A commercial shop lease is a binding contract that sets out the rights and obligations of both landlord and tenant.

For retail premises, the Retail Leases Act in your state provides additional protections.

Understanding the key clauses before signing can save you from costly surprises and disputes down the track.

This guide explains the essential terms you must review and negotiate.

Parties and Premises

The lease must clearly identify all parties including the landlord (owner), tenant (your business entity), and any guarantors (individuals who personally guarantee the lease).

The premises being leased must be clearly identified, including floor area, boundaries, and any fixtures included.

For shared spaces or co-occupancy arrangements, a more specific description is essential. If you are leasing a shop within a larger complex, the lease should specify access rights to common areas, parking allocations, and any shared amenities [citation:7].

Term and Options to Renew

The term clause defines how long the lease remains active, including commencement and termination dates and the initial time period (e.g., 3 years, 5 years).

The lease will also indicate if there are any option periods to renew.

Options to renew are critical for business security—they allow you to extend the lease on agreed terms without renegotiating from scratch [citation:7].

Critical: Option clauses specify a timeframe in which you must notify the landlord if you wish to exercise the option. This is typically three to six months before the end of the initial term. Missing this deadline means the landlord has no obligation to extend your lease. Mark the deadline on your calendar as soon as you sign the lease.

Commercial leases exceeding three years, including any option periods, must generally be registered to pass an estate to the tenant.

Registration provides additional legal protections but involves costs and formalities. Seek legal advice about whether registration is advisable for your situation [citation:7].

Permitted Use Clause

The permitted use clause outlines what the tenant can and cannot do on the premises.

This is critically important because any use outside the permitted scope is a breach of lease.

The clause may be specific (e.g., 'cafe selling coffee and light meals only') or general (e.g., 'any lawful retail use').

Ensure the permitted use encompasses all current activities and any planned future activities.

If there is any ambiguity, seek clarification before signing. If you subsequently change your business operations in a way that falls outside permitted use, you must obtain landlord consent—which may be refused or granted subject to additional conditions [citation:7].

Rent and Rent Review

The lease must specify the rental rate, when rent should be paid, payment intervals, and any rent-free periods (e.g., fit-out periods).

Most commercial leases include rent review clauses detailing how and when rent will increase throughout the lease term.

Common review methods include [citation:7]:

  • Fixed percentage increases: Rent increases by a set percentage (e.g., 3%) each year on the anniversary date.
  • CPI increases: Rent increases in line with the Consumer Price Index, providing some protection against inflation.
  • Market review: Rent is adjusted to current market rates at specified intervals (e.g., every 3 years). Market reviews require expert valuation and can be contentious.
  • Greater of methods: Rent is the higher of two determination methods (e.g., "the greater of 3% or CPI"), which primarily protects the landlord against negative inflation shocks.

Understand what you are agreeing to. Market reviews can result in significant rent increases if the local retail market has strengthened.

Fixed increases provide certainty but may become above-market if conditions soften.

Outgoings

The outgoings clause specifies which property expenses the tenant must pay in addition to rent.

These commonly include council rates, water rates, land tax, strata levies (if applicable), building insurance premiums, cleaning and maintenance of common areas, and management fees.

The lease should specify which outgoings are recoverable from the tenant and whether they are payable as a fixed amount, as a proportion of total outgoings (e.g., based on floor area relative to total building area), or as incurred.

Under retail lease legislation in most states, landlords cannot charge tenants for certain outgoings (e.g., capital improvements, depreciation, interest on borrowings).

Check your state's Retail Leases Act for specific limitations [citation:7].

Bank Guarantee or Security Bond

Most commercial leases require the tenant to provide security for performance of lease obligations.

This is typically a bank guarantee (an unconditional undertaking from a bank to pay the landlord up to the guaranteed amount) or a cash bond held by the landlord.

The amount is usually equivalent to 3 to 6 months' rent. The lease should specify when the security is returnable (typically after the lease ends and all obligations are met), any circumstances where the landlord can draw on the security (e.g., rent arrears, unpaid outgoings, make good costs), and any interest payable on cash bonds (if any) [citation:7].

Repair and Maintenance

The repair and maintenance clause allocates responsibility between landlord and tenant. Typically, the tenant is responsible for internal repairs and day-to-day maintenance, while the landlord handles structural repairs (roof, external walls, foundations, structural framing).

However, lease terms vary significantly. Some leases attempt to shift more responsibility to tenants.

