead to unexpected cost increases, significantly impacting profitability.
2. Outgoings and Additional Costs
Outgoings can significantly increase occupancy costs and may include:
- Insurance
- Council rates
- Water
- Shared maintenance
- Body corporate fees
A current statement of outgoings should always be obtained and reviewed so there are no surprises after settlement.
3. Maintenance, Alteration, and End‑of‑Lease Obligations
Common clauses that can create financial risk include:
- Requirements to repaint or replace flooring
- Removing existing fit‑out
- Restoring original layout (“make good” obligations)
These obligations can lead to substantial end‑of‑lease expenses if not understood in advance, ideally with a premises condition report as at the commencement date.
Know Exactly What You’re Taking On
Before purchasing a business with leased premises, buyers should obtain:
- A full lease history
- Any notices of breach or compliance issues
- Confirmation of up‑to‑date rent and outgoings
It’s also important to check:
- Restrictions on fit‑out, signage, or branding
- Whether the landlord will permit layout changes
- Whether a first right of refusal exists if the property is sold
These factors affect not only the value of the lease but also your long‑term flexibility and operational control.
The Bottom Line: A Lease Review Can Save You Stress, Cost, and Risk
A detailed review of the commercial lease as a condition of a business sale and purchase agreement can prevent costly mistakes.
If you’re buying or selling a business with a commercial lease, don’t leave the details to chance. Our commercial team can help identify risks, negotiate more favourable terms, and ensure you proceed with clarity and confidence.
