Insights Agreements
Six clauses to read twice before you sign a commercial lease
A commercial lease is often the largest fixed commitment a small business makes, and the one signed with the least scrutiny. The premises are right, the rent sounds affordable, the landlord seems reasonable, and the agreement goes unexamined because the business needs to open.
The rent is rarely where the trouble is. The trouble is in the six clauses below.
1. Escalation
The rent you are quoted is the rent for year one. The escalation clause decides every year after that.
Look for the percentage, whether it compounds, and what it is measured against. A fixed annual escalation compounds quietly: a rent rising at 10% a year is roughly 60% higher by year five, not 50%. Where the escalation is tied to an index or to a currency, find out which index, who publishes it, and what happens if it stops being published.
Ask before you sign: what is the rent in the final year of this lease, in figures? If nobody in the room can answer that quickly, the clause is not understood.
2. Operating costs and recoveries
Many leases quote a base rent and then recover a share of the landlord’s operating costs separately — security, cleaning, municipal charges, borehole or generator costs, management fees.
Three things matter: which costs can be recovered, how your share is calculated, and whether there is any cap on the increase. An uncapped recovery clause means your occupancy cost is not actually fixed by the lease at all.
Ask before you sign: what did these charges come to last year, per square metre, and may I see that figure in writing?
3. Repair and the condition of the premises
Repairing obligations decide who pays when something breaks. The phrase to find is whatever defines the standard you must return the premises in. An obligation to return premises in good repair, with no record of what condition they were in when you took them, means you can be asked to hand back premises in better condition than you received.
The protection is simple and almost always skipped: a dated schedule of condition, with photographs, signed by both parties and attached to the lease.
Ask before you sign: can we attach a photographic schedule of condition as an annexure?
4. The exit
Read the end of the lease before the beginning. How long is it? Is there a break clause, and on what notice? What happens if you simply stay on after the term ends — does it become a month-to-month arrangement, or does it renew for another full term automatically?
A lease with no break clause is a commitment to pay the full remaining rent even if the business closes. That is a decision worth making knowingly.
Ask before you sign: if this business has to close in year two, what do I owe?
5. Personal surety
This is the clause that follows people home. A surety signed by a director makes that director personally liable for the company’s obligations under the lease. The company structure that was supposed to separate business risk from personal assets stops doing so, for this debt.
Sometimes a landlord will not proceed without it. That is their right. But the scope is negotiable: a surety can be capped at an amount, limited in time, limited to rent rather than every obligation, or released once a payment history is established.
Ask before you sign: can this surety be capped, and can it fall away after twenty-four months of payment on time?
6. Assignment and subletting
If you sell the business, the buyer needs the premises. If the lease does not allow you to transfer it, or allows it only with the landlord’s consent on terms the landlord chooses, then the lease can hold up the sale of your business entirely.
The usual compromise is consent that may not be unreasonably withheld, which at least gives you something to argue with.
Ask before you sign: if I sell this business in three years, how does the new owner get these premises?
The pattern underneath
None of these clauses are unusual or improper. They are standard, and the landlord’s agreement is drafted by someone acting for the landlord — which is exactly as it should be. The problem is only that the tenant often arrives at the table with nobody doing the same for them.
Reading the lease takes an afternoon. Living with it takes five years.
This note is general information about commercial leases, not advice on your situation, and it is not legal advice. If you want your own lease read before you sign it, that is work we do.