Under retail lease legislation, the landlord is generally responsible for maintaining the building structure, but tenants may be responsible for repairing damage they cause, including accidental damage [citation:7].

Before signing, understand exactly what you are responsible for. If you are taking a long-term lease of an older building, major repairs (roof replacement, structural works, electrical rewiring) could be extremely expensive—ensure these remain the landlord's responsibility.

Make Good Clause

The make good clause is potentially the most expensive clause in a commercial lease if not properly negotiated.

It requires that at the end of the lease, the premises be returned in the original condition found at the start (or better), regardless of any changes made during the tenancy, including removal of all fit-out, reinstatement of walls and floors to original configuration, repair of any damage (fair wear and tear excepted), and removal of all signage and tenant-specific equipment [citation:7].

Warning: Make good obligations can cost tens or even hundreds of thousands of dollars. A cafe that installed a commercial kitchen, coolroom, custom joinery, and extraction system may need to demolish everything and return the space to an empty shell at lease end. Negotiate the make good clause carefully—consider seeking a 'no worse than current condition' standard, specific exclusions for certain improvements, or a cash contribution from the landlord toward make good costs.

For retail premises where you invest significantly in fit-out, try to negotiate a 'fit-out exclusion'—the landlord may allow you to leave improvements in place at lease end without penalty, particularly if they benefit the next tenant.

Subletting and Assignment

The lease may or may not allow the tenant to sublease or assign (transfer) the lease to another party.

This clause is critically important if you may need to sell your business or exit the lease early.

Subleasing allows the original tenant to lease part or all of the premises to another party while remaining liable under the headlease.

Assignment transfers the lease entirely to a new tenant, and the original tenant may be released from liability (negotiate this).

The lease will typically specify that landlord consent is required for either subletting or assignment, and the standard for consent may be 'absolute discretion' (landlord can refuse for any reason or no reason) or 'not to be unreasonably withheld' (landlord must have a reasonable basis for refusal).

Negotiate for the 'not to be unreasonably withheld' standard to preserve your flexibility.

Under retail lease legislation, landlords cannot unreasonably withhold consent to assignment in most circumstances, but check your specific state's provisions [citation:7].

Insurance

The lease should specify insurance obligations for both parties. The landlord typically insures the building structure, including fire, storm, flood, and other perils.

The tenant typically must maintain public liability insurance (minimum $20 million is standard for retail premises), plate glass insurance, and contents and stock insurance.

The lease may also require business interruption insurance. Ensure the lease requires the landlord to provide evidence of building insurance and that you receive copies of certificates of currency [citation:7].

Retail Leases Act Protections

If your lease is for a 'retail premises' as defined in your state's Retail Leases Act, you receive additional statutory protections.

These vary by state but commonly include mandatory disclosure requirements (landlord must provide a disclosure statement before the lease is signed); limits on lease terms (minimum 5 years unless tenant requests shorter); restrictions on outgoings that can be recovered; prohibition on 'ratchet clauses' (rent cannot go down even if market rents fall, but some states restrict this); procedures for rent review disputes; protections on lease assignment and subletting; and dispute resolution through the relevant civil and administrative tribunal.

The Retail Leases Act applies regardless of what the lease says—parties cannot 'contract out' of the Act.

Any clause attempting to exclude the Act is void [citation:7][citation:8].

However, there are exceptions. In Victoria, a lease for 15 years or longer that imposes genuine obligations on the tenant to carry out substantial work (building, installation, repair or maintenance of structure, fixtures, plant, equipment, or services) may be excluded from the Retail Leases Act.

The recent case of Lake Fyans Recreational Area Committee of Management Inc v Halski Pty Ltd & Anor [2025] VCC 1506 confirmed that this exclusion only applies if the lease actually imposes real, enforceable obligations from the outset—not just clauses that claim the Act does not apply [citation:8].

Practical Tips for Tenants

  • Never sign a commercial lease without legal advice. The amounts at stake are too large and the consequences of missing a key clause too severe.
  • If your lease is for retail premises, confirm that the landlord has provided all mandatory disclosure documents before you sign. Failure to provide disclosure may give you rights to terminate or claim compensation.
  • Negotiate before you sign. Many lease terms are negotiable, including rent-free periods, make good obligations, assignment rights, and outgoings caps.
  • If you are taking over an existing business, do not assume the existing lease terms are fair or market-standard. Get a copy of the lease reviewed before you commit.
  • Mark all option exercise deadlines on your calendar with reminders starting 6 months before the deadline. Missing an option deadline can cost you your business location [citation:7][citation:8].